<PAGE>
As filed with the Securities and Exchange Commission on
June 13, 1997.
1933 Act Registration No. 33-17619
1940 Act Registration No. 811-5349
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
____________
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 ( X )
Post-Effective Amendment No. 35 ( X )
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 ( X )
Amendment No. 37 ( X )
(Check appropriate box or boxes)
__________
GOLDMAN SACHS TRUST
(Exact name of registrant as specified in charter)
4900 Sears Tower
Chicago, Illinois 60606-6303
(Address of principal executive offices)
Registrant's Telephone Number,
including Area Code 312-993-4400
____________
Michael J. Richman, Esq. Copies to:
Goldman, Sachs & Co. Pamela J. Wilson, Esq.
85 Broad Street - 12th Floor Hale and Dorr LLP
New York, New York 10004 60 State Street
Boston, MA 02109
(Name and address of agent for service)
It is proposed that this filing will become effective (check appropriate box)
( ) immediately upon filing pursuant to paragraph (b)
( ) on (May 1, 1997) pursuant to paragraph (b)
( ) 60 days after filing pursuant to paragraph (a)(1)
( ) On May 1, 1997 pursuant to paragraph (a)(1)
( ) 75 days after filing pursuant to paragraph (a)(2)
(X) On August 15, 1997 pursuant to paragraph (a)(2) of rule 485.
Registrant has registered an indefinite number of its shares under the
Securities Act of 1933 pursuant to Rule 24f-2. On December 20, 1996, Registrant
filed a Rule 24f-2 notice on behalf of its fixed-income funds for their fiscal
year ended October 31, 1997. On February 28, 1997, Registrant filed a Rule 24f-2
notice on behalf of its money market funds for their fiscal year ended December
31, 1996. On March 31, 1997, Registrant filed a Rule 24f-2 notice on behalf of
its equity funds for their fiscal year ended January 31, 1997.
<PAGE>
GOLDMAN SACHS TRUST
Institutional Shares of
GOLDMAN SACHS FIXED INCOME FUNDS
GOLDMAN SACHS EQUITY PORTFOLIOS
---------------
CROSS REFERENCE SHEET
(as required by Rule 485)
<TABLE>
<CAPTION>
PART A CAPTION
- -------- -------
<S> <C>
1. Cover Page Cover Page
2. Synopsis Fund Highlights
3. Condensed Financial
Information Financial Highlights
4. General Description Cover Page; Fund Highlights;
of Registrant Investment Objective and
Policies; Description of
Securities; Risk Factors;
Investment Techniques;
Investment Restrictions;
Portfolio Turnover; Reports to
Shareholders; Shares of the
Trust; Additional Information
5. Management of the Fund Management
6. Capital Stock and Dividends; Shares of
Other Securities the Trust; Taxation; Additional
Information
7. Purchase of Securities Purchase of Institutional Being
Offered Shares; Net Asset Value;
Additional Information
8. Redemption or Redemption of Institutional
Repurchase Shares; Additional
Information
9. Pending Legal Not Applicable
Proceedings
</TABLE>
PART B CAPTION
- ------ -------
<PAGE>
<TABLE>
<S> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information Not Applicable
and History
13. Investment Objectives Investment Objective and Poli-
and Policies cies; Investment Restrictions
14. Management of the Management
Registrant
15. Control Persons and Shares of the Trust
Principal Holders of
Securities
16. Investment Advisory Management
and Other Services
17. Brokerage Allocation Portfolio Transactions
and Other Securities
18. Capital Stock and Shares of the Trust
Other Securities
19. Purchase, Redemption Management; Net Asset Value
and Pricing of
Securities Being
Offered
20. Tax Status Taxation
21. Underwriters Management-Distributor
22. Calculation of Performance Information
Performance Data
23. Financial Statements Financial Statements
</TABLE>
<PAGE>
GOLDMAN SACHS TRUST
Service Shares of
GOLDMAN SACHS FIXED INCOME FUNDS
GOLDMAN SACHS EQUITY PORTFOLIOS
---------------
CROSS REFERENCE SHEET
(as required by Rule 485)
<TABLE>
<CAPTION>
PART A CAPTION
- ------ -------
<S> <C>
1. Cover Page Cover Page
2. Synopsis Fund Highlights
3. Condensed Financial
Information Financial Highlights
4. General Description Cover Page; Fund Highlights;
of Registrant Investment Objective and Policies;
Description of Securities; Risk Factors;
Investment Techniques; Investment
Restrictions; Portfolio Turnover; Reports
to Shareholders; Shares of the Trust; Addi-
tional Information
5. Management of the Management
Fund
6. Capital Stock and Dividends; Shares of the
Other Securities Trust; Taxation; Additional
Information
7. Purchase of Securities Purchase of Service
Being Offered Shares; Net Asset Value;
Additional Information
8. Redemption or Redemption of Service
Repurchase Shares; Additional Information
9. Pending Legal Not Applicable Proceedings
</TABLE>
PART B CAPTION
- ------ -------
10. Cover Page Cover Page
<PAGE>
<TABLE>
<S> <C>
11. Table of Contents Table of Contents
12. General Information Not Applicable
and History
13. Investment Objectives Investment Objective and Poli-
and Policies cies; Investment Restrictions
14. Management of the Management
Registrant
15. Control Persons and Shares of the Trust
Principal Holders of
Securities
16. Investment Advisory Management
and Other Services
17. Brokerage Allocation Portfolio Transactions
and Other Securities
18. Capital Stock and Shares of the Trust
Other Securities
19. Purchase, Redemption Management; Net Asset Value
and Pricing of
Securities Being
Offered
20. Tax Status Taxation
21. Underwriters Management-Distributor
22. Calculation of Performance Information
Performance Data
23. Financial Statements Financial Statements
</TABLE>
<PAGE>
GOLDMAN SACHS TRUST
Class A, Class B and Class C Shares
GOLDMAN SACHS FIXED INCOME FUNDS
---------------
CROSS REFERENCE SHEET
(as required by Rule 485)
<TABLE>
<CAPTION>
PART A CAPTION
- ------ -------
<S> <C>
1. Cover Page Cover Page
2. Synopsis Fund Highlights
3. Condensed Financial
Information Financial Highlights
4. General Description Cover Page; Fund Highlights;
of Registrant Investment Objective and Poli
cies; Description of Securi
ties; Risk Factors; Investment
Techniques; Investment Re-
strictions; Portfolio Turn
over; Reports to Shareholders;
Shares of the Trust; Addition
al Information
5. Management of the Management
Fund
6. Capital Stock and Dividends; Shares of the
Other Securities Trust; Taxation; Additional
Information
7. Purchase of Securities Purchase of Service Shares;
Being Offered Net Asset Value; Additional Information
8. Redemption or Redemption of Service Shares;
Repurchase Additional Information
9. Pending Legal Not Applicable
Proceedings
</TABLE>
PART B CAPTION
- ------ -------
<PAGE>
<TABLE>
<S> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information Not Applicable
and History
13. Investment Objectives Investment Objective and Poli
and Policies cies; Investment Restrictions
14. Management of the Management
Registrant
15. Control Persons and Shares of the Trust
Principal Holders of
Securities
16. Investment Advisory Management
and Other Services
17. Brokerage Allocation Portfolio Transactions
and Other Securities
18. Capital Stock and Shares of the Trust
Other Securities
19. Purchase, Redemption Management; Net Asset Value
and Pricing of
Securities Being
Offered
20. Tax Status Taxation
21. Underwriters Management-Distributor
22. Calculation of Performance Information
Performance Data
23. Financial Statements Financial Statements
</TABLE>
<PAGE>
GOLDMAN SACHS TRUST
GOLDMAN SACHS MONEY MARKET FUNDS
ILA SERVICE UNITS
ILA CLASS B UNITS
ILA CLASS C UNITS
OF INSTITUTIONAL LIQUID ASSETS PORTFOLIOS
---------------
CROSS REFERENCE SHEET
(as required by Rule 485)
<TABLE>
<CAPTION>
PART A CAPTION
- ------ -------
<S> <C>
Institutional Liquid Assets Prime Obligations Portfolio and Institutional Liquid
Assets Tax-Exempt Diversified Portfolio
1. Cover Page Cover Page
2. Synopsis An Introduction to the Portfo-
lios; Unitholder and Portfolio Expenses
3. Condensed Financial Financial Highlights
Information
4. General Description
of Registrant An Introduction to the Portfo-
lios; Investment Policies; De-
scription of Securities and In-
vestment Techniques; Investment
Limitations; Distribution and
Authorized Dealer Service Plans;
Organization and Units of the
Portfolios
5. Management of the Fund Management; Organization and
Units of the Portfolios
6. Capital Stock and
Other Securities Purchase of Units; Reports to
Unitholders; Distributions; Tax-
es; Organization and Units of
the Portfolios
</TABLE>
<PAGE>
<TABLE>
<S> <C>
7. Purchase of Securities Purchase of Units;
Exchanges; Net Asset Value
8. Redemption or Repurchase Redemption of Units
9. Pending Legal Proceedings Not Applicable
PART A CAPTION
-------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information Organization and Capitalization
and History
13. Investment Objectives Investment Policies and Practic
and Policies es of the Fund;Investment Limita-
tions
14. Management of the Fund Trustees and Officers; The Advis-
er, Distributor and Transfer
Agent
15. Control Persons and Trustees and Officers; The Dis-
Principal Holders tributor and Transfer Agent;
of Securities Organization and Capitalization
16. Investment Advisory The Adviser, Distributor and
and Other Services Transfer Agent; Portfolio Trans-
actions; Custodian and Subcustodian;
Independent Accoun-
tants
17. Brokerage Allocation Portfolio Transactions
18. Capital Stock and Organization and Capitalization;
Other Securities Service Plan
19. Purchase, Redemption and Net Asset Value; Redemptions
Pricing of Securities
Being Offered
20. Tax Status Tax Information
21. Underwriters The Adviser, Distributor and
Transfer Agent
22. Calculation of Calculation of Yield Quotations
Performance Data
</TABLE>
<PAGE>
<TABLE>
<C> <S>
23. Financial Statements Financial Statements
</TABLE>
Part C
- ------
Information required to be included in Part C is set forth under the appropriate
Item, so numbered in Part C to this Registration Statement.
<PAGE>
- ------------------------------------------------------------------------------
PROSPECTUS SUBJECT TO COMPLETION DATED
, 1997
GOLDMAN SACHS EQUITY FUNDS INSTITUTIONAL SHARES
GOLDMAN SACHS BALANCED FUND GOLDMAN SACHS CAPITAL GROWTH FUND
Seeks long-term growth of capital through
diversified investments in equity securi-
Seeks long-term capital ties of companies that are considered to
growth and current income have long-term capital appreciation po-
through investments in equity tential.
and fixed income securities.
GOLDMAN SACHS MID CAP EQUITY FUND
GOLDMAN SACHS GROWTH AND INCOME Seeks long-term capital appreciation pri-
FUND marily through investments in equity se-
Seeks long-term growth of curities of companies with public stock
capital and growth of income market capitalizations of between $500
through investments in equity million and $7 billion at the time of in-
securities that are consid- vestment.
ered to have favorable pros-
pects for capital apprecia-
tion and/or dividend paying
ability.
GOLDMAN SACHS INTERNATIONAL EQUITY FUND
Seeks long-term capital appreciation
through investments in equity securities
of companies that are organized outside
the U.S. or whose securities are princi-
pally traded outside the U.S.
GOLDMAN SACHS CORE U.S. EQUITY
FUND
Seeks long-term growth of
capital and dividend income
through a broadly diversified
portfolio of large cap and
blue chip equity securities
representing all major sec-
tors of the U.S. economy.
GOLDMAN SACHS SMALL CAP EQUITY FUND
Seeks long-term capital growth through
investments in equity securities of com-
panies with public stock market capital-
izations of $1 billion or less at the
time of investment.
GOLDMAN SACHS CORE LARGE CAP GOLDMAN SACHS EMERGING MARKETS EQUITY FUND
GROWTH FUND Seeks long-term capital appreciation
Seeks long-term growth of through investments in equity securities
capital through a broadly di- of emerging country issuers.
versified portfolio of equity
securities of large cap U.S.
issuers that are expected to
have better prospects for
earnings growth than the
growth rate of the general
domestic economy. Dividend
income is a secondary consid-
eration.
GOLDMAN SACHS ASIA GROWTH FUND
Seeks long-term capital appreciation
through investments in equity securities
of companies related (in the manner de-
scribed herein) to Asian countries.
GOLDMAN SACHS CORE SMALL CAP
EQUITY FUND
Seeks long-term growth of
capital through a broadly di-
versified portfolio of equity
securities of U.S. companies
with public stock market cap-
italizations of $3 billion or
less at the time of invest-
ment.
GOLDMAN SACHS CORE INTERNA-
TIONAL EQUITY FUND
Seeks long-term growth of
capital through a broadly di-
versified portfolio of equity
securities of companies that
are organized outside the
U.S. or whose securities are
principally traded outside
the U.S.
-----------------
INSTITUTIONAL SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION AND
ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN A FUND INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
(continued on next page)
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY STATE.
<PAGE>
(cover continued)
A FUND'S INVESTMENTS IN SECURITIES OF FOREIGN ISSUERS AND FOREIGN CURRENCIES
ENTAIL CERTAIN RISKS NOT CUSTOMARILY ASSOCIATED WITH INVESTING IN SECURITIES OF
U.S. ISSUERS QUOTED IN U.S. DOLLARS. IN PARTICULAR, THE SECURITIES MARKETS OF
ASIAN, LATIN AMERICAN, EASTERN EUROPEAN, AFRICAN AND OTHER EMERGING COUNTRIES
IN WHICH THE INTERNATIONAL EQUITY, EMERGING MARKETS EQUITY AND ASIA GROWTH
FUNDS MAY INVEST WITHOUT LIMIT ARE LESS LIQUID, SUBJECT TO GREATER PRICE
VOLATILITY, HAVE SMALLER MARKET CAPITALIZATIONS, HAVE LESS GOVERNMENT
REGULATION AND ARE NOT SUBJECT TO AS EXTENSIVE AND FREQUENT ACCOUNTING,
FINANCIAL AND OTHER REPORTING REQUIREMENTS AS THE SECURITIES MARKETS OF MORE
DEVELOPED COUNTRIES. FURTHER, INVESTMENT IN EQUITY SECURITIES OF ISSUERS
LOCATED IN RUSSIA AND CERTAIN OTHER EMERGING COUNTRIES INVOLVES RISK OF LOSS
RESULTING FROM PROBLEMS IN SHARE REGISTRATION AND CUSTODY, WHICH RISKS ARE NOT
NORMALLY ASSOCIATED WITH INVESTMENT IN MORE DEVELOPED COUNTRIES. THE FUNDS THAT
INVEST IN FOREIGN SECURITIES AND EMERGING MARKETS ARE INTENDED FOR INVESTORS
WHO CAN ACCEPT THE RISKS ASSOCIATED WITH THEIR INVESTMENTS AND MAY NOT BE
SUITABLE FOR ALL INVESTORS. SEE "DESCRIPTION OF SECURITIES" AND "RISK FACTORS."
Goldman Sachs Asset Management ("GSAM"), New York, New York, a separate
operating division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as
investment adviser to the Balanced, CORE Large Cap Growth, CORE Small Cap
Equity, Goldman Sachs CORE International Equity, Growth and Income, Mid Cap
Equity and Small Cap Equity Funds. Goldman Sachs Funds Management, L.P.
("GSFM"), New York, New York, an affiliate of Goldman Sachs, serves as
investment adviser to the CORE U.S. Equity (formerly the "Select Equity Fund")
and Capital Growth Funds. Goldman Sachs Asset Management International
("GSAMI"), London, England, an affiliate of Goldman Sachs, serves as investment
adviser to the International Equity, Emerging Markets Equity and Asia Growth
Funds. GSAM, GSFM and GSAMI are each referred to in this Prospectus as the
"Investment Adviser." Goldman Sachs serves as each Fund's distributor and
transfer agent.
This Prospectus provides information about Goldman Sachs Trust (the "Trust")
and the Funds that a prospective investor should understand before investing.
This Prospectus should be retained for future reference. A Statement of
Additional Information (the "Additional Statement"), dated , 1997,
containing further information about the Trust and the Funds which may be of
interest to investors, has been filed with the Securities and Exchange
Commission ("SEC"), is incorporated herein by reference in its entirety, and
may be obtained without charge from Goldman Sachs by calling the telephone
number, or writing to one of the addresses, listed on the back cover of this
Prospectus. The SEC maintains a Web site (http://www.sec.gov) that contains the
Additional Statement and other information regarding the Trust.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Highlights.................... 3
Fees and Expenses.................. 8
Financial Highlights............... 9
Investment Objectives and Policies. 14
Description of Securities.......... 19
Investment Techniques.............. 24
Risk Factors....................... 27
Investment Restrictions............ 29
Portfolio Turnover................. 29
Management......................... 30
Net Asset Value.................... 33
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Performance Information............. 34
Shares of the Trust................. 35
Taxation............................ 35
Additional Information.............. 37
Reports to Shareholders............. 38
Dividends........................... 38
Purchase of Institutional Shares.... 38
Exchange Privilege.................. 40
Redemption of Institutional Shares.. 41
Appendix ........................... A-1
Account Information Form
</TABLE>
2
<PAGE>
FUND HIGHLIGHTS
The following is intended to highlight certain information contained in
this Prospectus and is qualified in its entirety by the more detailed
information contained herein.
WHAT IS THE GOLDMAN SACHS TRUST?
The Goldman Sachs Trust is an open-end management investment company
that offers its shares in several investment funds (mutual funds). Each
Fund pools the monies of investors by selling its shares to the public
and investing these monies in a portfolio of securities designed to
achieve that Fund's stated investment objectives.
WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS?
Each Fund has distinct investment objectives and policies. There can be
no assurance that a Fund's objectives will be achieved. For a complete
description of each Fund's investment objectives and policies, see
"Investment Objectives and Policies," "Description of Securities" and
"Investment Techniques."
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
FUND NAMES INVESTMENT OBJECTIVES INVESTMENT CRITERIA BENCHMARK
--------------------- ------------------------------
---------------
----------------------------
BALANCED Long-term capital Between 45% and 65% of total Lehman Aggregate Bond
FUND growth and current assets in equity securities Index
income. and at least 25% in fixed and the Standard &
income senior securities. Poor's Index of 500
Common Stocks (the
"S&P 500 Index")
- ----------------------------------------------------------------------------------------
GROWTH AND Long-term growth of At least 65% of total assets S&P 500 Index
INCOME FUND capital and growth of in equity securities that the
income. Investment Adviser considers
to have favorable prospects
for capital appreciation
and/or dividend paying
ability.
- ----------------------------------------------------------------------------------------
CORE U.S. Long-term growth of At least 90% of total assets S&P 500 Index
EQUITY FUND capital and dividend in equity securities of U.S.
income. issuers. The Fund seeks to
achieve its objective through
a broadly diversified
portfolio of large cap and
blue chip equity securities
representing all major sectors
of the U.S. economy. The
Fund's investments are
selected using both a variety
of quantitative techniques and
fundamental research in
seeking to maximize the
Fund's reward to risk ratio.
The Fund's portfolio is
designed to have risk, style,
capitalization and industry
characteristics similar to the
S&P 500 Index.
</TABLE>
(continued)
3
<PAGE>
<TABLE>
<S> <C> <C> <C>
FUND NAMES INVESTMENT OBJECTIVES INVESTMENT CRITERIA BENCHMARK
--------------------- ------------------------------
---------------
----------------------------
CORE LARGE Long-term growth of At least 90% of total assets Russell 1000 Growth
CAP GROWTH capital. Dividend in equity securities of U.S. Index
FUND income is a secondary issuers. The Fund seeks to
consideration. achieve its objective through
a broadly diversified
portfolio of equity securities
of large cap U.S. issuers that
are expected to have better
prospects for earnings growth
than the growth rate of the
general domestic economy. The
Fund's investments are
selected using both a variety
of quantitative techniques and
fundamental research in
seeking to maximize the Fund's
reward to risk ratio. The
Fund's portfolio is designed
to have risk, style,
capitalization and industry
characteristics similar to the
Russell 1000 Growth Index.
- -----------------------------------------------------------------------------------------
CORE SMALL Long-term growth of At least 90% of total assets [Russell 2500 or
CAP EQUITY capital. in equity securities of U.S. Russell 2000 Index]
FUND issuers. The Fund seeks to
achieve its investment
objective through a broadly
diversified portfolio of
equity securities of U.S.
companies with public stock
market capitalizations of $3
billion or less at the time of
investment. The Fund's
investments are selected using
both a variety of quantitative
techniques and fundamental
research in seeking to
maximize the Fund's reward to
risk ratio. The Fund's
portfolio is designed to have
risk, style, capitalization
and industry characteristics
similar to the [Russell 2500
or Russell 2000 Index].
- -----------------------------------------------------------------------------------------
CORE Long-term growth of At least 90% of total assets EAFE Index
INTERNATIONAL capital. in equity securities of
EQUITY FUND companies organized outside
the United States or whose
securities are principally
traded outside the United
States. The Fund seeks broad
representation across major
countries and sectors of the
international economy. The
Fund's investments are
selected using both a variety
of quantitative techniques and
fundamental research in
seeking to maximize the Fund's
reward to risk ratio. The
Fund's portfolio is designed
to have risk, style,
capitalization and industry
characteristics similar to the
Morgan Stanley Capital
International (MSCI) Europe,
Australia and Far East Index
(the "EAFE Index"). The Fund
may invest in securities of
issuers located in countries
with emerging economies or
securities markets and employ
certain currency management
techniques.
</TABLE>
4
<PAGE>
<TABLE>
<S> <C> <C> <C>
FUND NAMES INVESTMENT OBJECTIVES INVESTMENT CRITERIA BENCHMARK
--------------------- ------------------------------
---------------
----------------------------
CAPITAL Long-term capital At least 90% of total assets S&P 500 Index
GROWTH FUND growth. in a diversified portfolio of
equity securities. The
Investment Adviser considers
long-term capital appreciation
potential in selecting
investments.
- -------------------------------------------------------------------------------------------
MID CAP Long-term capital At least 65% of total assets Russell Midcap Index
EQUITY FUND appreciation. in equity securities of
companies ("Mid-Cap
Companies") with public stock
market capitalizations of
under $5 billion at the time
of investment.
- -------------------------------------------------------------------------------------------
INTERNATIONAL Long-term capital Substantially all, and at FT/Actuaries Europe
EQUITY FUND appreciation. least 65%, of total assets in and Pacific Index
equity securities of companies (unhedged)
organized outside the United
States or whose securities are
principally traded outside the
United States. The Fund may
invest in securities of
issuers located in countries
with emerging economies or
securities markets and employ
certain currency management
techniques.
- -------------------------------------------------------------------------------------------
SMALL CAP Long-term capital At least 65% of total assets Russell 2000
EQUITY FUND growth. in equity securities of
companies with public stock
market capitalizations of $1
billion or less at the time of
investment. The Fund currently
emphasizes investments in
companies with public stock
market capitalizations of $500
million or less at the time of
investment.
- -------------------------------------------------------------------------------------------
EMERGING Long-term capital Substantially all, and at Morgan Stanley
MARKETS appreciation. least 65%, of total assets in Capital International
EQUITY FUND equity securities of emerging Emerging Markets Free
country issuers. The Fund may Index
employ certain currency
management techniques.
- -------------------------------------------------------------------------------------------
ASIA GROWTH Long-term capital Substantially all, and at Morgan Stanley
FUND appreciation. least 65%, of total assets in Capital International
equity securities of companies All Country Asia Free
in China, Hong Kong, India, ex Japan Index
Indonesia, Malaysia, Pakistan,
the Philippines, Singapore,
South Korea, Sri Lanka,
Taiwan and Thailand. The Fund
may employ certain currency
management techniques.
</TABLE>
WHAT ARE THE RISK FACTORS AND SPECIAL CHARACTERISTICS THAT I SHOULD CONSIDER
BEFORE INVESTING?
Each Fund's share price will fluctuate with market, economic and, to the
extent applicable, foreign exchange conditions, so that an investment in
any of the Funds may be worth more or less when redeemed than when
purchased. None of the Funds should be relied upon as a complete investment
program. There can be no assurance that a Fund's investment objectives will
be achieved. See "Risk Factors."
5
<PAGE>
Risk of Investments in Small Capitalization Companies. To the extent that
a Fund invests in the securities of small market capitalization companies,
the Fund may be exposed to a higher degree of risk and price volatility.
Securities of such issuers may lack sufficient market liquidity to enable a
Fund to effect sales at an advantageous time or without a substantial drop
in price.
Foreign Risks. Investments in securities of foreign issuers and
currencies involve risks that are different from those associated with
investments in domestic securities. The risks associated with foreign
investments and currencies include changes in relative currency exchange
rates, political and economic developments, the imposition of exchange
controls, confiscation and other governmental restrictions. Generally,
there is less availability of data on foreign companies and securities
markets as well as less regulation of foreign stock exchanges, brokers and
issuers. A Fund's investments in emerging markets and countries ("Emerging
Countries") involves greater risks than investments in the developed
countries of Western Europe, the U.S., Canada, Australia, New Zealand and
Japan. In addition, because the International Equity, Emerging Markets
Equity and Asia Growth Funds invest primarily outside the U.S., these Funds
may involve greater risks, since the securities markets of foreign
countries are generally less liquid and subject to greater price
volatility. The securities markets of emerging countries, including those
in Asia, Latin America, Eastern Europe and Africa are marked by a high
concentration of market capitalization and trading volume in a small number
of issuers representing a limited number of industries, as well as a high
concentration of ownership of such securities by a limited number of
investors.
Other. A Fund's use of certain investment techniques, including
derivatives, forward contracts, options and futures, will subject the Fund
to greater risk than funds that do not employ such techniques.
WHO MANAGES THE FUNDS?
Goldman Sachs Asset Management serves as Investment Adviser to the
Balanced, Growth and Income, CORE Large Cap Growth, CORE Small Cap Equity,
CORE International Equity, Mid Cap Equity and Small Cap Equity Funds.
Goldman Sachs Funds Management, L.P. serves as Investment Adviser to the
CORE U.S. Equity and Capital Growth Funds. Goldman Sachs Asset Management
International serves as Investment Adviser to the International Equity,
Emerging Markets Equity and Asia Growth Funds. As of June 30, 1997, the
Investment Advisers, together with their affiliates, acted as investment
adviser, administrator or distributor for assets in excess of $ billion.
WHO DISTRIBUTES THE FUNDS' SHARES?
Goldman Sachs acts as distributor of each Fund's shares.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000,000 in Institutional Shares of
the Fund alone or in combination with Institutional Shares (or the
corresponding class) of any other mutual fund sponsored by Goldman Sachs
and designated as an eligible fund for this purpose.
6
<PAGE>
HOW DO I PURCHASE INSTITUTIONAL SHARES?
You may purchase Institutional Shares of the Funds through Goldman Sachs.
Institutional Shares are purchased at the current net asset value without
any sales load. See "Purchase of Institutional Shares."
HOW DO I SELL MY INSTITUTIONAL SHARES?
You may redeem Institutional Shares upon request on any Business Day, as
defined under "Additional Information," at the net asset value next
determined after receipt of such request in proper form. See "Redemption of
Institutional Shares."
HOW DO I RECEIVE DIVIDENDS AND DISTRIBUTIONS?
<TABLE>
<CAPTION>
INVESTMENT INCOME DIVIDENDS
--------------------------- CAPITAL GAINS
FUND DECLARED AND PAID DISTRIBUTIONS
- ---- ----------------- -------------
<S> <C> <C>
Balanced.............................. Quarterly Annually
Growth and Income..................... Quarterly Annually
CORE U.S. Equity...................... Annually Annually
CORE Large Cap Growth................. Annually Annually
CORE Small Cap Equity................. Annually Annually
CORE International Equity............. Annually Annually
Capital Growth........................ Annually Annually
Mid Cap Equity........................ Annually Annually
International Equity.................. Annually Annually
Small Cap Equity...................... Annually Annually
Emerging Markets Equity............... Annually Annually
Asia Growth........................... Annually Annually
</TABLE>
Recordholders of Institutional Shares may receive dividends in additional
Institutional Shares of the Fund in which you have invested or you may
elect to receive cash. For further information concerning dividends, see
"Dividends."
7
<PAGE>
FEES AND EXPENSES
(INSTITUTIONAL SHARES)
<TABLE>
<CAPTION>
CORE CORE
GROWTH LARGE SMALL CORE MID SMALL EMERGING
AND CORE U.S. CAP CAP INTERNATIONAL CAPITAL CAP INT'L CAP MARKETS ASIA
BALANCED INCOME EQUITY GROWTH EQUITY EQUITY GROWTH EQUITY EQUITY EQUITY EQUITY GROWTH
FUND FUND FUND FUND/1/ FUND/1/ FUND/1/ FUND FUND FUND FUND FUND/1/ FUND
-------- ------ --------- ------- ------- ------------- ------- ------ ------ ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES:
Maximum Sales
Charge Imposed
on Purchases... None None None None None None None None None None None None
Maximum Sales
Charge Imposed
on Reinvested
Dividends...... None None None None None None None None None None None None
Redemption Fees. None None None None None None None None None None None None
Exchange Fees... None None None None None None None None None None None None
ANNUAL FUND
OPERATING
EXPENSES: (as a
percentage of
average daily
net assets)
Management Fees
(after
applicable
limitations)/2/. 0.65% 0.70% 0.59% 0.60% 1.00% 1.00% 1.00% 0.75% 0.89% 1.00% 1.10% 0.86%
Distribution
(Rule 12b-1)
Fees........... None None None None None None None None None None None None
Other Expenses
(after
applicable
limitations)/3/. 0.10% 0.12% 0.06% 0.05% 0.20% 0.20% 0.09% 0.10% 0.21% 0.15% 0.20% 0.24%
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
TOTAL FUND
OPERATING
EXPENSES
(AFTER FEE AND
EXPENSE
LIMITATIONS)/4/. 0.75% 0.82% 0.65% 0.65% 1.20% 1.20% 1.09% 0.85% 1.10% 1.15% 1.30% 1.10%
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a hy-
pothetical $1,000 investment, assuming (1) a
5% annual return and (2) redemption at the
end of each time period:
Balanced Fund................................. $ 8 $24 $ 42 $ 93
Growth and Income Fund........................ $ 8 $26 $ 46 $101
CORE U.S. Equity Fund......................... $ 7 $21 $ 36 $ 81
CORE Large Cap Growth Fund.................... $ 7 $21 n/a n/a
CORE Small Cap Equity Fund.................... $12 $38 n/a n/a
CORE International Equity Fund................ $12 $38 n/a n/a
Capital Growth Fund........................... $11 $35 $ 60 $133
Mid Cap Equity Fund........................... $ 9 $27 $ 47 $105
International Equity Fund..................... $11 $35 $ 61 $134
Small Cap Equity Fund......................... $12 $37 $ 63 $140
Emerging Markets Equity Fund.................. $13 $41 n/a n/a
Asia Growth Fund.............................. $11 $35 $ 61 $134
</TABLE>
- ---------------------
/1/Based on estimated amounts for the current fiscal year for the CORE Large
Cap Growth, CORE Small Cap Equity, CORE International Equity and Emerging
Markets Equity Funds.
/2/The Investment Advisers have voluntarily agreed that a portion of the
management fee would not be imposed on the Core U.S. Equity, CORE Large Cap
Growth, [CORE Small Cap Equity,] [CORE International Equity,] International
Equity, Emerging Markets Equity and Asia Growth Funds equal to 0.16%, 0.15%,
[ %,] [ %,] 0.11%, 0.10% and 0.14%, respectively. Without such
limitations, management fees would be 0.75%, 0.75%, [ %,] [ %,] 1.00%,
1.20% and 1.00% of each Fund's average daily net assets, respectively.
8
<PAGE>
/3/The Investment Advisers voluntarily have agreed to reduce or limit certain
other expenses (excluding management fees, taxes, interest and brokerage fees
and litigation, indemnification and other extraordinary expenses (and
transfer agency fees in the case of each Fund other than CORE Large Cap
Growth Fund)) for the following funds to the extent such expenses exceed the
following percentage of average daily net assets:
<TABLE>
<CAPTION>
OTHER
EXPENSES
--------
<S> <C>
Balanced Fund.................................................... 0.10%
Growth and Income................................................ 0.11%
CORE U.S. Equity................................................. 0.06%
CORE Large Cap Growth............................................ 0.05%
CORE Small Cap Equity............................................ %
CORE International Equity........................................ %
Mid Cap Equity................................................... 0.06%
International Equity............................................. 0.20%
Emerging Markets Equity.......................................... 0.16%
Asia Growth...................................................... 0.24%
</TABLE>
/4/Without the limitations described above, "Other Expenses" and "Total
Operating Expenses" of the CORE U.S. Equity, Growth and Income, Mid Cap
Equity, International Equity and Asia Growth Funds for the fiscal year ended
January 31, 1997, would have been as follows:
<TABLE>
<CAPTION>
TOTAL
OTHER OPERATING
EXPENSES EXPENSES
-------- ---------
<S> <C> <C>
Growth and Income...................................... 0.12% 0.82%
CORE U.S. Equity....................................... 0.10% 0.85%
Mid Cap Equity......................................... 0.16% 0.91%
International Equity................................... 0.25% 1.25%
Asia Growth............................................ 0.26% 1.26%
</TABLE>
In addition, without the limitations described above, "Other Expenses" and
"Total Operating Expenses" of the Institutional Shares of the CORE Large Cap
Growth, CORE Small Cap Equity, CORE International Equity [, Balanced] and
Emerging Markets Equity Funds for the current fiscal year are estimated to be
as follows:
<TABLE>
<CAPTION>
TOTAL
OTHER OPERATING
EXPENSES EXPENSES
-------- ---------
<S> <C> <C>
CORE Large Cap Growth.................................. 0.65% 1.40%
CORE Small Cap Equity.................................. % %
CORE International Equity.............................. % %
[Balanced Fund]........................................ 0.62% 1.27%
Emerging Markets Equity................................ 0.82% 2.02%
</TABLE>
The Investment Advisers have no current intention of modifying or
discontinuing any of the limitations set forth above but may do so in the
future at their discretion. The information set forth in the foregoing table
and hypothetical example relates only to Institutional Shares of the Funds.
Each Fund also offers Service Shares and, except for Mid Cap Equity Fund,
Class A, Class B and Class C Shares, which are subject to different fees and
expenses (which affect performance), have different minimum investment
requirements and are entitled to different services. Information regarding
Service, Class A, Class B and Class C Shares may be obtained from an
investor's sales representative or from Goldman Sachs by calling the number on
the back cover of this Prospectus.
The purpose of the foregoing table is to assist investors in understanding
the various fees and expenses of a Fund that an investor will bear directly or
indirectly. The information on the fees and expenses included in the table and
hypothetical example above are based on each Fund's fees and expenses (actual
or estimated) and should not be considered as representative of past or future
expenses. Actual fees and expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, a Fund's
actual performance will vary and may result in an actual return greater or
less than 5%. See "Management--Investment Advisers."
9
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
The following data with respect to a share (of the Class specified) of the
Funds outstanding during the period(s) indicated has been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report
incorporated by reference into the Additional Statement from the Annual Report
to shareholders for the Funds for the year ended January 31, 1997 (the "Annual
Report"). This information should be read in conjunction with the financial
statements and related notes incorporated by reference and attached to the
Additional Statement. The Annual Report also contains performance information
and is available upon request and without charge by calling the telephone
number or writing to one of the addresses on the back cover of this
Prospectus. During the periods shown, the Trust did not offer the CORE Large
Cap Growth, CORE Small Cap Equity, CORE International Equity and Emerging
Markets Equity Funds or Class C shares of any Fund. Accordingly, there are no
financial highlights for these Funds or Classes.
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
INCOME (LOSS) FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS(H) SHAREHOLDERS
------------------------------ -----------------------------------
NET REALIZED FROM NET
NET ASSET AND UNREALIZED FROM REALIZED GAIN IN EXCESS NET NET ASSET
VALUE, NET GAIN (LOSS) ON NET ON INVESTMENT OF NET INCREASE VALUE,
BEGINNING INVESTMENT INVESTMENTS, INVESTMENT AND FUTURE INVESTMENT IN NET END OF TOTAL
OF PERIOD INCOME OPTIONS AND FUTURES INCOME TRANSACTIONS INCOME ASSET VALUE PERIOD RETURN(A)
--------- ---------- ------------------- ---------- ------------- ---------- ----------- --------- ---------
BALANCED FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... $17.31 $0.66 $2.47 $(0.66) $(1.00) -- $1.47 $18.78 18.59%
1997--Class B
Shares(b)....... 17.46 0.42 2.34 (0.42) (1.00) (0.07) 1.27 18.73 16.22(c)
1996--Class A
Shares.......... 14.22 0.51 3.43 (0.50) (0.35) -- 3.09 17.31 28.10
FOR THE PERIOD
ENDED JANUARY
31,
1995--Class A
Shares(d)....... 14.18 0.10 0.02 (0.08) -- -- 0.04 14.22 0.87(c)
<CAPTION>
RATIOS ASSUMING
NO VOLUNTARY WAIVER
OF FEES OR
EXPENSE LIMITATIONS
------------------------
RATIO OF RATIO OF
NET RATIO OF NET NET
ASSETS AT NET INVESTMENT RATIO OF INVESTMENT
PORTFOLIO AVERAGE END OF EXPENSES TO INCOME TO EXPENSES INCOME (LOSS)
TURNOVER COMMISSION PERIOD AVERAGE NET AVERAGE NET TO AVERAGE TO AVERAGE
RATE RATE(G) IN (000'S) ASSETS ASSETS NET ASSETS NET ASSETS
----------- ---------- ---------- ----------- ----------- ---------- -------------
BALANCED FUND
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... 208.11(f) $.0587 $81,410 1.00% 3.76% 1.77% 2.99%
1997--Class B
Shares(b)....... 208.11(f) .0587 2,110 1.75(e) 2.59(e) 2.27(e) 2.07(e)
1996--Class A
Shares.......... 197.10(f) -- 50,928 1.00 3.65 1.90 2.75
FOR THE PERIOD
ENDED JANUARY
31,
1995--Class A
Shares(d)....... 14.71(c) -- 7,510 1.00(e) 3.39(e) 8.29(e) (3.90)(e)
</TABLE>
- -----------
(a) 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 or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
(b) For the period from May 1, 1996 (commencement of operations) to January
31, 1997.
(c) Not annualized.
(d) For the period from October 12, 1994 (commencement of operations) to
January 31, 1995.
(e) Annualized.
(f) Includes the effect of mortgage dollar roll transactions.
(g) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
(h) Includes the balancing effect of calculating per share amounts.
9
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM
INVESTMENT OPERATIONS(H) DISTRIBUTIONS TO SHAREHOLDERS
-------------------------- -----------------------------------
NET REALIZED FROM NET
NET ASSET AND UNREALIZED FROM REALIZED GAIN IN EXCESS NET NET ASSET
VALUE, NET GAIN (LOSS) ON NET ON INVESTMENT OF NET ADDITIONAL INCREASE VALUE,
BEGINNING INVESTMENT INVESTMENTS INVESTMENT AND OPTION INVESTMENT PAID-IN IN NET END OF
OF PERIOD INCOME AND OPTIONS INCOME TRANSACTIONS INCOME CAPITAL ASSET VALUE PERIOD
--------- ---------- -------------- ---------- ------------- ---------- ---------- ----------- ---------
GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... $19.98 $0.35 $5.18 $(0.35) $(1.97) $(0.01) $-- $3.20 $23.18
1997--Class B
Shares(f)....... 20.82 0.17 4.31 (0.17) (1.97) (0.06) -- 2.28 23.10
1997--Institu-
tional
Shares(f)....... 21.25 0.29 3.96 (0.30) (1.97) (0.04) -- 1.94 23.19
1997--Service
Shares(f)....... 20.71 0.28 4.50 (0.28) (1.97) (0.07) -- 2.46 23.17
1996--Class A
Shares.......... 15.80 0.33 4.75 (0.30) (0.60) -- -- 4.18 19.98
1995--Class A
Shares.......... 15.79 0.20(b) 0.30(b) (0.20) (0.33) (0.07) 0.11(b) 0.01 15.80
FOR THE PERIOD
ENDED JANUARY
31,
1994--Class A
Shares(c)....... 14.18 0.15 1.68 (0.15) (0.06) (0.01) -- 1.61 15.79
<CAPTION>
RATIOS ASSUMING
NO VOLUNTARY WAIVER
OF FEES OR
EXPENSE LIMITATIONS
------------------------
RATIO OF RATIO OF
NET RATIO OF NET NET
ASSETS AT NET INVESTMENT RATIO OF INVESTMENT
PORTFOLIO AVERAGE END OF EXPENSES TO INCOME TO EXPENSES INCOME (LOSS)
TOTAL TURNOVER COMMISSION PERIOD AVERAGE NET AVERAGE NET TO AVERAGE TO AVERAGE
RETURN(A) RATE RATE(G) (IN 000'S) ASSETS ASSETS NET ASSETS NET ASSETS
---------- ----------- ---------- ---------- ----------- ----------- ---------- -------------
GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... 28.42% 53.03% $.0586 $615,103 1.22% 1.60% 1.43% 1.39%
1997--Class B
Shares(f)....... 22.23(d) 53.03 .0586 17,346 1.93(e) 0.15(e) 1.93(e) 0.15(e)
1997--Institu-
tional
Shares(f)....... 20.77(d) 53.03 .0586 193 0.82(e) 1.36(e) 0.82(e) 1.36(e)
1997--Service
Shares(f)....... 23.87(d) 53.03 .0586 3,174 1.32(e) 0.94(e) 1.32(e) 0.94(e)
1996--Class A
Shares.......... 32.45 57.93 -- 436,757 1.20 1.67 1.45 1.42
1995--Class A
Shares.......... 3.97 71.80 -- 193,772 1.25 1.28 1.58 0.95
FOR THE PERIOD
ENDED JANUARY
31,
1994--Class A
Shares(c)....... 13.08(d) 102.23(d) -- 41,528 1.25(e) 1.23(e) 3.24(e) (0.76)(e)
</TABLE>
- -----------
(a) 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 or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
(b) Calculated based on the average shares outstanding methodology.
(c) For the period from February 5, 1993 (commencement of operations) to
January 31, 1994.
(d) Not annualized.
(e) Annualized.
(f) For the period from March 6, May 1 and June 3, 1996 (commencement of
operations) to January 31, 1997 for Service, Class B and Institutional
shares, respectively.
(g) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
(h) Includes the balancing effect of calculating per share amounts.
10
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS(H) SHAREHOLDERS
------------------------- -----------------------------------
NET REALIZED
AND UNREALIZED FROM NET NET
NET ASSET GAIN (LOSS) ON FROM REALIZED GAIN IN EXCESS (DECREASE) NET ASSET
VALUE, NET INVESTMENTS, NET ON INVESTMENT OF NET INCREASE VALUE,
BEGINNING INVESTMENT OPTIONS INVESTMENT AND FUTURES INVESTMENT IN NET END OF TOTAL
OF PERIOD INCOME AND FUTURES INCOME TRANSACTIONS INCOME ASSET VALUE PERIOD RETURN(A)
--------- ---------- -------------- ---------- ------------- ---------- ----------- --------- ---------
CORE U.S. EQUITY FUND
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... $19.66 $0.16 $4.46 $(0.16) $(0.80) -- $3.66 $23.32 23.75%
1997--Class B
Shares(f)....... 20.44 0.04 3.70 (0.04) (0.80) (0.16) 2.74 23.18 18.59(b)
1997--Institu-
tional Shares... 19.71 0.30 4.51 (0.28) (0.80) -- 3.73 23.44 24.63
1997--Service
Shares(f)....... 21.02 0.13 3.15 (0.13) (0.80) (0.10) 2.25 23.27 15.92(b)
1996--Class A
Shares.......... 14.61 0.19 5.43 (0.16) (0.41) -- 5.05 19.66 38.63
1996--Institu-
tional
Shares(d)....... 16.97 0.16 3.23 (0.24) (0.41) -- 2.74 19.71 20.14(b)
1995--Class A
Shares.......... 15.93 0.20 (0.38) (0.20) (0.94) -- (1.32) 14.61 (1.10)
1994--Class A
Shares.......... 15.46 0.17 2.08 (0.17) (1.61) -- 0.47 15.93 15.12
1993--Class A
Shares.......... 15.05 0.22 0.41 (0.22) -- -- 0.41 15.46 4.30
FOR THE PERIOD
ENDED JANUARY
31,
1992--Class A
Shares(e)....... 14.17 0.11 0.88 (0.11) -- -- 0.88 15.05 7.01(b)
<CAPTION>
RATIOS ASSUMING
NO VOLUNTARY WAIVER
OF FEES OR
EXPENSE LIMITATIONS
-----------------------
RATIO OF
RATIO OF NET
NET RATIO OF NET INVESTMENT
ASSETS AT NET INVESTMENT RATIO OF INCOME
PORTFOLIO AVERAGE END OF EXPENSES TO INCOME TO EXPENSES TO
TURNOVER COMMISSION PERIOD AVERAGE NET AVERAGE NET TO AVERAGE AVERAGE
RATE RATE(G) (IN 000'S) ASSETS ASSETS NET ASSETS NET ASSETS
----------- ---------- ---------- ----------- ----------- ---------- ------------
CORE U.S. EQUITY FUND
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... 37.28% $.0417 $225,968 1.29% 0.91% 1.53% 0.67%
1997--Class B
Shares(f)....... 37.28 .0417 17,258 1.83(c) 0.06(c) 2.00(c) (0.11)(c)
1997--Institu-
tional Shares... 37.28 .0417 148,942 0.65 1.52 0.85 1.32
1997--Service
Shares(f)....... 37.28 .0417 3,666 1.15(c) 0.69(c) 1.35(c) 0.49(c)
1996--Class A
Shares.......... 39.35 -- 129,045 1.25 1.01 1.55 0.71
1996--Institu-
tional
Shares(d)....... 39.35(b) -- 64,829 0.65(c) 1.49(c) 0.96(c) 1.18(c)
1995--Class A
Shares.......... 56.18 -- 94,968 1.38 1.33 1.63 1.08
1994--Class A
Shares.......... 87.73 -- 92,769 1.42 0.92 1.67 0.67
1993--Class A
Shares.......... 144.93 -- 117,757 1.28 1.30 1.53 1.05
FOR THE PERIOD
ENDED JANUARY
31,
1992--Class A
Shares(e)....... 135.02(c) -- 151,142 1.57(c) 1.24(c) 1.82(c) 0.99(c)
</TABLE>
- -----------
(a) 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 or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
(b) Not annualized.
(c) Annualized.
(d) For the period from June 15, 1995 (commencement of operations) to January
31, 1996.
(e) For the period from May 24, 1991 (commencement of operations) to January
31, 1992.
(f) For the period from May 1 and June 7, 1996 (commencement of operations) to
January 31, 1997 for Class B and Service shares, respectively.
(g) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
(h) Includes the balancing effect of calculating per share amounts.
11
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS(G) SHAREHOLDERS
------------------------------ ------------------------------------
NET REALIZED FROM NET NET
NET ASSET AND UNREALIZED FROM REALIZED GAIN IN EXCESS INCREASE NET ASSET
VALUE, NET GAIN (LOSS) ON NET ON INVESTMENTS OF NET (DECREASE) VALUE,
BEGINNING INVESTMENT INVESTMENTS, INVESTMENT OPTIONS INVESTMENT IN NET END OF TOTAL
OF PERIOD INCOME OPTIONS AND FUTURES INCOME AND FUTURES INCOME ASSET VALUE PERIOD RETURN(A)
--------- ---------- ------------------- ---------- -------------- ---------- ----------- --------- ---------
CAPITAL GROWTH FUND
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... $14.91 $0.10 $3.56 $(0.10) $(1.72) $(0.02) $1.82 $16.73 25.97%
1997--Class B
Shares(b)....... 15.67 0.01 2.81 (0.01) (1.72) (0.09) 1.00 16.67 19.39(d)
1996--Class A
Shares.......... 13.67 0.12 3.93 (0.12) (2.69) -- 1.24 14.91 30.45
1995--Class A
Shares.......... 15.96 0.03 (0.69) (0.01) (1.62) -- (2.29) 13.67 (4.38)
1994--Class A
Shares.......... 14.64 0.02 2.40 (0.01) (1.07) (0.02) 1.32 15.96 16.89
1993--Class A
Shares.......... 13.65 0.06 2.28 (0.07) (1.28) -- 0.99 14.64 18.01
1992--Class A
Shares.......... 11.10 0.28 2.90 (0.31) (0.32) -- 2.55 13.65 29.31
FOR THE PERIOD
ENDED JANUARY
31,
1991--Class A
Shares(c)....... 11.34 0.34 (0.27) (0.31) -- -- (0.24) 11.10 0.84(d)
<CAPTION>
RATIOS ASSUMING
NO VOLUNTARY WAIVER
OF FEES
RATIO OF ------------------------
NET RATIO OF
NET RATIO OF INVESTMENT NET
ASSETS AT NET INCOME RATIO OF INVESTMENT
PORTFOLIO AVERAGE END OF EXPENSES TO (LOSS) TO EXPENSES INCOME (LOSS)
TURNOVER COMMISSION PERIOD AVERAGE NET AVERAGE NET TO AVERAGE TO AVERAGE
RATE RATE(F) IN (000'S) ASSETS ASSETS NET ASSETS NET ASSETS
---------- ---------- ---------- ----------- ------------ ---------- -------------
CAPITAL GROWTH FUND
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... 52.92% $.0563 $920,646 1.40% 0.62% 1.65% 0.37%
1997--Class B
Shares(b)....... 52.92 .0563 3,221 2.15(e) (0.39)(e) 2.15(e) (0.39)(e)
1996--Class A
Shares.......... 63.90 -- 881,056 1.36 0.65 1.61 0.40
1995--Class A
Shares.......... 38.36 -- 862,105 1.38 0.16 1.63 (0.09)
1994--Class A
Shares.......... 36.12 -- 833,682 1.38 0.13 1.63 (0.12)
1993--Class A
Shares.......... 58.93 -- 665,976 1.41 0.42 1.66 0.17
1992--Class A
Shares.......... 48.93 -- 500,307 1.53 2.09 1.78 1.84
FOR THE PERIOD
ENDED JANUARY
31,
1991--Class A
Shares(c)....... 35.63(d) -- 437,533 1.27(d) 3.24(d) 1.47(d) 3.04(d)
</TABLE>
- -----------
(a) 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 or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
(b) For the period from May 1, 1996 (commencement of operations) to January
31, 1997.
(c) For the period from April 20, 1990 (commencement of operations) to January
31, 1991.
(d) Not annualized.
(e) Annualized.
(f) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
(g) Includes the balancing effect of calculating per share amounts.
12
<PAGE>
<TABLE>
<CAPTION>
INCOME FROM
INVESTMENT OPERATIONS DISTRIBUTIONS TO SHAREHOLDERS
--------------------------------- ------------------------------------------------
NET
REALIZED TOTAL FROM NET
AND INCOME REALIZED NET NET
NET ASSET UNREALIZED (LOSS) IN EXCESS GAIN ON TOTAL INCREASE ASSET
VALUE, NET GAIN ON FROM FROM NET OF NET INVESTMENTS DISTRIBUTIONS IN NET VALUE,
BEGINNING INVESTMENT INVESTMENTS INVESTMENT INVESTMENT INVESTMENT AND-OPTION TO ASSET END OF
OF PERIOD INCOME AND OPTIONS OPERATIONS INCOME INCOME TRANSACTIONS SHAREHOLDERS VALUE PERIOD
--------- ---------- ----------- ---------- ---------- ---------- ------------ ------------- -------- -------
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year
Ended January
31,
1997--Institu-
tional Shares... $15.91 $0.24 $3.77 $4.01 $(0.24) $(0.02) $(0.93) $(1.19) $2.82 $18.73
For the Period
Ended January
31,
1996--Institu-
tional
Shares(a)....... 15.00 0.13 0.90 1.03 (0.12) -- -- (0.12) 0.91 15.91
<CAPTION>
RATIOS ASSUMING NO
EXPENSE LIMITATION
--------------------
NET RATIO OF RATIO OF
ASSETS NET RATIO OF NET
AT END INVESTMENT EXPENSES INVESTMENT
OF RATIO OF NET INCOME TO TO INCOME TO
PORTFOLIO AVERAGE PERIOD EXPENSES TO AVERAGE AVERAGE AVERAGE
TOTAL TURNOVER COMMISSION (IN AVERAGE NET NET NET NET
RETURN(B) RATE RATE(E) 000'S) ASSETS(C) ASSETS(C) ASSETS(C) ASSETS(C)
---------- ----------- ---------- -------- ------------ ---------- --------- ----------
MID CAP EQUITY FUND
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year
Ended January
31,
1997--Institu-
tional Shares... 25.63% 74.03% $.0547 $145,253 0.85% 1.35% 0.91% 1.29%
For the Period
Ended January
31,
1996--Institu-
tional
Shares(a)....... 6.89(d) 58.77%(d) -- 135,670 0.85 1.67 0.98 1.54
</TABLE>
- -----------
(a) For the period from August 1, 1995 (commencement of operations) to January
31, 1996.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption
of the investment at the net asset value at the end of the period.
(c) Annualized.
(d) Not annualized.
(e) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
13
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS(G) SHAREHOLDERS
-------------------------------------------------- -----------------------
FROM NET
NET REALIZED REALIZED
NET REALIZED AND UNREALIZED GAIN ON NET
NET ASSET AND UNREALIZED GAIN (LOSS) ON FROM INVESTMENT, INCREASE NET ASSET
VALUE, NET GAIN (LOSS) ON FOREIGN NET OPTION AND (DECREASE) VALUE,
BEGINNING INVESTMENT INVESTMENTS, CURRENCY RELATED INVESTMENT FUTURES IN NET END OF
OF PERIOD INCOME (LOSS) OPTIONS AND FUTURES TRANSACTIONS INCOME TRANSACTIONS ASSET VALUE PERIOD
--------- ------------- ------------------- ---------------- ---------- ------------ ----------- ---------
INTERNATIONAL EQUITY FUND
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... $17.20 $0.10 $3.51 $(1.28) $ -- $(0.21) $2.12 $19.32
1997--Class B
Shares(e)....... 18.91 (0.06) 0.94 (0.34) -- (0.21) 0.33 19.24
1997--Institu-
tional
Shares(e)....... 17.45 0.04 3.39 (1.24) (0.03) (0.21) 1.95 19.40
1997--Service
Shares(e)....... 17.70 (0.02) 2.95 (1.08) -- (0.21) 1.64 19.34
1996--Class A
Shares.......... 14.52 0.13 2.58 1.42 (0.58) (0.87) 2.68 17.20
1995--Class A
Shares.......... 18.10 0.06 (3.04) (0.01) -- (0.59) (3.58) 14.52
1994--Class A
Shares.......... 14.35 0.05 4.08 (0.38) -- -- 3.75 18.10
FOR THE PERIOD
ENDED JANUARY
31,
1993--Class A
Shares(b)....... 14.18 (0.01) 0.29 (0.11) -- -- 0.17 14.35
<CAPTION>
RATIOS ASSUMING
NO VOLUNTARY WAIVER
OF FEES OR
EXPENSE LIMITATIONS
------------------------
RATIO OF RATIO OF
NET RATIO OF NET NET
ASSETS AT NET INVESTMENT RATIO OF INVESTMENT
PORTFOLIO AVERAGE END OF EXPENSES TO INCOME (LOSS) TO EXPENSES INCOME (LOSS)
TOTAL TURNOVER COMMISSION PERIOD AVERAGE NET AVERAGE NET TO AVERAGE TO AVERAGE
RETURN(A) RATE RATE(F) (IN 000S) ASSETS ASSETS NET ASSETS NET ASSETS
----------- --------- ---------- --------- ----------- ---------------- ---------- -------------
INTERNATIONAL EQUITY FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... 13.48% 38.01% $.0318 $536,283 1.69% (0.07)% 1.88% (0.26)%
1997--Class B
Shares(e)....... 2.83(c) 38.01 .0318 19,198 2.23(d) (0.97)(d) 2.38(d) (1.12)(d)
1997--Institu-
tional
Shares(e)....... 12.53(c) 38.01 .0318 68,374 1.10(d) 0.43(d) 1.25(d) 0.28(d)
1997--Service
Shares(e)....... 10.42(c) 38.01 .0318 674 1.60(d) (0.40)(d) 1.75(d) (0.55)(d)
1996--Class A
Shares.......... 28.68 68.48 -- 330,860 1.52 0.26 1.77 0.01
1995--Class A
Shares.......... (16.65) 84.54 -- 275,086 1.73 0.40 1.98 0.15
1994--Class A
Shares.......... 26.13 60.04 -- 269,091 1.76 0.51 2.01 0.26
FOR THE PERIOD
ENDED JANUARY
31,
1993--Class A
Shares(b)....... 1.23(c) 0.00 -- 66,063 1.80(d) (0.42)(d) 2.58(d) (1.20)(d)
</TABLE>
- -----------
(a) 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 or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
(b) For the period from December 1, 1992 (commencement of operations) to
January 31, 1993.
(c) Not annualized.
(d) Annualized.
(e) For the period from February 7, March 6 and May 1, 1996 (commencement of
operations) to January 31, 1997 for Institutional, Service and Class B
shares, respectively.
(f) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
(g) Includes the balancing effect of calculating per share amounts.
14
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS(G) SHAREHOLDERS
------------------------------ --------------------------------------
IN EXCESS OF
FROM NET REALIZED
NET REALIZED REALIZED GAIN GAINS ON NET
NET ASSET NET AND UNREALIZED FROM ON INVESTMENT, INVESTMENT, INCREASE NET ASSET
VALUE, INVESTMENT GAIN (LOSS) ON NET OPTION AND OPTION AND (DECREASE) VALUE,
BEGINNING INCOME INVESTMENTS, INVESTMENT FUTURES FUTURES IN NET END OF TOTAL
OF PERIOD (LOSS) OPTIONS AND FUTURES INCOME TRANSACTIONS TRANSACTIONS ASSET VALUE PERIOD RETURN(A)
--------- ---------- ------------------- ---------- -------------- ------------ ----------- --------- ---------
SMALL CAP EQUITY FUND
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... $17.29 $(0.21) $ 4.92 $ -- $(1.09) $ -- $ 3.62 $20.91 $ 27.28%
1997--Class B
Shares(b)....... 20.79 (0.11) 1.21 -- (1.09) -- 0.01 20.80 5.39(d)
1996--Class A
Shares.......... 16.14 (0.23) 1.39 -- (0.01) -- 1.15 17.29 7.20
1995--Class A
Shares.......... 20.67 (0.07) (3.53) -- (0.69) (0.24) (4.53) 16.14 (17.53)
1994--Class A
Shares.......... 16.68 (0.04) 5.03 -- (1.00) -- 3.99 20.67 30.13
FOR THE PERIOD
ENDED JANUARY
31,
1993--Class A
Shares(c)....... 14.18 0.03 2.50 (0.03) -- -- 2.50 16.68 17.86(d)
<CAPTION>
RATIOS ASSUMING NO
VOLUNTARY WAIVER
OF FEES
-----------------------
RATIO OF RATIO OF
NET RATIO OF NET NET
ASSETS AT NET INVESTMENT RATIO OF INVESTMENT
PORTFOLIO AVERAGE END OF EXPENSES TO INCOME (LOSS) EXPENSES LOSS
TURNOVER COMMISSION PERIOD AVERAGE NET TO AVERAGE TO AVERAGE TO AVERAGE
RATE RATE(F) (IN 000'S) ASSETS NET ASSETS NET ASSETS NET ASSETS
---------- ---------- ---------- ----------- ------------- ---------- ------------
SMALL CAP EQUITY FUND
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... 99.46% $.0461 $212,061 1.60% (0.72)% 1.85% (0.97)%
1997--Class B
Shares(b)....... 99.46 .0461 3,674 2.35(e) (1.63)(e) 2.35(e) (1.63)(e)
1996--Class A
Shares.......... 57.58 -- 204,994 1.41 (0.59) 1.66 (0.84)
1995--Class A
Shares.......... 43.67 -- 319,487 1.53 (0.53) 1.78 (0.78)
1994--Class A
Shares.......... 56.81 -- 261,074 1.60 (0.45) 1.85 (0.70)
FOR THE PERIOD
ENDED JANUARY
31,
1993--Class A
Shares(c)....... 7.12(e) -- 59,339 1.65(e) 0.62(e) 2.70(e) (0.43)(e)
</TABLE>
- -----------
(a) 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 or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
(b) For the period from May 1, 1996 (commencement of operations) to January
31, 1997.
(c) For the period from October 22, 1992 (commencement of operations) to
January 31, 1993.
(d) Not annualized.
(e) Annualized.
(f) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
(g) Includes the balancing effect of calculating per share amounts.
15
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS(G) SHAREHOLDERS
-------------------------------------- ---------------------
NET
REALIZED AND
UNREALIZED
GAIN ON NET
NET ASSET NET NET REALIZED FOREIGN FROM IN EXCESS INCREASE NET ASSET
VALUE, INVESTMENT AND UNREALIZED CURRENCY NET OF NET (DECREASE) VALUE,
BEGINNING INCOME GAIN (LOSS) ON RELATED INVESTMENT INVESTMENT IN NET END OF TOTAL
OF PERIOD (LOSS) INVESTMENTS TRANSACTIONS INCOME INCOME ASSET VALUE PERIOD RETURN(A)
--------- ---------- -------------- ------------ ---------- ---------- ----------- --------- ---------
ASIA GROWTH FUND
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... $16.49 $ 0.06 $(0.11) $(0.12) $(0.01) $ -- $(0.18) $16.31 (1.01)%
1997--Class B
Shares(e)....... 17.31 (0.05) (0.48) (0.51) -- (0.03) (1.07) 16.24 (6.02)(c)
1997--Institu-
tional
Shares(e)....... 16.61 0.04 (0.11) (0.11) (0.04) (0.06) (0.28) 16.33 (1.09)(c)
1996--Class A
Shares.......... 13.31 0.17 3.44 (0.12) (0.17) (0.14) 3.18 16.49 26.49
FOR THE PERIOD
ENDED JANUARY
31,
1995--Class A
Shares(b)....... 14.18 0.11 (0.89) 0.01 (0.10) -- (0.87) 13.31 (5.46)(c)
<CAPTION>
RATIOS ASSUMING
NO VOLUNTARY WAIVER
OF FEES OR
EXPENSE LIMITATIONS
------------------------
RATIO OF RATIO OF
NET RATIO OF NET NET
ASSETS AT NET INVESTMENT RATIO OF INVESTMENT
PORTFOLIO AVERAGE END OF EXPENSES TO INCOME (LOSS) EXPENSES INCOME (LOSS)
TURNOVER COMMISSION PERIOD AVERAGE NET TO AVERAGE TO AVERAGE TO AVERAGE
RATE RATE(F) (000'S) ASSETS NET ASSETS NET ASSETS NET ASSETS
---------- ---------- --------- ----------- ------------- ---------- -------------
ASIA GROWTH FUND
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... 48.40% $.0151 $263,014 1.67% 0.20% 1.87% 0.00%
1997--Class B
Shares(e)....... 48.40 .0151 3,354 2.21(d) (0.56)(d) 2.37(d) (0.72)(d)
1997--Institu-
tional
Shares(e)....... 48.40 .0151 13,322 1.10(d) 0.54(d) 1.26(d) 0.38(d)
1996--Class A
Shares.......... 88.80 -- 205,539 1.77 1.05 2.02 0.80
FOR THE PERIOD
ENDED JANUARY
31,
1995--Class A
Shares(b)....... 36.08(c) -- 124,298 1.90(d) 1.83(d) 2.38(d) 1.35(d)
</TABLE>
- -----------
(a) 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 or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
(b) For the period from July 8, 1994 (commencement of operations) to January
31, 1995.
(c) Not annualized.
(d) Annualized.
(e) For the period from February 2 and May 1, 1996 (commencement of
operations) to January 31, 1997 for Institutional and Class B shares,
respectively.
(f) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
(g) Includes the balancing effect of calculating per share amounts.
16
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and principal investment policies of each Fund are
described below. Other investment practices and management techniques, which
involve certain risks are described under "Description of Securities," "Risk
Factors" and "Investment Techniques." There can be no assurance that a Fund's
investment objectives will be achieved.
The Investment Advisers may purchase for the Funds common stocks, preferred
stocks, interests in real estate investment trusts, convertible debt
obligations, convertible preferred stocks, equity interests in trusts,
partnerships, joint ventures and similar enterprises, warrants and stock
purchase rights ("equity securities"). In choosing a Fund's securities, the
Investment Advisers utilize first-hand fundamental research, including
visiting company facilities to assess operations and to meet decision-makers.
The Investment Advisers may also use macro analysis of numerous economic and
valuation variables to anticipate changes in company earnings and the overall
investment climate. The Investment Advisers are able to draw on the research
and market expertise of the Goldman Sachs Global Investment Research
Department and other affiliates of the Investment Advisers, as well as
information provided by other securities dealers. Equity securities in a
Fund's portfolio will generally be sold when the Investment Adviser believes
that the market price fully reflects or exceeds the securities' fundamental
valuation or when other more attractive investments are identified.
Value Style Funds. The Growth and Income, Mid Cap Equity, Small Cap Equity
and the equity portion of the Balanced Funds are managed using a value
oriented approach. The Investment Adviser evaluates securities using
fundamental analysis and intends to purchase equity securities that are, in
its view, underpriced relative to a combination of such companies' long-term
earnings prospects, growth rate, free cash flow and/or dividend-paying
ability. Consideration will be given to the business quality of the issuer.
Factors positively affecting the Investment Adviser's view of that quality
include the competitiveness and degree of regulation in the markets in which
the company operates, the existence of a management team with a record of
success, the position of the company in the markets in which it operates, the
level of the company's financial leverage and the sustainable return on
capital invested in the business. The Funds may also purchase securities of
companies that have experienced difficulties and that, in the opinion of the
Investment Adviser, are available at attractive prices.
Growth Style Funds. The Capital Growth, International Equity, Emerging
Markets Equity and Asia Growth Funds are managed using a growth oriented
approach. Equity securities for these Funds are selected based on their
prospects for above average growth. The Investment Adviser will select
securities of growth companies trading, in the Investment Adviser's opinion,
at a reasonable price relative to other industries, competitors and historical
price/earnings multiples. These Funds will generally invest in companies whose
earnings are believed to be in a relatively strong growth trend, or, to a
lesser extent, in companies in which significant further growth is not
anticipated but whose market value per share is thought to be undervalued. In
order to determine whether a security has favorable growth prospects, the
Investment Adviser ordinarily looks for one or more of the following
characteristics in relation to the security's prevailing price: prospects for
above average sales and earnings growth per share; high return on invested
capital; free cash flow generation; sound balance sheet, financial and
accounting policies, and overall financial strength; strong competitive
advantages; effective research, product development, and marketing; pricing
flexibility; strength of management; and general operating characteristics
that will enable the company to compete successfully in its marketplace.
17
<PAGE>
Quantitative Style Funds. The CORE U.S. Equity, CORE Large Cap Growth, CORE
Small Cap Equity and CORE International Equity Funds (the "CORE Funds") are
managed using both quantitative and fundamental techniques. CORE is an acronym
for "Computer-Optimized, Research-Enhanced," which reflects the Funds'
investment process. This investment process and the proprietary multifactor
model used to implement it are discussed below.
Investment Process. The Investment Adviser begins with a broad universe of
U.S. equity securities for the CORE U.S. Equity, CORE Large Cap Growth and
CORE Small Cap Equity Funds (the "CORE U.S. Funds"), and a broad universe of
foreign equity securities for the CORE International Equity Fund. The
Investment Adviser uses a proprietary multifactor model (the "Multifactor
Model") to assign each equity security a rating. In the case of a U.S. equity
security followed by the Goldman Sachs Global Investment Research Department
(the "Research Department"), a second rating is assigned based upon the
Research Department's evaluation. In the discretion of the Investment Adviser,
such ratings may also be assigned to U.S. equity securities based on research
ratings obtained from other industry sources. In building a diversified
portfolio for each CORE Fund, the Investment Adviser utilizes optimization
techniques to seek to maximize the Fund's expected reward to risk ratio. The
resulting portfolio is primarily comprised of securities rated highest by the
foregoing investment process and has risk characteristics and industry
weightings similar to the relevant Fund's benchmark. Under normal conditions,
the securities of any one issuer may not exceed 5% of a Fund's total assets.
Multifactor Model. The Multifactor Model is a rigorous computerized rating
system for valuing equity securities according to fundamental investment
characteristics. The factors used by the Multifactor Model incorporate many
variables studied by traditional fundamental analysts, and cover measures of
value, growth, momentum and risk (e.g., price/earnings ratio, book/price
ratio, consensus growth forecasts, earnings estimate revisions, price
momentum, price volatility and earnings stability). All of the factors used in
the Multifactor Model have been shown to significantly impact the performance
of equity securities. The weightings assigned to the factors are derived using
a statistical formulation that considers each factor's historical performance
in different market environments. As such, the Multifactor Model is designed
to evaluate each security using only the factors that are statistically
related to returns in the anticipated market environment. Because it includes
many disparate factors, the Investment Adviser believes that the Multifactor
Model is broader in scope and provides a more thorough evaluation than most
conventional, value-oriented quantitative models. As a result, the securities
ranked highest by the Multifactor Model do not have one dominant investment
characteristic (such as a low price/earnings ratio); rather, they possess an
attractive combination of investment characteristics.
Research Department. In assigning ratings to U.S. equity securities, the
Research Department uses a four category rating system ranging from
"recommended for purchase" to "likely to underperform." The ratings reflect
the analyst's judgment as to the investment results of a specific security and
incorporate economic outlook, valuation, risk and a variety of other factors.
By employing both a quantitative (i.e., the Multifactor Model) and a
qualitative (i.e., research enhanced) method of selecting securities, each
CORE Fund seeks to capitalize on the strengths of each discipline.
BALANCED FUND
Objective. The Fund's investment objective is to provide investors with
long-term capital growth and current income. The Fund seeks capital
appreciation primarily through the equity component of its portfolio while
investing in fixed income securities primarily to provide income for regular
quarterly dividends.
18
<PAGE>
Primary Investment Focus. The Fund invests, under normal circumstances,
between 45% and 65% of its total assets in equity securities. The Fund also
invests at least 25% of its total assets in fixed income senior securities and
the remainder of its assets in other fixed income securities and cash. The
percentage of the portfolio invested in equity and fixed income securities
will vary from time to time as the Investment Adviser evaluates their relative
attractiveness based on market valuations, economic growth and inflation
prospects. This allocation is subject to the Fund's intention to pay regular
quarterly dividends. The amount of quarterly dividends can also be expected to
fluctuate in accordance with factors such as prevailing interest rates and the
percentage of the Fund's assets invested in fixed-income securities.
Other. Although the Fund's equity investments consist primarily of publicly
traded U.S. securities, the Fund may invest up to 10% of its total assets in
the equity securities of foreign issuers, including issuers in Emerging
Countries and equity securities quoted in foreign currencies. A portion of the
Fund's portfolio of equity securities may be selected primarily to provide
current income. Equity securities selected to provide current income may
include interests in real estate investment trusts, convertible securities,
preferred stocks, utility stocks and interests in limited partnerships.
The Fund's fixed income securities primarily include securities issued by
the U.S. Government, its agencies, instrumentalities or sponsored enterprises,
corporations or other entities, mortgage-backed and asset-backed securities,
municipal securities and custodial receipts. The Fund may also invest in debt
obligations (U.S. dollar and non-U.S. dollar denominated) issued or guaranteed
by one or more foreign governments or any of their political subdivisions,
agencies or instrumentalities and foreign corporations or other entities. Such
securities are collectively referred to herein as "fixed income securities."
The Fund's investments in fixed income securities that are issued by foreign
issuers, including issuers in Emerging Countries may not exceed 10% of the
Fund's total assets. The Fund may employ certain currency techniques to seek
to hedge against currency exchange rate fluctuations or to seek to increase
total return. When used to seek to enhance return, these management techniques
are considered speculative. Such currency management techniques involve risks
different from those associated with investing solely in securities of U.S.
issuers quoted in U.S. dollars. See "Description of Securities," "Investment
Techniques" and "Risk Factors."
GROWTH AND INCOME FUND
Objectives. The Fund's investment objectives are to provide investors with
long-term growth of capital and growth of income.
Primary Investment Focus. The Fund invests, under normal circumstances, at
least 65% of its total assets in equity securities that the Investment Adviser
considers to have favorable prospects for capital appreciation and/or
dividend-paying ability.
Other. The Fund may invest up to 35% of its total assets in fixed income
securities that, in the opinion of the Investment Adviser, offer the potential
to further the Fund's investment objectives. In addition, although the Fund
will invest primarily in publicly traded U.S. securities, it may invest up to
25% of its total assets in foreign securities, including securities of issuers
in Emerging Countries and securities quoted in foreign currencies.
CORE U.S. EQUITY FUND (FORMERLY, THE "SELECT EQUITY FUND")
Objective. The Fund's investment objective is to provide investors with
long-term growth of capital and dividend income. The Fund seeks to achieve its
objective through a broadly diversified portfolio of large cap and blue chip
equity securities representing all major sectors of the U.S. economy.
19
<PAGE>
Primary Investment Focus. The Fund invests, under normal circumstances, at
least 90% of its total assets in equity securities. The Fund may invest in
equity securities of foreign issuers that are traded in the United States and
that comply with U.S. accounting standards. The Fund's investments are
selected using both a variety of quantitative techniques and fundamental
research in seeking to maximize the Fund's reward to risk ratio. The Fund's
portfolio is designed to have risk, style, capitalization and industry
characteristics similar to the S&P 500 Index. The Fund seeks a broad
representation in most major sectors of the U.S. economy and a portfolio
comprised of companies with average long-term earnings growth expectations and
dividend yields. The Fund may invest only in fixed income securities that are
considered cash equivalents.
For a description of the investment process of the Fund, see "Investment
Process," "Multifactor Model" and "Research Department" under "INVESTMENT
OBJECTIVES AND POLICIES--Quantitative Style Funds."
CORE LARGE CAP GROWTH FUND
Objective. The Fund's investment objective is to provide investors with
long-term growth of capital. The Fund seeks to achieve its objective through a
broadly diversified portfolio of equity securities of large cap U.S. issuers
that are expected to have better prospects for earnings growth than the growth
rate of the general domestic economy. Dividend income is a secondary
consideration.
Primary Investment Focus. The Fund invests, under normal circumstances, at
least 90% of its total assets in equity securities. The Investment Adviser
emphasizes a company's growth prospects in analyzing equity securities to be
purchased by the Fund. The Fund may invest in equity securities of foreign
issuers that are traded in the United States and that comply with U.S.
accounting standards. The Fund's investments are selected using both a variety
of quantitative techniques and fundamental research in seeking to maximize the
Fund's reward to risk ratio. The Fund's portfolio is designed to have risk,
style, capitalization and industry characteristics similar to the Russell 1000
Growth Index. The Fund seeks a portfolio comprised of companies with above
average capitalizations and earnings growth expectations and below average
dividend yields. The Fund may invest only in fixed income securities that are
considered cash equivalents.
For a description of the investment process of the Fund, see "Investment
Process," "Multifactor Model" and "Research Department" under "INVESTMENT
OBJECTIVES AND POLICIES--Quantitative Style Funds."
CORE SMALL CAP EQUITY FUND
Objective. The Fund's investment objective is to provide investors with
long-term growth of capital. The Fund seeks to achieve its objective through a
broadly diversified portfolio of equity securities of U.S. companies with
public stock market capitalizations of $3 billion or less at the time of
investment.
Primary Investment Focus. The Fund invests, under normal circumstances, at
least 90% of its total assets in U.S. equity securities. The Fund may
occasionally invest in equity securities of foreign issuers that are traded in
the United States and that comply with U.S. accounting standards. The Fund's
investments are selected using both a variety of quantitative techniques and
fundamental research in seeking to maximize the Fund's reward to risk ratio.
The Fund's portfolio is designed to have risk, style, capitalization and
industry characteristics similar
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to the [Russell 2500 or Russell 2000] Index. The Fund seeks a portfolio
comprised of companies with small market capitalizations, strong expected
earnings growth and momentum, and better valuation and risk characteristics
than the [Russell 2000 or Russell 2500] Index. The Fund may invest only in
fixed income securities that are considered cash equivalents.
The Investment Adviser believes that companies in which the Fund may invest
offer greater opportunity for growth of capital than larger, more mature,
better known companies. Investment in small market capitalization issuers
involves special risks. See "Description of Securities" and "Risk Factors."
For a description of the investment process of the Fund, see "Investment
Process," "Multifactor Model" and "Research Department" under "INVESTMENT
OBJECTIVES AND POLICIES--Quantitative Style Funds."
CORE INTERNATIONAL EQUITY FUND
Objective. The Fund's investment objective is to provide investors with
long-term growth of capital.
Primary Investment Focus. The Fund invests, under normal circumstances, at
least 90%, of its total assets in equity securities of companies that are
organized outside the United States or whose securities are principally traded
outside the United States. The Fund's investments are selected using both a
variety of quantitative techniques and fundamental research in seeking to
maximize the Fund's reward to risk ratio. The Fund's portfolio is designed to
have risk, style, capitalization and industry characteristics similar to the
EAFE Index. The Fund seeks broad diversification across major countries and
sectors of the international economy. In addition, the Fund seeks attractive
valuations and stronger momentum characteristics than the EAFE Index.
The Fund may allocate its assets among countries as determined by the
Investment Adviser from time to time, provided the Fund's assets are invested
in at least three foreign countries. The Fund may invest in countries that
have emerging markets or economies which involve certain risks, as described
below under "Risk Factors--Special Risks of Investments in the Asian and Other
Emerging Markets," which are not present in investments in more developed
countries. The Fund may invest only in fixed income securities that are
considered to be cash equivalents.
For a description of the investment process of the Fund, see "Investment
Process," "Multifactor Model" and "Research Department" under "INVESTMENT
OBJECTIVES AND POLICIES--Quantitative Style Funds."
Other. The Fund may employ certain currency techniques to seek to hedge
against currency exchange rate fluctuations or to seek to increase total
return. When used to seek to enhance return, these management techniques are
considered speculative. Such currency management techniques involve risks
different from those associated with investing solely in securities of U.S.
issuers quoted in U.S. dollars. To the extent that the Fund is fully invested
in foreign securities while also maintaining currency positions, it may be
exposed to greater combined risk. The Fund's net currency positions may expose
it to risks independent of its securities positions. See "Description of
Securities," "Investment Techniques" and "Risk Factors."
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MID CAP EQUITY FUND
Objective. The Fund's investment objective is to provide investors with
long-term capital appreciation.
Primary Investment Focus. The Fund invests, under normal circumstances,
substantially all of its assets in equity securities and at least 65% of its
total assets in equity securities of Mid Cap Companies with public stock
market capitalizations (based upon shares available for trading on an
unrestricted basis) of between $500 million and $7 billion at the time of
investment. However, the Fund currently intends to emphasize investments in
Mid Cap Companies with public stock market capitalizations of below $5 billion
at the time of investment. Dividend income, if any, is an incidental
consideration.
Other. The Fund may invest up to 35% of its total assets in mortgage-backed,
asset-backed and fixed income securities. In addition, although the Fund will
invest primarily in publicly traded U.S. securities, it may invest up to 25%
of its total assets in foreign securities, including securities of issuers in
Emerging Countries and securities quoted in foreign currencies.
CAPITAL GROWTH FUND
Objective. The Fund's investment objective is to provide investors with
long-term growth of capital.
Primary Investment Focus. The Fund invests, under normal circumstances, at
least 90% of its total assets in equity securities. The Fund seeks to achieve
its investment objective by investing in a diversified portfolio of equity
securities that are considered by the Investment Adviser to have long-term
capital appreciation potential.
Other. Although the Fund will invest primarily in publicly traded U.S.
securities, it may invest up to 10% of its total assets in foreign securities,
including securities of issuers in Emerging Countries and securities quoted in
foreign currencies.
INTERNATIONAL EQUITY FUND
Objective. The Fund's investment objective is to provide investors with
long-term capital appreciation.
Primary Investment Focus. The Fund invests, under normal circumstances,
substantially all, and at least 65%, of its total assets in equity securities
of companies that are organized outside the United States or whose securities
are principally traded outside the United States. The Fund may allocate its
assets among countries as determined by the Investment Adviser from time to
time provided that the Fund's assets are invested in at least three foreign
countries. The Fund expects to invest a substantial portion of its assets in
the securities of issuers located in the developed countries of Western Europe
and in Japan. However, the Fund may also invest in the securities of issuers
located in Australia, Canada, New Zealand and the Emerging Countries in which
the Emerging Markets Equity Fund may invest. Many of the countries in which
the Fund may invest have emerging markets or economies which involve certain
risks, as described below under "Risk Factors--Special Risks of Investments in
the Asian and Other Emerging Markets," which are not present in investments in
more developed countries.
Other. The Fund may employ certain currency techniques to seek to hedge
against currency exchange rate fluctuations or to seek to increase total
return. When used to seek to enhance return, these management techniques are
considered speculative. Such currency management techniques involve risks
different from those
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associated with investing solely in securities of U.S. issuers quoted in U.S.
dollars. To the extent that the Fund is fully invested in foreign securities
while also maintaining currency positions, it may be exposed to greater
combined risk. The Fund's net currency positions may expose it to risks
independent of its securities positions. See "Description of Securities,"
"Investment Techniques" and "Risk Factors." Up to 35% of the Fund's total
assets may be invested in fixed income securities.
SMALL CAP EQUITY FUND
Objective. The Fund's investment objective is to provide investors with
long-term capital growth.
Primary Investment Focus. The Fund invests, under normal circumstances, at
least 65% of its total assets in equity securities of companies with public
stock market capitalizations of $1 billion or less at the time of investment.
However, the Fund currently emphasizes investments in companies with public
stock market capitalizations of $500 million or less at the time of
investment. Under normal circumstances, the Fund's investment horizon for
ownership of stocks will be two to three years. Dividend income, if any, is an
incidental consideration.
Small Capitalization Companies. The Fund invests in companies which the
Investment Adviser believes are well managed niche businesses that have the
potential to achieve high or improving returns on capital and/or above average
sustainable growth. The Fund may invest in securities of small market
capitalization companies which may have experienced financial difficulties.
Investments may also be made in companies that are in the early stages of
their life and that the Investment Adviser believes have significant growth
potential. The Investment Adviser believes that the companies in which the
Fund may invest offer greater opportunity for growth of capital than larger,
more mature, better known companies. However, investments in such small market
capitalization companies involve special risks. See "Description of
Securities" and "Risk Factors."
Other. The Fund may invest in the aggregate up to 35% of its total assets in
the equity securities of companies with public stock market capitalizations in
excess of $1 billion and in fixed income securities. In addition, although the
Fund will invest primarily in publicly traded U.S. securities, it may invest
up to 25% of its total assets in foreign securities, including securities of
issuers in Emerging Countries and securities quoted in foreign currencies.
EMERGING MARKETS EQUITY FUND
Objective. The Fund's investment objective is to provide investors with
long-term capital appreciation.
Primary Investment Focus. The Fund invests, under normal market
circumstances, substantially all, and at least 65%, of its total assets in
equity securities of Emerging Country issuers. For purposes of the Fund's
investment policies, Emerging Countries are countries with economies or
securities markets that are considered by the Investment Adviser not to be
fully developed. The Investment Adviser may consider, but is not bound by,
classifications by the World Bank, the International Finance Corporation or
the United Nations and its agencies in determining whether a country is
emerging or developed. Currently, Emerging Countries include among others,
most Latin American, African, Asian and Eastern European nations. The
Investment Adviser currently intends that the Fund's investment focus will be
in the following Emerging Countries: Argentina, Botswana, Brazil, Chile,
China, Colombia, the Czech Republic, Egypt, Greece, Hong Kong, Hungary, India,
Indonesia, Israel, Jordan, Kenya, Malaysia, Mexico, Morocco, Pakistan, Peru,
the Philippines, Poland, Portugal, Russia, Singapore, South Africa, South
Korea, Sri Lanka, Taiwan, Thailand, Turkey, Venezuela and Zimbabwe. At the
Investment Adviser's discretion, the Fund may invest in other Emerging
Countries.
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An Emerging Country issuer is any entity that satisfies at least one of the
following criteria: (i) it derives 50% or more of its total revenue from goods
produced, sales made or services performed in one or more Emerging Countries,
(ii) it is organized under the laws of, or has a principal office in, an
Emerging Country, (iii) it maintains 50% or more of its assets in one or more
of the Emerging Countries or (iv) the principal securities trading market for
a class of its securities is in an Emerging Country.
Investments in Emerging Countries involve certain risks as described under
"Risk Factors--Special Risks of Investments in the Asian and Other Emerging
Markets," which are not present in investments in more developed countries.
The Fund may purchase privately placed equity securities, equity securities of
companies that are in the process of being privatized by foreign governments,
securities of issuers that have not paid dividends on a timely basis, equity
securities of issuers that have experienced difficulties, and securities of
companies without performance records.
Other. The Fund may employ certain currency management techniques to seek to
hedge against currency exchange rate fluctuations or to seek to increase total
return. When used to seek to enhance return, these management techniques are
considered speculative. Such currency management techniques involve risks
different from those associated with investing solely in securities of U.S.
issuers quoted in U.S. dollars. To the extent that the Fund is fully invested
in foreign securities while also maintaining currency positions, it may be
exposed to greater combined risk. The Fund's net currency positions may expose
it to risks independent of its securities positions. See "Description of
Securities," "Investment Techniques" and "Risk Factors."
Under normal circumstances, the Fund maintains investments in at least six
Emerging Countries and will not invest more than 35% of its total assets in
securities of issuers in any one Emerging Country. Allocation of the Fund's
investments will depend upon the relative attractiveness of the Emerging
Country markets and particular issuers. In addition, macro-economic factors
and the portfolio manager's and Goldman Sachs economists' views of the
relative attractiveness of Emerging Countries and currencies are considered in
allocating the Fund's assets among Emerging Countries. Concentration of the
Fund's assets in one or a few Emerging Countries and currencies will subject
the Fund to greater risks than if the Fund's assets were not geographically
concentrated. See "Description of Securities--Foreign Transactions" and "Risk
Factors." The Fund may invest in the aggregate up to 35% of its total assets
in (i) fixed income securities of private and governmental Emerging Country
issuers, (ii) equity and fixed income securities of issuers in developed
countries and (iii) temporary investments.
ASIA GROWTH FUND
Objective. The Fund's investment objective is to provide investors with
long-term capital appreciation.
Primary Investment Focus. The Fund invests, under normal market
circumstances, substantially all, and at least 65%, of its total assets in
equity securities of companies that satisfy at least one of the following
criteria: (i) their securities are traded principally on stock exchanges in
one or more of the Asian countries, (ii) they derive 50% or more of their
total revenue from goods produced, sales made or services performed in one or
more of the Asian countries, (iii) they maintain 50% or more of their assets
in one or more of the Asian countries, or (iv) they are organized under the
laws of one of the Asian countries. The Fund seeks to achieve its objective by
investing primarily in equity securities of Asian companies which are
considered by the Investment Adviser to have long-term capital appreciation
potential. Many of the countries in which the Fund may invest have emerging
markets or economies which involve certain risks as described under "Risk
Factors--Special Risks of Investments in the Asian and Other Emerging
Markets," which are not present in investments in more developed
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<PAGE>
countries. The Fund may purchase equity securities of issuers that have not
paid dividends on a timely basis, securities of companies that have
experienced difficulties, and securities of companies without performance
records.
Other. The Fund may employ certain currency management techniques to seek to
hedge against currency exchange rate fluctuations or to seek to increase total
return. When used to seek to enhance return, these management techniques are
considered speculative. Such currency management techniques involve risks
different from those associated with investing solely in securities of U.S.
issuers quoted in U.S. dollars. To the extent that the Fund is fully invested
in foreign securities while also maintaining currency positions, it may be
exposed to greater combined risk. The Fund's net currency positions may expose
it to risks independent of its securities positions. See "Description of
Securities," "Investment Techniques" and "Risk Factors."
The Fund may allocate its assets among the Asian countries as determined
from time to time by the Investment Adviser. For purposes of the Fund's
investment policies, Asian countries are China, Hong Kong, India, Indonesia,
Malaysia, Pakistan, the Philippines, Singapore, South Korea, Sri Lanka, Taiwan
and Thailand as well as any other country in the Asian region (other than
Japan) to the extent that foreign investors are permitted by applicable law to
make such investments. Allocation of the Fund's investments will depend upon
the relative attractiveness of the Asian markets and particular issuers.
Concentration of the Fund's assets in one or a few of the Asian countries and
Asian currencies will subject the Fund to greater risks than if the Fund's
assets were not geographically concentrated. See "Description of Securities--
Foreign Investments." The Fund may invest in the aggregate up to 35% of its
total assets in equity securities of issuers in other countries, including
Japan, and in fixed income securities.
DESCRIPTION OF SECURITIES
CONVERTIBLE SECURITIES
Each Fund may invest in convertible securities, including debt obligations
and preferred stock of the issuer convertible at a stated exchange rate into
common stock of the issuer. Convertible securities generally offer lower
interest or dividend yields than non-convertible securities of similar
quality. As with all fixed income securities, the market value of convertible
securities tends to decline as interest rates increase and, conversely, to
increase as interest rates decline. However, when the market price of the
common stock underlying a convertible security exceeds the conversion price,
the convertible security tends to reflect the market price 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 decline in price to the same extent as the underlying common stock.
Convertible securities rank senior to common stocks in an issuer's capital
structure and consequently entail less risk than the issuer's common stock. In
evaluating a convertible security, the Investment Adviser will give primary
emphasis to the attractiveness of the underlying common stock. The convertible
debt securities in which the Balanced Fund invests will be rated, at the time
of investment, B or better by Standard & Poor's Ratings Group ("Standard &
Poor's") or Moody's Investors Service, Inc. ("Moody's"), or if unrated by such
rating organizations, determined to be of comparable quality by the Investment
Adviser. The convertible securities in which the CORE U.S. Equity, CORE Large
Cap Growth, CORE Small Cap Equity and CORE International Equity Funds invest
are not subject to any minimum rating criteria. The convertible debt
securities in which the other Funds may invest are subject to the same rating
criteria as a Fund's investments in non-convertible debt securities.
Convertible debt securities are equity investments for purposes of each Fund's
investment policies.
FOREIGN INVESTMENTS
FOREIGN SECURITIES. Each Fund may invest in the securities of foreign
issuers (provided that the CORE U.S. Equity, CORE Large Cap Growth and CORE
Small Cap Equity Funds may only invest in equity securities
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of foreign issuers that are traded in the U.S. and comply with U.S. accounting
standards). Investments in foreign securities may offer potential benefits
that are not available from investments exclusively in equity securities of
domestic issuers quoted in U.S. dollars. Foreign countries may have economic
policies or business cycles different from those of the U.S. and markets for
foreign securities do not necessarily move in a manner parallel to U.S.
markets.
Investing in the securities of foreign issuers involves risks that are not
typically associated with investing in equity securities of domestic issuers
quoted in U.S. dollars. Such investments may be affected by changes in
currency rates, changes in foreign or U.S. laws or restrictions applicable to
such investments and in exchange control regulations (e.g., currency
blockage). A decline in the exchange rate of the currency (i.e., weakening of
the currency against the U.S. dollar) in which a portfolio security is quoted
or denominated relative to the U.S. dollar would reduce the value of the
portfolio security. In addition, if the currency in which a Fund receives
dividends, interest or other payments declines in value against the U.S.
dollar before such income is distributed as dividends to shareholders or
converted to U.S. dollars, the Fund may have to sell portfolio securities to
obtain sufficient cash to pay such dividends. Commissions on transactions in
foreign securities may be higher than those for similar transactions on
domestic stock markets. In addition, clearance and settlement procedures may
be different in foreign countries and, in certain markets, such procedures
have on occasion been unable to keep pace with the volume of securities
transactions, thus making it difficult to conduct such transactions.
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to U.S.
issuers. There may be less publicly available information about a foreign
issuer than about a U.S. issuer. In addition, there is generally less
government regulation of foreign markets, companies and securities dealers
than in the U.S. Foreign securities markets may have substantially less volume
than U.S. securities markets and securities of many foreign issuers are less
liquid and more volatile than securities of comparable domestic issuers.
Furthermore, with respect to certain foreign countries, there is a possibility
of nationalization, expropriation or confiscatory taxation, imposition of
withholding or other taxes on dividend or interest payments (or, in some
cases, capital gains), limitations on the removal of funds or other assets of
the Funds, political or social instability or diplomatic developments which
could affect investments in those countries.
INVESTMENTS IN ADRS, EDRS AND GDRS. Each Fund may invest in foreign
securities which take the form of sponsored and unsponsored American
Depository Receipts ("ADRs") and Global Depository Receipts ("GDRs") and each
Fund, other than the CORE U.S. Equity, CORE Large Cap Growth and CORE Small
Cap Equity Funds, may also invest in European Depository Receipts ("EDRs") or
other similar instruments representing securities of foreign issuers
(together, "Depository Receipts"). ADRs represent the right to receive
securities of foreign issuers deposited in a domestic bank or a correspondent
bank. Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the
United States on exchanges or over-the-counter and are sponsored and issued by
domestic banks. EDRs and GDRs are receipts evidencing an arrangement with a
non-U.S. bank. EDRs and GDRs are not necessarily quoted in the same currency
as the underlying security. To the extent a Fund acquires Depository Receipts
through banks which do not have a contractual relationship with the foreign
issuer of the security underlying the Depository Receipts to issue and service
such Depository Receipts (unsponsored Depository Receipts), there may be an
increased possibility that the Fund would not become aware of and be able to
respond to corporate actions, such as stock splits or rights offerings
involving the foreign issuer, in a timely manner. In addition, the lack of
information may result in inefficiencies in the valuation of such instruments.
Investment in Depository Receipts does not eliminate all the risks inherent in
investing in securities of non-U.S. issuers. The market value of Depository
Receipts is dependent upon the market value of the underlying securities and
fluctuations in the relative value of the currencies in which the Depository
Receipt and
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the underlying securities are quoted. However, by investing in Depository
Receipts, such as ADRs, that are quoted in U.S. dollars, a Fund will avoid
currency risks during the settlement period for purchases and sales.
FOREIGN CURRENCY TRANSACTIONS. Because investment in foreign issuers will
usually involve currencies of foreign countries, and because the Balanced,
CORE International Equity, International Equity, Emerging Markets Equity and
Asia Growth Funds may have currency exposure independent of their securities
positions, the value of the assets of a Fund as measured in U.S. dollars will
be affected by changes in foreign currency exchange rates. A Fund may, to the
extent it invests in foreign securities, purchase or sell forward foreign
currency exchange contracts for hedging purposes and to seek to protect
against anticipated changes in future foreign currency exchange rates. In
addition, the Balanced, CORE International Equity, International Equity,
Emerging Markets Equity and Asia Growth Funds may enter into such contracts to
seek to increase total return when the Investment Adviser anticipates that the
foreign currency will appreciate or depreciate in value, but securities
denominated or quoted in that currency do not present attractive investment
opportunities and are not held in the Fund's portfolio. When entered into to
seek to enhance return, forward foreign currency exchange contracts are
considered speculative. The Balanced, CORE International Equity, International
Equity, Emerging Markets Equity and Asia Growth Funds may also engage in
cross-hedging by using forward contracts in a currency different from that in
which the hedged security is denominated or quoted if the Investment Adviser
determines that there is a pattern of correlation between the two currencies.
If a Fund enters into a forward foreign currency exchange contract to buy
foreign currency for any purpose or the Balanced, CORE International Equity,
International Equity, Emerging Markets Equity and Asia Growth Funds enter into
forward foreign currency exchange contracts to sell foreign currency to seek
to increase total return, the Fund will be required to place cash or liquid
assets in a segregated account with the Fund's custodian in an amount equal to
the value of the Fund's total assets committed to the consummation of the
forward contract. The Fund will incur costs in connection with conversions
between various currencies. A Fund may hold foreign currency received in
connection with investments in foreign securities when, in the judgment of the
Investment Adviser, it would be beneficial to convert such currency into U.S.
dollars at a later date, based on anticipated changes in the relevant exchange
rate.
Currency exchange rates may fluctuate significantly over short periods of
time causing, along with other factors, a Fund's net asset value to fluctuate.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments
in different countries, actual or anticipated changes in interest rates and
other complex factors, as seen from an international perspective. Currency
exchange rates also can be affected unpredictably by the intervention of U.S.
or foreign governments or central banks or the failure to intervene or by
currency controls or political developments in the U.S. or abroad. To the
extent that a substantial portion of a Fund's total assets, adjusted to
reflect the Fund's net position after giving effect to currency transactions,
is denominated or quoted in the currencies of foreign countries, the Fund will
be more susceptible to the risk of adverse economic and political developments
within those countries.
The market in forward foreign currency exchange contracts, currency swaps
and other privately negotiated currency instruments offers less protection
against defaults by the other party to such instruments than is available for
currency instruments traded on an exchange. Such contracts are subject to the
risk that the counterparty to the contract will default on its obligations.
Since these contracts are not guaranteed by an exchange or clearinghouse, a
default on the contract would deprive the 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 forward foreign currency exchange contracts, currency
swaps
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or other privately negotiated currency instruments 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 Investment Adviser.
The Balanced, CORE International Equity, International Equity, Emerging
Markets Equity and Asia Growth Funds may also engage in a variety of foreign
currency management techniques. However, due to the limited market for these
instruments with respect to the currencies of many Emerging Countries,
including certain Asian countries, the Investment Advisers do not currently
anticipate that a significant portion of Emerging Markets Equity and Asia
Growth Fund's currency exposure will be covered by such instruments. For a
discussion of such instruments and the risks associated with their use, see
"Investment Objective and Policies" in the Additional Statement.
FIXED INCOME SECURITIES
U.S. GOVERNMENT SECURITIES. Each Fund may invest in U.S. Government
securities. Generally, these securities include U.S. Treasury obligations and
obligations issued or guaranteed by U.S. Government agencies,
instrumentalities or sponsored enterprises. U.S. Government securities also
include Treasury receipts and other stripped U.S. Government securities, where
the interest and principal components of stripped U.S. Government securities
are traded independently. A Fund may also invest in zero coupon U.S. Treasury
securities and in zero coupon securities issued by financial institutions,
which represent a proportionate interest in underlying U.S. Treasury
securities. A zero coupon security pays no interest to its holder during its
life and its value consists of the difference between its face value at
maturity and its cost. The market prices of zero coupon securities generally
are more volatile than the market prices of securities that pay interest
periodically. See "Taxation" in the Additional Statement.
FOREIGN GOVERNMENT SECURITIES. The Balanced, CORE International Equity,
International Equity, Emerging Markets Equity and Asia Growth Funds may invest
in debt obligations of foreign governments and governmental agencies,
including those of Emerging Countries. Investment in sovereign debt
obligations involves special risks not present in debt obligations of
corporate issuers. The issuer of the debt or the governmental authorities that
control the repayment of the debt may be unable or unwilling to repay
principal or interest when due in accordance with the terms of such debt, and
a Fund may have limited recourse in the event of a default. Periods of
economic uncertainty may result in the volatility of market prices of
sovereign debt, and in turn a Fund's net asset value, to a greater extent than
the volatility inherent in debt obligations of U.S. issuers. A sovereign
debtor's willingness or ability to repay principal and pay interest in a
timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's
policy toward international lenders and the political constraints to which a
sovereign debtor may be subject.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. Each Fund (other than the CORE
U.S. Equity, CORE Large Cap Growth, CORE Small Cap Equity and CORE
International Equity Funds) may invest in mortgage-backed securities
("Mortgage-Backed Securities"), which represent direct or indirect
participations in, or are collateralized by and payable from, mortgage loans
secured by real property. Each Fund (other than the CORE U.S. Equity, CORE
Large Cap Growth, CORE Small Cap Equity and CORE International Equity Funds)
may also invest in asset-backed securities ("Asset-Backed Securities"). The
principal and interest payments on Asset-Backed Securities are collateralized
by pools of assets such as auto loans, credit card receivables, leases,
installment contracts and personal property. Such asset pools are securitized
through the use of special purpose trusts or corporations. Principal and
interest payments may be credit enhanced by a letter of credit, a pool
insurance policy or a senior/subordinated structure.
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The Balanced Fund may also invest in stripped Mortgage-Backed Securities
("SMBS") (including interest only and principal only securities), which are
derivative multiple class Mortgage-Backed Securities. SMBS are usually
structured with two different classes: one that receives 100% of the interest
payments and the other that receives 100% of the principal payments from a
pool of mortgage loans. If the underlying mortgage loans experience different
than anticipated prepayments of principal, a Fund may fail to fully recoup its
initial investment in these securities. 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 loans 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.
CORPORATE DEBT OBLIGATIONS. Each Fund may invest in corporate debt
obligations. Corporate debt obligations are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations.
BANK OBLIGATIONS. Each Fund may invest in obligations issued or guaranteed
by U.S. or 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 limited to the issuing branch by the
terms of the specific obligations or by government regulation. Banks are
subject to extensive but different governmental regulations which may limit
both the amount and types of loans which may be made and interest rates which
may be charged. In addition, the profitability of the banking industry is
largely dependent upon the availability and cost of funds for the purpose of
financing lending operations under prevailing money market conditions. General
economic conditions as well as exposure to credit losses arising from possible
financial difficulties of borrowers play an important part in the operation of
this industry.
STRUCTURED SECURITIES. Each Fund may invest in structured securities. The
value of the principal of and/or interest on such securities is determined by
reference to changes in the value of specific currencies, interest rates,
commodities, indices or other financial indicators (the "Reference") or the
relative change in two or more References. The interest rate or the principal
amount payable upon maturity or redemption may be increased or decreased
depending upon changes in the applicable Reference. The terms of the
structured securities may provide that in certain circumstances no principal
is due at maturity and, therefore, result in the loss of a Fund's investment.
Structured securities may be positively or negatively indexed, so that
appreciation of the Reference may produce an increase or decrease in the
interest rate or value of the security at maturity. In addition, changes in
the interest rates or the value of the security at maturity may be a multiple
of changes in the value of the Reference. Consequently, structured securities
may entail a greater degree of market risk than other types of fixed-income
securities. Structured securities may also be more volatile, less liquid and
more difficult to accurately price than less complex securities.
RATING CRITERIA. Except as noted below, each Fund (other than the CORE U.S.
Equity, CORE Large Cap Growth, CORE Small Cap Equity and CORE International
Equity Funds, which only invest in debt instruments that are cash equivalents)
may invest in debt securities rated at least investment grade at the time of
investment. Investment grade debt securities are securities rated BBB or
higher by Standard & Poor's or Baa or higher by Moody's. A security will be
deemed to have met a rating requirement if it receives the minimum required
rating from at least one such rating organization even though it has been
rated below the minimum rating by one or more other rating organizations, or
if unrated by such rating organizations, determined by the Investment Adviser
to be of comparable credit quality. The Balanced Fund may invest up to 10% of
its total assets on debt securities
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that are rated BB or B by Standard & Poor's or Ba or B by Moody's. The Growth
and Income, Capital Growth, Small Cap Equity, International Equity, Emerging
Markets Equity and Asia Growth Funds may invest up to 10%, 10%, 35%, 35%, 35%
and 35%, respectively, of their total assets in debt securities which are
unrated or rated in the lowest rating categories by Standard & Poor's or
Moody's (i.e., BB or lower by Standard & Poor's or Ba or lower by Moody's),
including securities rated D by Moody's or Standard & Poor's. Mid Cap Equity
Fund may invest up to 10% of its total assets in below investment grade debt
securities rated B or higher by Standard & Poor's or B or higher by Moody's.
Fixed income securities rated BBB or Baa are considered medium-grade
obligations with speculative characteristics, and adverse economic conditions
or changing circumstances may weaken their issuers' capacity to pay interest
and repay principal. Fixed income securities rated BB or Ba or below (or
comparable unrated securities) are commonly referred to as "junk bonds," are
considered predominately speculative and may be questionable as to principal
and interest payments. In some cases, such bonds may be highly speculative,
have poor prospects for reaching investment grade standing and be in default.
As a result, investment in such bonds will entail greater speculative risks
than those associated with investment in investment grade bonds. Also, to the
extent that the rating assigned to a security in a Fund's portfolio is
downgraded by a rating organization, the market price and liquidity of such
security may be adversely affected. See Appendix A to the Additional Statement
for a description of the corporate bond ratings assigned by Standard & Poor's
and Moody's.
REAL ESTATE INVESTMENT TRUSTS ("REITS")
Each Fund may invest in REITs, which are pooled investment vehicles that
invest primarily in either real estate or real estate related loans. The value
of a REIT is affected by changes in the value of the properties owned by the
REIT or securing mortgage loans held by the REIT. REITs are dependant upon
cash flow from their investments to repay financing costs and the ability of
the REITs' manager. REITs are also subject to risks generally associated with
investments in real estate. A Fund will indirectly bear its proportionate
share of any expenses, including management fees, paid by a REIT in which it
invests.
INVESTMENT TECHNIQUES
OPTIONS ON SECURITIES AND SECURITIES INDICES
Each Fund (other than the CORE U.S. Equity and CORE Large Cap Growth Funds)
may write (sell) covered call and put options and purchase call and put
options on any securities in which it may invest or on any securities index
composed of securities in which it may invest. 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 use of options to seek to increase total return involves the
risk of loss if the Investment Adviser is incorrect in its expectation of
fluctuations in securities prices or interest rates. The successful use of
options for hedging purposes also depends in part on the ability of the
Investment Adviser to manage future price fluctuations and the degree of
correlation between the options and securities markets. If the Investment
Adviser is incorrect in its expectation of changes in securities prices or
determination of the correlation between the securities indices on which
options are written and purchased and the securities in a Fund's investment
portfolio, the investment performance of the Fund will be less favorable than
it would have been in the absence of such options transactions. The writing of
options could significantly increase a Fund's portfolio turnover rate and,
therefore, associated brokerage commissions or spreads.
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OPTIONS ON FOREIGN CURRENCIES
A Fund may, to the extent it invests in foreign securities, purchase and
sell (write) call and put options on foreign currencies for the purpose of
protecting against declines in the U.S. dollar value of foreign portfolio
securities and anticipated dividends on such securities and against increases
in the U.S. dollar cost of foreign securities to be acquired. In addition, the
Balanced, CORE International Equity, International Equity, Emerging Markets
Equity and Asia Growth Funds may use options on currency to cross-hedge, which
involves writing or purchasing options on one currency to hedge against
changes in exchange rates for a different currency, if there is a pattern of
correlation between the two currencies. As with other kinds of option
transactions, however, the writing of an option on foreign currency will
constitute only a partial hedge, up to the amount of the premium received. If
an option that a Fund has written is exercised, the Fund could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on foreign currency may constitute
an effective hedge against exchange rate fluctuations; however, in the event
of exchange rate movements adverse to a Fund's position, the Fund may forfeit
the entire amount of the premium plus related transaction costs. In addition
to purchasing call and put options for hedging purposes, the Balanced, CORE
International Equity, International Equity, Emerging Markets Equity and Asia
Growth Funds may purchase call or put options on currency to seek to increase
total return when the Investment Adviser anticipates that the currency will
appreciate or depreciate in value, but the securities quoted or denominated in
that currency do not present attractive investment opportunities and are not
held in the Fund's portfolio. When purchased or sold to seek to increase total
return, options on currencies are considered speculative. Options on foreign
currencies written or purchased by the Funds are traded on U.S. and foreign
exchanges or over-the-counter.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
To seek to increase total return or to hedge against changes in interest
rates, securities prices or currency exchange rates, a 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 such contracts and
options. The futures contracts may be based on various securities (such as
U.S. Government securities), foreign currencies, securities indices and other
financial instruments and indices. The CORE U.S. Equity and CORE Large Cap
Growth Funds may enter into such transactions only with respect to the S&P 500
Index in the case of the CORE U.S. Equity Fund and a representative index in
the case of the CORE Large Cap Growth Fund. A Fund will engage in futures and
related options transactions for bona fide hedging purposes as defined in
regulations of the Commodity Futures Trading Commission or to seek to increase
total return to the extent permitted by such regulations. A Fund may not
purchase or sell futures contracts or purchase or sell related options to seek
to increase total return, except for closing purchase or sale transactions, if
immediately thereafter the sum of the amount of initial margin deposits and
premiums paid on the Fund's outstanding positions in futures and related
options entered into for the purpose of seeking to increase total return would
exceed 5% of the market value of the Fund's net assets. These transactions
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 segregate and maintain cash or liquid assets with a value equal to
the amount of the Fund's obligations.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. See
"Investment Objectives and Policies--Futures Contracts and Options on Future
Contracts" in the Additional Statement. Thus, while a Fund may benefit from
the use of futures and options on futures, unanticipated changes in interest
rates, securities prices or currency exchange rates may result
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in poorer overall performance than if the Fund had not entered into any
futures contracts or options transactions. Because perfect correlation between
a futures position and portfolio position that is intended to be protected is
impossible to achieve, the desired protection may not be obtained and a Fund
may be exposed to risk of loss. The loss incurred by a Fund in entering into
futures contracts and in writing call options on futures is potentially
unlimited and may exceed the amount of the premium received. Futures markets
are highly volatile and the use of futures may increase the volatility of a
Fund's net asset value. The profitability of a Fund's trading in futures to
seek to increase total return depends upon the ability of the Investment
Adviser to correctly analyze the futures markets. In addition, because of the
low margin deposits normally required in futures trading, a relatively small
price movement in a futures contract may result in substantial losses to a
Fund. Further, futures contracts and options on futures may be illiquid, and
exchanges may limit fluctuations in futures contract prices during a single
day.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
Each Fund may purchase when-issued securities. When-issued transactions
arise when securities are purchased by a Fund with payment and delivery taking
place in the future in order to secure what is considered to be an
advantageous price and yield to the Fund at the time of entering into the
transaction. Each Fund may also purchase securities on a forward commitment
basis; that is, make contracts to purchase securities for a fixed price at a
future date beyond the customary three-day settlement period. A Fund is
required to hold and maintain in a segregated account with the Fund's
custodian until three days prior to the settlement date, cash or liquid assets
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. The purchase of securities on a when-issued or forward
commitment basis involves a risk of loss if the value of the security to be
purchased declines prior to the settlement date. Although a Fund would
generally purchase securities on a when-issued or forward commitment basis
with the intention of acquiring securities for its portfolio, a Fund may
dispose of when-issued securities or forward commitments prior to settlement
if its Investment Adviser deems it appropriate to do so.
ILLIQUID AND RESTRICTED SECURITIES
A Fund will not invest more than 15% of its net assets in illiquid
investments, which include securities (both foreign and domestic) that are not
readily marketable, swap transactions, certain SMBS, repurchase agreements
maturing in more than seven days, time deposits with a notice or demand period
of more than seven days, and certain restricted securities, unless it is
determined, based upon the continuing review of the trading markets for a
specific restricted security, that such restricted security is eligible for
resale under Rule 144A under the Securities Act of 1933 and, therefore, is
liquid. The Trustees have adopted guidelines and delegated to the Investment
Advisers the daily function of determining and monitoring the liquidity of
portfolio securities. The Trustees, however, retain oversight focusing on
factors such as valuation, liquidity and availability of information and are
ultimately responsible for each determination. Investing in restricted
securities eligible for resale pursuant to Rule 144A may decrease the
liquidity of a Fund's portfolio 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 and
illiquid securities normally reflect a discount, which may be significant,
from the market price of comparable securities for which a liquid market
exists.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with dealers in U.S.
Government securities and member banks of the Federal Reserve System which
furnish collateral at least equal in value or market price to the amount
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of their repurchase obligation. The Balanced, CORE International Equity,
International Equity, Emerging Markets Equity and Asia Growth Funds may also
enter into repurchase agreements involving certain foreign government
securities. If the other party or "seller" defaults, a Fund might suffer a
loss to the extent that the proceeds from the sale of the underlying
securities and other collateral held by the Fund in connection with the
related repurchase agreement are less than the repurchase price. In addition,
in the event of bankruptcy of the seller or failure of the seller to
repurchase the securities as agreed, a Fund could suffer losses, including
loss of interest on or principal of the security and costs associated with
delay and enforcement of the repurchase agreement. The Trustees have reviewed
and approved certain counterparties whom they believe to be creditworthy and
have authorized the Funds to enter into repurchase agreements with such
counterparties. In addition, each Fund, together with other registered
investment companies having management agreements with an Investment Adviser,
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.
LENDING OF PORTFOLIO SECURITIES
Each Fund may also seek to increase its income by lending portfolio
securities. Under present regulatory policies, such loans may be made to
institutions, such as certain broker-dealers, and are required to be secured
continuously by collateral in cash, cash equivalents, 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. If an Investment Adviser determines to make securities loans, the
value of the securities loaned may not exceed 33 1/3% of the value of the
total assets of a Fund. A Fund may experience a loss or delay in the recovery
of its securities if the institution with which it has engaged in a portfolio
loan transaction breaches its agreement with the Fund.
SHORT SALES AGAINST-THE-BOX
Each Fund (other than the CORE U.S. Equity, CORE Large Cap Growth, CORE
Small Cap Equity and CORE International Equity Funds) may make short sales of
securities or maintain a short position, provided that 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 an equal amount of the securities of the same issuer as the
securities sold short (a short sale against-the-box). Not more than 25% of a
Fund's net assets (determined at the time of the short sale) may be subject to
such short sales. Short sales will be made primarily to defer realization of
gain or loss for federal tax purposes; a gain or loss in a Fund's long
position will be offset by a gain or loss in its short position.
MORTGAGE DOLLAR ROLLS
The Balanced Fund may enter into mortgage "dollar rolls" in which the Fund
sells securities for delivery in the current month and simultaneously
contracts with the same counterparty to repurchase substantially similar (same
type, coupon and maturity) but not identical securities on a specified future
date. During the roll period, the Fund loses the right to receive principal
and interest paid on the securities sold. However, the 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 or fee income plus
the interest earned on the cash proceeds of the securities sold until the
settlement date for 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
the Fund. The Fund will hold and maintain in a segregated account until the
settlement date cash or liquid assets in an amount equal to the forward
purchase price. Successful use of mortgage dollar rolls depends upon the
Investment Adviser's
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ability to predict correctly interest rates and mortgage prepayments. There is
no assurance that mortgage dollar rolls can be successfully employed. For
financial reporting and tax 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. The Fund does not currently intend to
enter into mortgage dollar rolls that are accounted for as a financing.
TEMPORARY INVESTMENTS
Each Fund may, for temporary defensive purposes, invest 100% of its total
assets (except that the CORE U.S. Equity, CORE Large Cap Growth, CORE Small
Cap Equity, CORE International Equity and Emerging Markets Equity Funds may
only hold up to 35% of their respective total assets) in U.S. Government
securities, repurchase agreements collateralized by U.S. Government
securities, commercial paper rated at least A-2 by Standard & Poor's or P-2 by
Moody's, certificates of deposit, bankers' acceptances, repurchase agreements,
non-convertible preferred stocks, non-convertible corporate bonds with a
remaining maturity of less than one year or, subject to certain tax
restrictions, foreign currencies. When a Fund's assets are invested in such
instruments, the Fund may not be achieving its investment objective.
MISCELLANEOUS TECHNIQUES
In addition to the techniques and investments described above, each Fund
may, with respect to no more than 5% of its net assets, engage in the
following techniques and investments: (i) warrants and stock purchase rights,
(ii) currency swaps (Balanced, CORE International Equity, International
Equity, Emerging Markets Equity and Asia Growth Funds only), (iii) mortgage
swaps, index swaps and interest rate swaps, caps, floors and collars (Balanced
Fund only), (iv) yield curve options and inverse floating rate securities
(Balanced Fund only), (v) other investment companies, (vi) unseasoned
companies and (vii) municipal securities (Balanced Fund only). For more
information see the Additional Statement.
RISK FACTORS
RISK OF INVESTING IN SMALL CAPITALIZATION COMPANIES. Investing in the
securities of such companies involves greater risk and the possibility of
greater portfolio price volatility. Historically, small market capitalization
stocks and stocks of recently organized companies have been more volatile in
price than the larger market capitalization stocks included in the S&P 500
Index. Among the reasons for the greater price volatility of these small
company and unseasoned stocks are the less certain growth prospects of smaller
firms and the lower degree of liquidity in the markets for such stocks.
SPECIAL RISKS OF INVESTMENTS IN THE ASIAN AND OTHER EMERGING
MARKETS. Investing in the securities of issuers in Emerging Countries involves
risks in addition to those discussed under "Description of Securities--
Foreign Investments." The International Equity, Emerging Markets Equity and
Asia Growth Funds may each invest without limit in the securities of issuers
in Emerging Countries. The Balanced, Growth and Income, Small Cap Equity and
Mid Cap Equity Funds may each invest up to 15%, the Capital Growth Fund may
invest up to 10% and the CORE International Equity Fund may invest up to 25%
of its total assets in securities of issuers in Emerging Countries. Emerging
Countries are generally located in the Asia-Pacific region, Eastern Europe,
Latin and South America and Africa. A Fund's purchase and sale of portfolio
securities in certain Emerging Countries may be constrained by limitations as
to daily changes in the prices of listed securities, periodic trading or
settlement volume and/or limitations on aggregate holdings of foreign
investors. Such limitations may be
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computed based on the aggregate trading volume by or holdings of a Fund, the
Investment Adviser, its affiliates and their respective clients and other
service providers. A Fund may not be able to sell securities in circumstances
where price, trading or settlement volume limitations have been reached.
Foreign investment in the securities markets of certain Emerging Countries
is restricted or controlled to varying degrees which may limit investment in
such countries or increase the administrative costs of such investments. For
example, certain Asian countries require governmental approval prior to
investments by foreign persons or limit investment by foreign persons to only
a specified percentage of an issuer's outstanding securities or a specific
class of securities which may have less advantageous terms (including price)
than securities of the issuer available for purchase by nationals. In
addition, certain countries may restrict or prohibit investment opportunities
in issuers or industries deemed important to national interests. Such
restrictions may affect the market price, liquidity and rights of securities
that may be purchased by a Fund. The repatriation of both investment income
and capital from certain Emerging Countries is subject to restrictions such as
the need for governmental consents. Due to restrictions on direct investment
in equity securities in certain Asian countries, such as Taiwan, it is
anticipated that a Fund may invest in such countries only through other
investment funds in such countries. See "Other Investment Companies" in the
Additional Statement.
Many Emerging Countries may be subject to a greater degree of economic,
political and social instability than is the case in Western Europe, the
United States, Canada, Australia, New Zealand and Japan. Many Emerging
Countries do not have fully democratic governments. For example, governments
of some Emerging Countries are authoritarian in nature or have been installed
or removed as a result of military coups, while governments in other Emerging
Countries have periodically used force to suppress civil dissent. Disparities
of wealth, the pace and success of democratization, and ethnic, religious and
racial disaffection, among other factors, have also led to social unrest,
violence and/or labor unrest in some Asian and other Emerging Countries.
Unanticipated political or social developments may affect the values of a
Fund's investments. Investing in Emerging Countries involves the risk of loss
due to expropriation, nationalization, confiscation of assets and property or
the imposition of restrictions on foreign investments and on repatriation of
capital invested. Economies in individual Emerging Countries may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross domestic product, rates of inflation, currency valuation, capital
reinvestment, resource self-sufficiency and balance of payments positions.
Many Emerging Countries have experienced currency devaluations and substantial
and, in some cases, extremely high rates of inflation, which have a negative
effect on the economies and securities markets of such Emerging Countries.
Economies in Emerging Countries generally are dependent heavily upon commodity
prices and international trade and, accordingly, have been and may continue to
be affected adversely by the economies of their trading partners, trade
barriers, exchange controls, managed adjustments in relative currency values
and other protectionist measures imposed or negotiated by the countries with
which they trade.
Brokerage commissions, custodial services and other costs relating to
investment in international securities markets generally are more expensive
than in the U.S. A Fund's investment in Emerging Countries may also be subject
to withholding or other taxes, which may be significant and may reduce the
return from an investment in such country to the Fund. Settlement procedures
in Emerging Countries are frequently less developed and reliable than those in
the United States and may involve a Fund's delivery of securities before
receipt of payment for their sale. In addition, significant delays are common
in certain markets in registering the transfer of securities. Settlement or
registration problems may make it more difficult for a Fund to value its
portfolio securities and could cause the Fund to miss attractive investment
opportunities, to have a portion of its assets uninvested or to incur losses
due to the failure of a counterparty to pay for securities the Fund has
delivered or the Fund's inability to complete its contractual obligations.
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Currently, there is no market or only a limited market for many of the
management techniques and instruments with respect to the currencies and
securities markets of the Emerging Countries. Consequently, there can be no
assurance that suitable instruments for hedging currency and market-related
risks will be available at the times when a Fund wishes to use them.
RISK OF INVESTING IN FIXED INCOME SECURITIES. When interest rates decline,
the market value of fixed income securities tends to increase. Conversely,
when interest rates increase, the market value of fixed income securities
tends to decline. Volatility of a security's market value will differ
depending upon the security's duration, the issuer and the type of instrument.
Investments in fixed income securities are subject to the risk that the issuer
could default on its obligations and a Fund could sustain losses on such
investments. A default could impact both interest and principal payments.
RISKS OF DERIVATIVE TRANSACTIONS. A Fund's transactions, if any, in options,
futures, options on futures, swap transactions, structured securities and
currency forward contracts involve certain risks, including a possible lack of
correlation between changes in the value of hedging instruments and the
portfolio assets being hedged, the potential illiquidity of the markets for
derivative instruments, the risks arising from the margin requirements and
related leverage factors associated with such transactions. The use of these
management techniques to seek to increase total return may be regarded as a
speculative practice and involves the risk of loss if the Investment Adviser
is incorrect in its expectation of fluctuations in securities prices, interest
rates or currency prices. A Fund's use of certain derivative transactions may
be limited by the requirements of the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company.
INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions that are described
in detail under "Investment Restrictions" in the Additional Statement.
Fundamental investment restrictions of a Fund can not be changed without
approval of a majority of the outstanding shares of that Fund. Each Fund's
investment objectives and all policies not specifically designated as
fundamental are non-fundamental and may be changed without shareholder
approval. If there is a change in a Fund's investment objectives, shareholders
should consider whether that Fund remains an appropriate investment in light
of their then current financial positions and needs.
PORTFOLIO TURNOVER
A high rate of portfolio turnover (100% or more) involves correspondingly
greater expenses which must be borne by a Fund and its shareholders and may
under certain circumstances make it more difficult for a Fund to qualify as a
regulated investment company under the Code. See "Financial Highlights" for a
statement of each Fund's (other than the CORE Large Cap Growth, CORE Small Cap
Equity, CORE International Equity and Emerging Markets Equity Funds)
historical portfolio turnover ratio. It is anticipated that the annual
portfolio turnover rates of the CORE Large Cap Growth, CORE Small Cap Equity,
CORE International Equity and Emerging Markets Equity Funds will generally not
exceed 70%, 70%, 70% and 100%, respectively. The portfolio turnover rate is
calculated by dividing the lesser of the dollar amount of sales or purchases
of portfolio securities by the average monthly value of a Fund's portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less. Notwithstanding the foregoing, the Investment Adviser may,
from time to time, make short-term investments when it believes such
investments are in the best interest of a Fund.
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MANAGEMENT
TRUSTEES AND OFFICERS
The Trustees are responsible for deciding matters of general policy and
reviewing the actions of the Investment Advisers, distributor and transfer
agent. The officers of the Trust conduct and supervise the Funds' daily
business operations. The Additional Statement contains information as to the
identity of, and other information about, the Trustees and officers of the
Trust.
INVESTMENT ADVISERS
INVESTMENT ADVISERS. Goldman Sachs Asset Management, One New York Plaza, New
York, New York 10004, a separate operating division of Goldman Sachs, serves
as the investment adviser to the Balanced, CORE Large Cap Growth, CORE Small
Cap Equity, CORE International Equity, Growth and Income, Mid Cap Equity and
Small Cap Equity Funds. Goldman Sachs registered as an investment adviser in
1981. Goldman Sachs Funds Management, L.P., One New York Plaza, New York, New
York 10004, a Delaware limited partnership which is an affiliate of Goldman
Sachs, serves as the investment adviser to the CORE U.S. Equity and Capital
Growth Funds. Goldman Sachs Funds Management, L.P. registered as an investment
adviser in 1990. Goldman Sachs Asset Management International, 133
Peterborough Court, London EC4A 2BB, England, an affiliate of Goldman Sachs,
serves as the investment adviser to the International Equity, Emerging Markets
Equity and Asia Growth Funds. Goldman Sachs Asset Management International
became a member of the Investment Management Regulatory Organisation Limited
in 1990 and registered as an investment adviser in 1991. As of June 30, 1997,
Goldman Sachs Asset Management, Goldman Sachs Funds Management, L.P. and
Goldman Sachs Asset Management International, together with their affiliates,
acted as investment adviser, administrator or distributor for assets in excess
of $ billion.
Under a Management Agreement with each Fund, the applicable Investment
Adviser, subject to the general supervision of the Trustees, provides day-to-
day advice as to the Fund's portfolio transactions. Goldman Sachs has agreed
to permit the Trust to use the name "Goldman Sachs" or a derivative thereof as
part of each Fund's name for as long as a Fund's Management Agreement is in
effect.
In performing its investment advisory services, each Investment Adviser,
while remaining ultimately responsible for the management of the Funds, may
rely upon the asset management division of its Singapore and Tokyo affiliates
for portfolio decisions and management with respect to certain portfolio
securities and is able to draw upon the research and expertise of its other
affiliate offices. In addition, the Investment Advisers will haveaccess to the
research of, and proprietary technical models developed by, Goldman Sachs and
may apply quantitative and qualitative analysis in determining the appropriate
allocations among the categories of issuers and types of securities.
Under the Management Agreement, each Investment Adviser also: (i) supervises
all non-advisory operations of each Fund that it advises; (ii) provides
personnel to perform such executive, administrative and clerical services as
are reasonably necessary to provide effective administration of each Fund;
(iii) arranges for at each Fund's expense (a) the preparation of all required
tax returns, (b) the preparation and submission of reports to existing
shareholders, (c) the periodic updating of prospectuses and statements of
additional information and (d) the preparation of reports to be filed with the
SEC and other regulatory authorities; (iv) maintains each Fund's records; and
(v) provides office space and all necessary office equipment and services.
37
<PAGE>
FUND MANAGERS
<TABLE>
<CAPTION>
YEARS
PRIMARILY
NAME AND TITLE FUND RESPONSIBILITY RESPONSIBLE FIVE YEAR EMPLOYMENT HISTORY
-------------- ------------------- ----------- ----------------------------
<C> <C> <C> <S>
George D. Adler Portfolio Manager-- Since Mr. Adler joined the
Vice President Capital Growth 1997 Investment Adviser in
1997. Prior to 1997, he
was a portfolio manager
at Liberty Investment
Management, Inc. and its
predecessor firm
("Liberty").
- ----------------------------------------------------------------------------------------------------------
G. Lee Anderson Portfolio Manager-- Since Mr. Anderson joined the
Vice President Growth and Income 1996 Investment Adviser in
Mid Cap Equity 1997 1992. Prior to 1992, he
Balanced (Equity) 1996 was a research analyst
in the Investment
Research Department of
Goldman, Sachs & Co.
- ----------------------------------------------------------------------------------------------------------
Eileen A. Aptman Portfolio Manager-- Since Ms. Aptman jointed the
Vice President Mid Cap Equity 1996 Investment Adviser in
Growth and Income 1996 1993. Prior to 1993, she
Balanced (Equity) 1996 was an equity analyst at
Delphi Management.
- ----------------------------------------------------------------------------------------------------------
Robert Beckwitt Portfolio Manager Since Mr. Beckwitt joined the
Vice President Emerging Markets Equity 1997 Investment Adviser in
1996. Prior to 1996, he
was Chief Investment
Strategist--Portfolio
Advisory at Fidelity
Investments.
- ----------------------------------------------------------------------------------------------------------
Jonathan A. Beinner Portfolio Manager-- Since Mr. Beinner joined the
Vice President and Co-Head Balanced (Fixed Income) 1994 Investment Adviser in
U.S. Fixed Income 1990.
Department
- ----------------------------------------------------------------------------------------------------------
Kent A. Clark Portfolio Manager-- Since Mr. Clark joined the
Vice President CORE U.S. Equity 1996 Investment Adviser in
CORE Large-Cap Growth 1997 1992. Prior to 1992, he
CORE Small Cap Equity 1997 was studying for a Ph.D.
CORE International Equity 1997 in finance at the
University of Chicago.
- ----------------------------------------------------------------------------------------------------------
Robert G. Collins Portfolio Manager-- Since Mr. Collins joined the
Vice President Capital Growth 1997 Investment Adviser in
1997. Prior to 1997, he
was a portfolio manager
at Liberty.
- ----------------------------------------------------------------------------------------------------------
Herbert E. Ehlers Senior Portfolio Manager-- Since Mr. Ehlers joined the
Managing Director Capital Growth 1997 Investment Adviser in
1997. Prior to 1997, he
was the Chief Investment
Officer of Liberty.
- ----------------------------------------------------------------------------------------------------------
Gregory H. Ekizian Portfolio Manager-- Since Mr. Ekizian joined the
Vice President Capital Growth 1997 Investment Adviser in
1997. Prior to 1997, he
was a portfolio manager
at Liberty.
- ----------------------------------------------------------------------------------------------------------
Paul D. Farrell Senior Portfolio Manager-- Since Mr. Farrell joined the
Vice President Small Cap Equity 1992 Investment Adviser in
1991.
- ----------------------------------------------------------------------------------------------------------
Ronald E. Gutfleish Senior Portfolio Manager-- Since Mr. Gutfleish joined the
Vice President Growth and Income Investment Adviser in
Mid Cap Equity 1993 1993. Prior to 1993, he
Balanced (Equity) 1995 was a principal of
1994 Sanford C. Bernstein &
Co. in its Investment
Management Research
Department.
- ----------------------------------------------------------------------------------------------------------
Roderick D. Jack Portfolio Manager-- Since Mr. Jack joined the
Managing Director International Equity 1992 Investment Adviser in
1992. Prior to 1992, he
worked in the advisory
and financing group for
S.G. Warburg in London.
- ----------------------------------------------------------------------------------------------------------
Robert C. Jones Senior Portfolio Manager-- Since Mr. Jones joined the
Managing Director CORE U.S. Equity 1991 Investment Adviser in
CORE Large Cap Growth 1997 1989. From 1987 to 1989,
CORE Small Cap Equity 1997 Mr. Jones was a senior
CORE International Equity 1997 quantitative analyst in
the Research Department.
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
YEARS
PRIMARILY
NAME AND TITLE FUND RESPONSIBILITY RESPONSIBLE FIVE YEAR EMPLOYMENT HISTORY
-------------- ------------------- ----------- ----------------------------
<C> <C> <C> <S>
Marcel Jongen Portfolio Manager-- Since Mr. Jongen joined the
Executive Director International Equity 1992 Investment Adviser in
1992. Prior to 1992, he
was head of equities at
Philips Pension Fund in
Eindhoven.
- ----------------------------------------------------------------------------------------------------
Richard C. Lucy Portfolio Manager-- Since Mr. Lucy joined the
Vice President Balanced (Fixed Income) 1994 Investment Adviser in
Co-Head U.S. 1992. Prior to 1992, he
Fixed Income managed fixed income
Department assets at Brown Brothers
Harriman & Co.
- ----------------------------------------------------------------------------------------------------
Alice Lui Portfolio Manager-- Since Ms. Lui joined the
Vice President Asia Growth 1994 Investment Adviser in
1990.
- ----------------------------------------------------------------------------------------------------
Shogo Maeda Portfolio Manager-- Since Mr. Maeda joined the
Vice President International Equity 1994 Investment Adviser in
1994. Prior to 1994, he
worked at Nomura
Investment Management
Incorporated and for a
period at Manufacturers
Hanover Bank in New
York.
- ----------------------------------------------------------------------------------------------------
Matthew B. McLennan Assistant Portfolio Since Mr. McLennan joined the
Associate Manager-- 1996 Investment Adviser in
Small Cap Equity 1995. Prior to 1995, he
worked in the Investment
Banking Division of
Goldman, Sachs & Co. in
Australia. Prior to
that, Mr. McLennan
worked at Queensland
Investment Corporation
in Australia.
- ----------------------------------------------------------------------------------------------------
Warwick M. Negus Senior Portfolio Manager-- Since Mr. Negus joined the
Managing Director Asia Growth 1994 Investment Adviser in
Portfolio Manager-- 1994. Prior to 1994, he
International Equity 1994 was a vice president of
Emerging Markets Equity 1997 Bankers Trust Australia
Ltd.
- ----------------------------------------------------------------------------------------------------
Victor H. Pinter Portfolio Manager-- Since Mr. Pinter joined the
Vice President CORE U.S. Equity 1996 Investment Adviser in
CORE Large Cap Growth 1997 1990.
CORE Small Cap Equity 1997
CORE International Equity 1997
- ----------------------------------------------------------------------------------------------------
Ramakrishna Shanker Portfolio Manager-- Since Mr. Shanker joined the
Vice President Asia Growth 1997 Investment Adviser in
1997. Prior to 1997, he
worked for the
Investment Banking
Division of Goldman,
Sachs & Co. in
Singapore.
- ----------------------------------------------------------------------------------------------------
David G. Shell Portfolio Manager-- Since Mr. Shell joined the
Vice President Capital Growth 1997 Investment Adviser in
1997. Prior to 1997, he
was a portfolio manager
at Liberty.
- ----------------------------------------------------------------------------------------------------
Ernest C. Segundo, Jr. Portfolio Manager-- Since Mr. Segundo joined the
Vice President Capital Growth 1997 Investment Adviser in
1997. Prior to 1997, he
was a portfolio manager
at Liberty.
- ----------------------------------------------------------------------------------------------------
Karma Wilson Portfolio Manager-- Since Ms. Wilson joined the
Vice President Asia Growth 1995 Investment Adviser in
1994. Prior to 1994, she
was an investment
analyst with Bankers
Trust Australia Ltd.
Before 1992 she was
employed by Arthur
Andersen LLP.
</TABLE>
It is the responsibility of the Investment Adviser to make investment
decisions for a Fund and to place the purchase and sale orders for the Fund's
portfolio transactions in U.S. and foreign securities and currency markets.
Such orders may be directed to any broker including, to the extent and in the
manner permitted by applicable law, Goldman Sachs or its affiliates. In
effecting purchases and sales of portfolio securities for the Funds, the
Investment Advisers will seek the best price and execution of a Fund's orders.
In doing so, where two or more
39
<PAGE>
brokers or dealers offer comparable prices and execution for a particular
trade, consideration may be given to whether the broker or dealer provides
investment research or brokerage services or sells shares of any Goldman Sachs
Fund. See the Additional Statement for a further description of the Investment
Advisers' brokerage allocation practices.
As compensation for its services rendered and assumption of certain expenses
pursuant to separate Management Agreements, GSAM, GSFM and GSAMI are entitled
to the following fees, computed daily and payable monthly at the annual rates
listed below:
<TABLE>
<CAPTION>
FOR THE FISCAL
CONTRACTUAL YEAR ENDED
RATE* JANUARY 31, 1997*
----------- -----------------
<S> <C> <C>
GSAM
Balanced..................................... 0.65% 0.65%
Growth and Income............................ 0.70% 0.70%
CORE Large Cap Growth........................ 0.75% n/a
CORE Small Cap Equity........................ 1.00% n/a
CORE International Equity ................... 1.00% n/a
Mid Cap Equity............................... 0.75% 0.75%
Small Cap Equity............................. 1.00% 1.00%
GSFM
CORE U.S. Equity............................. 0.75% 0.59%
Capital Growth............................... 1.00% 1.00%
GSAMI
International Equity......................... 1.00% 0.89%
Emerging Markets Equity...................... 1.20% n/a
Asia Growth.................................. 1.00% 0.86%
</TABLE>
- ---------------------
*With respect to the Balanced, Growth and Income, CORE U.S. Equity, Capital
Growth, Mid Cap Equity, International Equity, Small Cap Equity and Asia Growth
Funds, a Management Agreement combining both advisory and administrative
services was adopted effective April 30, 1997. The contractual rate set forth
in the table is the rate payable under the Management Agreements and is
identical to the aggregate advisory and administration fees payable by each
Fund under the previous separate investment advisory (including subadvisory in
the case of International Equity Fund) and administration agreements. For the
fiscal year ended January 31, 1997, the annual rate expressed is the combined
advisory and administration fees paid (after voluntary fee limitations). The
difference, if any, between the stated fees and the actual fees paid by the
Funds reflects that the applicable Investment Adviser did not charge the full
amount of the fees to which it would have been entitled. The Investment
Advisers may discontinue or modify such voluntary limitations in the future at
their discretion, although they have no current intention to do so.
The Investment Advisers to the Balanced, Growth and Income, CORE U.S.
Equity, CORE Large Cap Growth, [CORE Small Cap Equity, CORE International
Equity], Mid Cap International Equity, Emerging Markets Equity and Asia Growth
Funds have voluntarily agreed to reduce or limit certain "Other Expenses" of
such Funds (excluding management fees, service fees, taxes, interest and
brokerage fees and litigation, indemnification and other extraordinary
expenses and, in the case of each Fund other than Balanced and CORE Large Cap
Growth Funds, transfer agency fees) to the extent such expenses exceed 0.10%,
0.11%, 0.06%, 0.05%, [ %,] [ %,] 0.06%, 0.20%, 0.16% and 0.24% per annum of
such Funds' average daily net assets, respectively. Such reductions or limits,
if any, are calculated monthly on a cumulative basis and may be discontinued
or modified by the applicable Investment Adviser in its discretion at any
time.
40
<PAGE>
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
GOLDMAN SACHS. The involvement of the Investment Advisers, 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 a Fund or limit a Fund's investment activities. Goldman Sachs and
its affiliates engage in proprietary trading and advise accounts and funds
which have investment objectives similar to those of the Funds and/or which
engage in and compete for transactions in the same type of securities,
currencies and instruments as the Funds. Goldman Sachs and its affiliates will
not 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 in general it is not anticipated that the Investment Advisers will have
access to proprietary information for the purpose of managing a Fund. The
results of a Fund's investment activities, therefore, may differ from those of
Goldman Sachs and its affiliates and it is possible that a Fund could sustain
losses during periods in which Goldman Sachs and its affiliates and other
accounts achieve significant profits on their trading for proprietary or other
accounts. From time to time, a Fund's activities may be limited because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. See
"Management--Activities of Goldman Sachs and its Affiliates and Other Accounts
Managed by Goldman Sachs" in the Additional Statement for further information.
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York, serves as the exclusive
distributor (the "Distributor") of each Fund's shares. Goldman Sachs, 4900
Sears Tower, Chicago, Illinois, also serves as each Fund's transfer agent (the
"Transfer Agent") and as such performs various shareholder servicing
functions. Shareholders with inquiries regarding a Fund should contact Goldman
Sachs (as Transfer Agent) at the address or the telephone number set forth on
the back cover page of this Prospectus. Goldman Sachs is not entitled to
receive a transfer agency fee from the CORE U.S. Equity, International Equity
and Asia Growth Funds with respect to Institutional or Service Shares. Goldman
Sachs is entitled to receive a transfer agency fee from the Capital Growth,
Growth and Income, Mid Cap Equity, Small Cap Equity and Emerging Markets
Equity Funds equal to 0.04% of the average daily net assets of the
Institutional and Service Shares of such Funds. Goldman Sachs is entitled to
receive a fee from the Balanced, CORE International Equity, CORE Large Cap
Growth and CORE Small Cap Equity Funds, with respect to Institutional and
Service shares, equal to the fixed per account charge of $12,000 per year plus
$7.50 per account, together with out-of-pocket and transaction related
expenses (including those out-of-pocket expenses payable to servicing and/or
sub-transfer agents) applicable to Class A and B shares plus 0.04% of the
average daily net assets of the Institutional and Service classes of the CORE
Large Cap Growth Fund.
NET ASSET VALUE
The net asset value per share of each class of a Fund is calculated by the
Fund's custodian as of the close of regular trading on the New York Stock
Exchange (normally 3:00 p.m. Chicago time, 4:00 p.m. New York time), on each
Business Day (as such term is defined under "Additional Information"). Net
asset value per share of each class is calculated by determining the net
assets attributable to each class and dividing by the number of outstanding
shares of that class. Portfolio securities are valued based on market
quotations or, if accurate quotations are not readily available, at fair value
as determined in good faith under procedures established by the Trustees.
41
<PAGE>
PERFORMANCE INFORMATION
From time to time each Fund may publish average annual total return and the
Balanced and Growth and Income Funds may publish their yield and distribution
rates in advertisements and communications to shareholders or prospective
investors. Average annual total return is determined by computing the average
annual percentage change in value of $1,000 invested at the maximum public
offering price for specified periods ending with the most recent calendar
quarter, assuming reinvestment of all dividends and distributions at net asset
value. The total return calculation assumes a complete redemption of the
investment at the end of the relevant period. Each Fund may also from time to
time advertise total return on a cumulative, average, year-by-year or other
basis for various specified periods by means of quotations, charts, graphs or
schedules. In addition, each Fund may furnish total return calculations based
on investments at various sales charge levels or at net asset value. Any
performance data which are based on the net asset value per share would be
reduced if any applicable sales charge were taken into account. In addition to
the above, each Fund may from time to time advertise its performance relative
to certain averages, performance rankings, indices, other information prepared
by recognized mutual fund statistical services and investments for which
reliable performance data is available.
The Balanced and Growth and Income Funds computes their yield by dividing
net investment income earned during a recent thirty-day period by the product
of the average daily number of shares outstanding and entitled to receive
dividends during the period and the maximum offering price per share on the
last day of the relevant period. The results are compounded on a bond
equivalent (semi-annual) basis and then annualized. 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. The Balanced and Growth and Income Funds' quotations of
distribution rate are calculated by annualizing the most recent distribution
of net investment income for a monthly, quarterly or other relevant period and
dividing this amount by the net asset value per share on the last day of the
period for which the distribution rates are being calculated.
Each Fund's total return, yield and distribution rate will be calculated
separately for each class of shares in existence. Because each class of shares
may be subject to different expenses, the total return, yield and distribution
rate calculations with respect to each class of shares for the same period
will differ. See "Shares of the Trust."
The investment results of a Fund will fluctuate over time and any
presentation of investment results for any prior period should not be
considered a representation of what an investment may earn or what the Fund's
performance may be in any future period. In addition to information provided
in shareholder reports, the Funds may, in their discretion, from time to time
make a list of their holdings available to investors upon request.
SHARES OF THE TRUST
Each Fund is a series of Goldman Sachs Trust, which was formed under the
laws of the State of Delaware on January 28, 1997. The Funds were formerly
series of Goldman Sachs Equity Portfolios, Inc., a Maryland corporation, and
were reorganized into the Trust as of April 30, 1997. The Trustees have
authority under the Trust's Declaration of Trust to create and classify shares
of beneficial interests in separate series, without further action by
shareholders. Additional series may be added in the future. The Trustees also
have authority to classify and reclassify any series or portfolio of shares
into one or more classes.
42
<PAGE>
When issued, shares are fully paid and non-assessable. In the event of
liquidation, shareholders are entitled to share pro rata in the net assets of
the applicable Fund available for distribution to such shareholders. All
shares, are freely transferable and have no preemptive, subscription or
conversion rights. Shareholders are entitled to one vote per share, provided
that, at the option of the Trustees, shareholders will be entitled to a number
of votes based upon the net asset values represented by their shares.
As of , 1997, State Street Bank and Trust Company as Trustee for
Goldman Sachs Profit Sharing Master Trust, Attention: Louis Pereira, P.O. Box
1992, Boston, MA 02105-1992 was recordholder of 97.88% of Mid Cap Equity
Fund's outstanding shares.
The Trust does not intend to hold annual meetings of shareholders. However,
pursuant to the Trust's By-Laws, the recordholders of at least 10% of the
shares outstanding and entitled to vote at a special meeting may require the
Trust to hold such special meeting of shareholders for any purpose and
recordholders may, under certain circumstances, as permitted by the Act,
communicate with other shareholders in connection with requiring a special
meeting of shareholders. The Trustees will call a special meeting of
shareholders for the purpose of electing Trustees if, at any time, less than a
majority of Trustees holding office at the time were elected by shareholders.
In the interest of economy and convenience, the Trust does not issue
certificates representing the Funds' shares. Instead, the Transfer Agent
maintains a record of each shareholder's ownership. Each shareholder receives
confirmation of purchase and redemption orders from the Transfer Agent. Fund
shares and any dividends and distributions paid by the Fund are reflected in
account statements from the Transfer Agent.
TAXATION
FEDERAL TAXES
Each Fund is treated as a separate entity for tax purposes. The CORE Large
Cap Growth, CORE Small Cap Equity, CORE International Equity and Emerging
Markets Equity Funds intend to elect and each other Fund has elected to be
treated as a regulated investment company and each Fund intends to qualify for
such treatment for each taxable year under Subchapter M of the Code. To
qualify as such, a Fund must satisfy certain requirements relating to the
sources of its income, diversification of its assets and distribution of its
income to shareholders. As a regulated investment company, a Fund will not be
subject to federal income or excise tax on any net investment income and net
realized capital gains that are distributed to its shareholders in accordance
with certain timing requirements of the Code.
Dividends paid by a Fund from net investment income, certain net realized
foreign exchange gains, the excess of net short-term capital gain over net
long-term capital loss and original issue discount or market discount income
will be taxable to its shareholders as ordinary income. Dividends paid by a
Fund from the excess of net long-term capital gain over net short-term capital
loss will be taxable as long-term capital gains regardless of how long the
shareholders have held their shares. These tax consequences will apply
regardless of whether distributions are received in cash or reinvested in
shares. A Fund's dividends that are paid to its corporate shareholders and are
attributable to qualifying dividends such Fund receives from U.S. domestic
corporations may be eligible, in the hands of such corporate shareholders, for
the corporate dividends-received deduction, subject to certain holding period
requirements and debt financing limitations under the Code. Dividends paid by
CORE International Equity, International Equity, Emerging Markets Equity and
Asia Growth Funds are not
43
<PAGE>
generally expected to qualify, in the hands of corporate shareholders, for the
corporate dividends-received deduction, but a portion of each other Fund's
dividends may generally so qualify. Certain distributions paid by a Fund in
January of a given year may be taxable to shareholders as if received the
prior December 31. Shareholders will be informed annually about the amount and
character of distributions received from the Funds for federal income tax
purposes.
Investors should consider the tax implications of buying shares immediately
prior to a distribution. Investors who purchase shares shortly before the
record date for a distribution will pay a per share price that includes the
value of the anticipated distribution and will be taxed on the distribution
even though the distribution represents a return of a portion of the purchase
price.
Redemptions and exchanges of shares are taxable events.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on distributions, redemptions and
exchanges if they fail to furnish their correct taxpayer identification number
and certain certifications required by the Internal Revenue Service or if they
are otherwise subject to backup withholding. Individuals, corporations and
other shareholders that are not U.S. persons under the Code are subject to
different tax rules and may be subject to nonresident alien withholding at the
rate of 30% (or a lower rate provided by an applicable tax treaty) on amounts
treated as ordinary dividends from the Funds.
Each Fund may be subject to foreign withholding or other foreign taxes on
income or gain from certain foreign securities. The Funds do not anticipate
that they will elect to pass such foreign taxes through to their shareholders,
who therefore will generally not take such taxes into account on their own tax
returns. The Funds will generally deduct such taxes in determining the amounts
available for distribution to shareholders.
OTHER TAXES
In addition to federal taxes, a shareholder may be subject to state, local
or foreign taxes on payments received from the Funds. A state income (and
possibly local income and/or intangible property) tax exemption is generally
available to the extent (if any) a Fund's distributions are derived from
interest on (or, in the case of intangible property taxes, the value of its
assets is attributable to) certain U.S. Government obligations, provided in
some states that certain thresholds for holdings of such obligations and/or
reporting requirements are satisfied. For a further discussion of certain tax
consequences of investing in shares of the Funds, see "Taxation" in the
Additional Statement. Shareholders are urged to consult their own tax advisers
regarding specific questions as to federal, state and local taxes as well as
to any foreign taxes.
ADDITIONAL INFORMATION
The term "a vote of the majority of the outstanding shares" of a Fund means
the vote of the lesser of (i) 67% or more of the shares 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 (ii) more than 50% of the outstanding
shares of the Fund.
As used in this Prospectus, the term "Business Day" means any day the New
York Stock Exchange is open for trading, which is Monday through Friday except
for holidays. The New York Stock Exchange is closed on the following holidays:
New Year's Day, Presidents' Day (observed), Good Friday, Memorial Day
(observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
44
<PAGE>
REPORTS TO SHAREHOLDERS
Recordholders of Institutional Shares of the Funds will receive an annual
report containing audited financial statements and a semi-annual report. Each
recordholder of Institutional Shares will also be provided with a printed
confirmation for each transaction in its account and a quarterly account
statement. A year-to-date statement for any account will be provided upon
request made to Goldman Sachs. The Funds do not generally provide subaccounting
services.
DIVIDENDS
Each dividend from net investment income and capital gain distributions, if
any, declared by a Fund on its outstanding Institutional Shares will, at the
election of each shareholder, be paid (i) in cash or (ii) in additional
Institutional Shares of such Fund. This election should initially be made on a
shareholder's Account Information Form and may be changed upon written notice
to Goldman Sachs at any time prior to the record date for a particular dividend
or distribution. If no election is made, all dividends from net investment
income and capital gain distributions will be reinvested in Institutional
Shares of the applicable Fund.
The election to reinvest dividends and distributions paid by a Fund in
additional Institutional Shares of the Fund 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 Institutional Shares of a Fund.
Each Fund intends that all or substantially all its net investment income and
net realized long-term and short-term capital gains, after reduction by
available capital losses, including any capital losses carried forward from
prior years, will be declared as dividends for each taxable year. The Balanced
and Growth and Income Fund will pay dividends from net investment income
quarterly. Each other Fund will pay dividends from net investment income at
least annually. All of the Funds will pay dividends from net realized long-term
and short-term capital gains, reduced by available capital losses, at least
annually. From time to time, a portion of a Fund's dividends may constitute a
return of capital.
At the time of an investor's purchase of shares of a Fund a portion of the
net asset value per share may be represented by undistributed income of the
Fund or realized or unrealized appreciation of the Fund's portfolio securities.
Therefore, subsequent distributions on such shares from such income or realized
appreciation may be taxable to the investor even if the net asset value of the
investor's shares is, as a result of the distributions, reduced below the cost
of such shares and the distributions (or portions thereof) represent a return
of a portion of the purchase price.
PURCHASE OF INSTITUTIONAL SHARES
Institutional Shares may be purchased on any Business Day through Goldman
Sachs at the net asset value per share next determined after receipt of an
order. No sales load will be charged. If, by the close of regular trading on
the New York Stock Exchange (normally 3:00 p.m. Chicago time, 4:00 p.m. New
York time), an order is received by Goldman Sachs, the price per share will be
the net asset value per share computed on the
38
<PAGE>
day the purchase order is received. See "Net Asset Value." Purchases of
Institutional Shares of the Funds must be settled within three (3) Business
Days of the receipt of a complete purchase order. Payment of the proceeds of
redemption of shares purchased by check may be delayed for a period of time as
described under "Redemption of Institutional Shares."
Prior to making an initial investment in a Fund, an investor must open an
account with a Fund by furnishing necessary information to the Fund or Goldman
Sachs. An Account Information Form, a copy of which is attached to this
Prospectus, should be used to open such an account. Subsequent purchases may be
made in the manner set forth below.
PURCHASE PROCEDURES
Purchases of Institutional Shares may be made by placing an order with
Goldman Sachs at 800-621-2550 and either wiring federal funds to State Street
Bank and Trust Company ("State Street") or initiating an ACH transfer.
Purchases may also be made by check (except that the Trust will not accept a
check drawn on a foreign bank or a third party check) or Federal Reserve draft
made payable to "Goldman Sachs Equity Funds--Name of Fund and Class of shares"
and should be directed to "Goldman Sachs Equity Funds--Name of Fund and Class
of shares," c/o National Financial Data Services, Inc. ("NFDS"), P.O. Box
419711, Kansas City, MO 64141-6711.
The minimum initial investment is $1,000,000 in Institutional Shares of a
Fund alone or in combination with other assets under the management of GSAM and
its affiliates. Institutional Shares of the Fund are offered to (a) banks,
trust companies or other types of depository institutions investing for their
own account or on behalf of their clients; (b) pension and profit sharing
plans, pension funds and other company-sponsored benefit plans; (c) qualified
non-profit organizations, charitable trusts, foundations and endowments; (d)
any state, county, city or any instrumentality, department, authority or agency
thereof; (e) corporations and other for-profit business organizations with
assets of at least $100 million or publicly traded securities outstanding; (f)
"wrap" accounts for the benefit of clients of broker-dealers, financial
institutions or financial planners, provided that they have entered into an
agreement with GSAM specifying aggregate minimums and certain operating
policies and standards; (g) registered investment advisers investing for
accounts for which they receive asset-based fees; and (h) accounts over which
GSAM or its advisory affiliates have investment discretion. The minimum
investment requirement may be waived at the discretion of the Trust's officers.
No minimum amount is required for subsequent investments.
OTHER PURCHASE INFORMATION
The Funds reserve the right to redeem the Institutional Shares of any
Institutional Shareholder whose account balance is less than $50 as a result of
earlier redemptions. Such redemptions will not be implemented if the value of
an Institutional Shareholder's account falls below the minimum account balance
solely as a result of market conditions. The Trust will give sixty (60) days'
prior written notice to Institutional Shareholders whose Institutional Shares
are being redeemed to allow them to purchase sufficient additional
Institutional Shares of a Fund to avoid such redemption.
Banks, trust companies or other institutions through which investors acquire
Institutional Shares may impose charges in connection with transactions in
Institutional Shares. Such institutions should be consulted for information
regarding such charges.
39
<PAGE>
The Funds and Goldman Sachs each reserves the right to reject any specific
purchase order (including exchanges) or to restrict purchases or exchanges by a
particular purchaser (or group of related purchasers). This may occur, for
example, when a purchaser or group of purchasers' pattern of frequent
purchases, sales or exchanges of Institutional Shares of a Fund is evident, or
if purchases, sales or exchanges are, or a subsequent abrupt redemption might
be, of a size that would disrupt management of a Fund.
In the sole discretion of Goldman Sachs, a Fund may accept securities instead
of cash for the purchase of shares of the Fund. Such purchases will be
permitted only if the Investment Adviser determines that any securities
acquired in this manner are consistent with the Fund's investment objectives,
restrictions and policies and are desirable investments for the Fund.
EXCHANGE PRIVILEGE
Institutional Shares of the Fund may be exchanged for (i) Institutional
Shares of any other mutual fund sponsored by Goldman Sachs and designated as an
eligible fund for this purpose and (ii) the corresponding class of any Goldman
Sachs Money Market Fund at the net asset value next determined either by
writing to Goldman Sachs, Attention: Goldman Sachs Equity Funds--Name of Fund
and Class of Shares, c/o GSAM Shareholder Services, 4900 Sears Tower, Chicago,
Illinois 60606 or, if previously elected in the Fund's Account Information
Form, by telephone at 800-621-2550 (7:00 a.m. to 5:30 p.m. Chicago time). A
shareholder should obtain and read the prospectus relating to any other fund
and its shares and consider its investment objective, policies and applicable
fees before making an exchange. Under the telephone exchange privilege,
Institutional Shares may be exchanged among accounts with different names,
addresses and social security or other taxpayer identification numbers only if
the exchange request is in writing and is received in accordance with the
procedures set forth under "Redemptions of Institutional Shares."
In an effort to prevent unauthorized or fraudulent exchanges by telephone,
Goldman Sachs employs reasonable procedures as set forth under "Redemption of
Institutional Shares" to confirm that such instructions are genuine. In times
of drastic economic or market changes the telephone exchange privilege may be
difficult to implement. For federal income tax purposes, an exchange is treated
as a sale of the Institutional Shares surrendered in the exchange on which an
investor may realize a gain or loss, followed by a purchase of Institutional
Shares, or the corresponding class of any Goldman Sachs Money Market Fund
received in the exchange. Shareholders should consult their own tax adviser
concerning the tax consequences of an exchange.
Each exchange which represents an initial investment in a Fund must satisfy
the minimum investment requirements of the fund into which the Institutional
Shares are being exchanged, except that this requirement may be waived at the
discretion of the officers of the Fund. Exchanges are available only in states
where exchanges may legally be made. The exchange privilege may be modified or
withdrawn at any time on sixty (60) days' written notice to Institutional
Shareholders and is subject to certain limitations. See "Purchase of
Institutional Shares."
40
<PAGE>
REDEMPTION OF INSTITUTIONAL SHARES
The Funds will redeem their Institutional Shares upon request of an
Institutional Shareholder on any Business Day at the net asset value next
determined after the receipt by the Transfer Agent of such request in proper
form. See "Net Asset Value." If Institutional Shares to be redeemed were
recently purchased by check, a Fund may delay transmittal of redemption
proceeds until such time as it has assured itself that good funds have been
collected for the purchase of such Institutional Shares. This may take up to
fifteen (15) days. Redemption requests may be made by writing to or calling the
Transfer Agent at the address or telephone number set forth on the back cover
of this Prospectus. An Institutional Shareholder may request redemptions by
telephone if the optional telephone redemption privilege is elected on the
Account Information Form accompanying this Prospectus. It may be difficult to
implement redemptions by telephone in times of drastic economic or market
changes.
In an effort to prevent unauthorized or fraudulent redemption or exchange
requests by telephone, Goldman Sachs employs reasonable procedures specified by
the Trust to confirm that such instructions are genuine. Among other things,
any redemption request that requires money to go to an account or address other
than that designated on the Account Information Form must be in writing and
signed by an authorized person designated on the Account Information Form. Any
such written request is also confirmed by telephone with both the requesting
party and the designated bank account to verify instructions. Exchanges among
accounts with different names, addresses and social security or other taxpayer
identification numbers must be in writing and signed by an authorized person
designated on the Account Information Form. Other procedures may be implemented
from time to time. If reasonable procedures are not implemented, the Trust may
be liable for any loss due to unauthorized or fraudulent transactions. In all
other cases, neither the Funds, the Trust nor Goldman Sachs will be responsible
for the authenticity of redemption or exchange instructions received by
telephone.
Written requests for redemptions must be signed by each Institutional
Shareholder whose signature has been guaranteed by a bank, a securities broker
or dealer, a credit union having authority to issue signature guarantees, a
savings and loan association, a building and loan association, a cooperative
bank, a federal savings bank or association, a national securities exchange, a
registered securities association or a clearing agency, provided that such
institution satisfies the standards established by the Transfer Agent.
The Funds will arrange for the proceeds of redemptions effected by any means
to be wired as federal funds to the bank account designated in the
Institutional Shareholder's Account Information Form or, if the shareholder
elects in writing, by check. Redemption proceeds paid by wire transfer will
normally be wired on the next Business Day in federal funds (for a total one-
day delay), but may be paid up to three (3) Business Days after receipt of a
properly executed redemption request. Wiring of redemption proceeds may be
delayed one additional Business Day if the Federal Reserve Bank is closed on
the day redemption proceeds would originally be wired. Redemption proceeds paid
by check will normally be mailed to the address of record within three (3)
Business Days of receipt of a properly executed redemption request. In order to
change the bank designated on the Account Information Form to receive
redemption proceeds, a written request must be received by the Transfer Agent.
This request must be signature guaranteed as set forth above. Further
documentation may be required for executors, trustees or corporations. Once
wire transfer instructions have been given by Goldman Sachs, neither the Funds,
the Trust nor Goldman Sachs assumes any further responsibility for the
performance of intermediaries
41
<PAGE>
or the Institutional Shareholder's bank in the transfer process. If a problem
with such performance arises, the Institutional Shareholder should deal
directly with such intermediaries or bank.
Additional documentation regarding a redemption by any means may be required
to effect a redemption when deemed appropriate by Goldman Sachs. The request
for such redemption will not be considered to have been received in proper form
until such additional documentation has been received.
--------------------
42
<PAGE>
APPENDIX
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON ACCOUNT
INFORMATION FORM
You are required by law to provide the Fund with your correct Taxpayer
Identification Number (TIN), regardless of whether you file tax returns.
Failure to do so may subject you to penalties. Failure to provide your correct
TIN and to sign your name in the Certification section of the Account
Information Form could result in withholding of 31% by the Fund for the
federal backup withholding tax on distributions, redemptions, exchanges and
other payments relating to your account.
Any tax withheld may be credited against taxes owed on your federal income
tax return.
If you do not have a TIN, you should apply for one immediately by contacting
your local office of the Social Security Administration or the Internal
Revenue Service (IRS). Backup withholding could also apply to payments
relating to your account prior to the Fund's receipt of your TIN.
Special rules apply for certain entities. For example, for an account
established under a Uniform Gifts or Transfers to Minors Act, the TIN of the
minor should be furnished.
If you have been notified by the IRS that you are subject to backup
withholding because you failed to report all your interest and/or dividend
income on your tax return and you have not been notified by the IRS that such
withholding should cease, you must cross out item (2) in the Certification
section of the Account Information Form.
If you are an exempt recipient, you should furnish your TIN and certify your
exemption by signing the Certification section and writing "exempt" after your
signature. Exempt recipients include: corporations, tax-exempt pension plans
and IRA's, governmental agencies, financial institutions, registered
securities and commodities dealers and others.
If you are a nonresident alien or foreign entity, you must provide a
completed Form W-8 to the Fund in order to avoid backup withholding on certain
payments. Other payments to you may be subject to nonresident alien
withholding of up to 30%.
For further information regarding backup and nonresident alien withholding,
see Sections 3406, 1441 and 1442 of the Internal Revenue Code and consult your
tax adviser.
A-1
<PAGE>
- --------------------------------------------------------------------------------
GOLDMAN SACHS ASSET
MANAGEMENT
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS FUNDS
MANAGEMENT, L.P.
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS ASSET
MANAGEMENT INTERNATIONAL
133 PETERBOROUGH COURT
LONDON, ENGLAND EC4A 2BB
GOLDMAN, SACHS & CO.
DISTRIBUTOR
85 BROAD STREET
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
TRANSFER AGENT
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN
1776 HERITAGE DRIVE
NORTH QUINCY, MASSACHUSETTS 02110
TOLL FREE (IN U.S.) . . . . . . . . 800-621-2550
EQPROINST
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GOLDMAN SACHS
EQUITY FUNDS
- --------------------------------------------------------------------------------
PROSPECTUS
INSTITUTIONAL SHARES
[LOGO] GOLDMAN
SACHS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- -----------------------------------------------------------------------------
SUBJECT TO COMPLETION DATED
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
, 1997 GOLDMAN SACHS EQUITY FUNDS
SERVICE SHARES
GOLDMAN SACHS BALANCED FUND GOLDMAN SACHS CAPITAL GROWTH FUND
Seeks long-term growth of capital through
diversified investments in equity securi-
Seeks long-term capital ties of companies that are considered to
growth and current income have long-term capital appreciation po-
through investments in equity tential.
and fixed income securities.
GOLDMAN SACHS MID CAP EQUITY FUND
GOLDMAN SACHS GROWTH AND IN- Seeks long-term capital appreciation pri-
COME FUND marily through investments in equity se-
Seeks long-term growth of curities of companies with public stock
capital and growth of income market capitalizations of between $500
through investments in equity million and $7 billion at the time of in-
securities that are consid- vestment.
ered to have favorable pros-
pects for capital apprecia-
tion and/or dividend paying
ability.
GOLDMAN SACHS INTERNATIONAL EQUITY FUND
Seeks long-term capital appreciation
through investments in equity securities
of companies that are organized outside
the U.S. or whose securities are princi-
pally traded outside the U.S.
GOLDMAN SACHS CORE U.S. EQUITY
FUND
Seeks long-term growth of
capital and dividend income
through a broadly diversified
portfolio of large cap and
blue chip equity securities
representing all major sec-
tors of the U.S. economy.
GOLDMAN SACHS SMALL CAP EQUITY FUND
Seeks long-term capital growth through
investments in equity securities of com-
panies with public stock market capital-
izations of $1 billion or less at the
time of investment.
GOLDMAN SACHS EMERGING MARKETS
GOLDMAN SACHS CORE LARGE CAP EQUITY FUND
GROWTH FUND Seeks long-term capital appreciation
Seeks long-term growth of through investments in equity securities
capital through a broadly di- of emerging country issuers.
versified portfolio of equity
securities of large cap U.S.
issuers that are expected to
have better prospects for
earnings growth than the
growth rate of the general
domestic economy. Dividend
income is a secondary consid-
eration.
GOLDMAN SACHS ASIA GROWTH FUND
Seeks long-term capital appreciation
through investments in equity securities
of companies related (in the manner de-
scribed herein) to Asian countries.
GOLDMAN SACHS CORE SMALL CAP
EQUITY FUND
Seeks long-term growth of
capital through a broadly di-
versified portfolio of equity
securities of U.S. companies
with public stock market cap-
italizations of $3 billion or
less at the time of invest-
ment.
GOLDMAN SACHS CORE
INTERNATIONAL EQUITY FUND
Seeks long term growth of
capital through a broadly di-
versified portfolio of equity
securities of companies that
are organized outside the
U.S. or whose securities are
principally traded outside
the U.S.
-------------
SERVICE SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN A FUND INVOLVES INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
(continued on next page)
<PAGE>
(cover continued)
A FUND'S INVESTMENTS IN SECURITIES OF FOREIGN ISSUERS AND FOREIGN CURRENCIES
ENTAIL CERTAIN RISKS NOT CUSTOMARILY ASSOCIATED WITH INVESTING IN SECURITIES OF
U.S. ISSUERS QUOTED IN U.S. DOLLARS. IN PARTICULAR, THE SECURITIES MARKETS OF
ASIAN, LATIN AMERICAN, EASTERN EUROPEAN, AFRICAN AND OTHER EMERGING COUNTRIES
IN WHICH THE INTERNATIONAL EQUITY, EMERGING MARKETS EQUITY AND ASIA GROWTH
FUNDS MAY INVEST WITHOUT LIMIT ARE LESS LIQUID, SUBJECT TO GREATER PRICE
VOLATILITY, HAVE SMALLER MARKET CAPITALIZATIONS, HAVE LESS GOVERNMENT
REGULATION AND ARE NOT SUBJECT TO AS EXTENSIVE AND FREQUENT ACCOUNTING,
FINANCIAL AND OTHER REPORTING REQUIREMENTS AS THE SECURITIES MARKETS OF MORE
DEVELOPED COUNTRIES. FURTHER, INVESTMENT IN EQUITY SECURITIES OF ISSUERS
LOCATED IN RUSSIA AND CERTAIN OTHER EMERGING COUNTRIES INVOLVES RISK OF LOSS
RESULTING FROM PROBLEMS IN SHARE REGISTRATION AND CUSTODY, WHICH RISKS ARE NOT
NORMALLY ASSOCIATED WITH INVESTMENT IN MORE DEVELOPED COUNTRIES. THE FUNDS THAT
INVEST IN FOREIGN SECURITIES AND EMERGING MARKETS ARE INTENDED FOR INVESTORS
WHO CAN ACCEPT THE RISKS ASSOCIATED WITH THEIR INVESTMENTS AND MAY NOT BE
SUITABLE FOR ALL INVESTORS. SEE "DESCRIPTION OF SECURITIES" AND "RISK FACTORS."
Goldman Sachs Asset Management ("GSAM"), New York, New York, a separate
operating division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as
investment adviser to the Balanced, CORE Large Cap Growth, CORE Small Cap
Equity, CORE International Equity, Growth and Income, Mid Cap Equity and Small
Cap Equity Funds. Goldman Sachs Funds Management, L.P. ("GSFM"), New York, New
York, an affiliate of Goldman Sachs, serves as investment adviser to the CORE
U.S. Equity (formerly the "Select Equity Fund") and Capital Growth Funds.
Goldman Sachs Asset Management International ("GSAMI"), London, England, an
affiliate of Goldman Sachs, serves as investment adviser to the International
Equity, Emerging Markets Equity and Asia Growth Funds. GSAM, GSFM and GSAMI are
each referred to in this Prospectus as the "Investment Adviser." Goldman Sachs
serves as each Fund's distributor and transfer agent.
This Prospectus provides information about Goldman Sachs Trust (the "Trust")
and the Funds that a prospective investor should understand before investing.
This Prospectus should be retained for future reference. A Statement of
Additional Information (the "Additional Statement"), dated , 1997,
containing further information about the Trust and the Funds which may be of
interest to investors, has been filed with the Securities and Exchange
Commission ("SEC"), is incorporated herein by reference in its entirety, and
may be obtained without charge from Service Organizations (as defined herein),
or Goldman Sachs by calling the telephone number, or writing to one of the
addresses, listed on the back cover of this Prospectus. The SEC maintains a Web
site (http://www.sec.gov) that contains the Additional Statement and other
information regarding the Trust.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Highlights.................... 3
Fees and Expenses.................. 7
Financial Highlights............... 9
Investment Objectives and Policies. 14
Description of Securities.......... 19
Investment Techniques.............. 24
Risk Factors....................... 27
Investment Restrictions............ 29
Portfolio Turnover................. 29
Management......................... 30
Net Asset Value.................... 33
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Performance Information....... 34
Shares of the Trust........... 35
Taxation...................... 35
Additional Information........ 37
Additional Services........... 38
Reports to Shareholders....... 38
Dividends..................... 39
Purchase of Service Shares.... 39
Exchange Privilege............ 40
Redemption of Service Shares.. 41
Appendix...................... A-1
</TABLE>
2
<PAGE>
FUND HIGHLIGHTS
The following is intended to highlight certain information contained in
this Prospectus and is qualified in its entirety by the more detailed
information contained herein.
WHAT IS THE GOLDMAN SACHS TRUST?
The Goldman Sachs Trust is an open-end management investment company
that offers its shares in several investment funds (mutual funds). Each
Fund pools the monies of investors by selling its shares to the public
and investing these monies in a portfolio of securities designed to
achieve that Fund's stated investment objectives.
WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS?
Each Fund has distinct investment objectives and policies. There can be
no assurance that a Fund's objectives will be achieved. For a complete
description of each Fund's investment objectives and policies, see
"Investment Objectives and Policies," "Description of Securities" and
"Investment Techniques."
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT
FUND NAME OBJECTIVES INVESTMENT CRITERIA BENCHMARK
---------------- ---------------------------------------
--------------
---------------------
BALANCED Long-term Between 45% and 65% of total assets in Lehman Aggregate
FUND capital growth equity securities and at least 25% in Bond Index and
and current fixed income senior securities. the Standard &
income. Poor's Index of
500 Common
Stocks (the "S&P
500 Index")
- ----------------------------------------------------------------------------------------
GROWTH AND Long-term growth At least 65% of total assets in equity S&P 500 Index
INCOME FUND of capital and securities that the Investment Adviser
growth of considers to have favorable prospects
income. for capital appreciation and/or
dividend paying ability.
- ----------------------------------------------------------------------------------------
CORE U.S. Long-term growth At least 90% of total assets in equity S&P 500 Index
EQUITY FUND of capital and securities of U.S. issuers. The Fund
dividend income. seeks to achieve its objective through
a broadly diversified portfolio of
large cap and blue chip equity
securities representing all major
sectors of the U.S. economy. The Fund's
investments are selected using both a
variety of quantitative techniques and
fundamental research in seeking to
maximize the Fund's reward to risk
ratio. The Fund's portfolio is designed
to have risk, style, capitalization and
industry characteristics similar to the
S&P 500 Index.
- ----------------------------------------------------------------------------------------
CORE LARGE Long-term growth At least 90% of total assets in equity Russell 1000
CAP GROWTH of capital. securities of U.S. issuers. The Fund Growth Index
FUND Dividend income seeks to achieve its objective through
is a secondary a broadly diversified portfolio of
consideration. equity securities of large cap U.S.
issuers that are expected to have
better prospects for earnings growth
than the growth rate of the general
domestic economy. The Fund's
investments are selected using both a
variety of quantitative techniques and
fundamental research in seeking to
maximize the Fund's reward to risk
ratio. The Fund's portfolio is designed
to have risk, style, capitalization and
industry characteristics similar to the
Russell 1000 Growth Index.
</TABLE>
(continued)
3
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT
FUND NAME OBJECTIVES INVESTMENT CRITERIA BENCHMARK
---------------- ---------------------------------------
--------------
----------------------
CORE SMALL Long-term growth At least 90% of total assets in equity [Russell 2500 or
CAP EQUITY of capital. securities of U.S. issuers. The Fund Russell 2000
FUND seeks to achieve its investment Index]
objective through a broadly diversified
portfolio of equity securities of U.S.
companies with public stock market
capitalizations of $3 billion or less
at the time of investment. The Fund's
investments are selected using both a
variety of quantitative techniques and
fundamental research in seeking to
maximize the Fund's reward to risk
ratio. The Fund's portfolio is designed
to have risk, style, capitalization and
industry characteristics similar to the
[Russell 2500 or Russell 2000 Index.]
- -------------------------------------------------------------------------------------------
CORE Long-term growth At least 90% of total assets in equity EAFE Index
INTERNATIONAL of capital. securities of companies organized
EQUITY FUND outside the United States or whose
securities are principally traded
outside the United States. The Fund
seeks broad representation across major
countries and sectors of the
international economy. The Fund's
investments are selected using both a
variety of quantitative techniques and
fundamental research in seeking to
maximize the Fund's reward to risk
ratio. The Fund's portfolio is designed
to have risk, style, capitalization and
industry characteristics similar to the
Morgan Stanley Capital International
(MSCI) Europe, Australia and Far East
Index (the "EAFE Index"). The Fund may
invest in securities of issuers located
in countries with emerging economies or
securities markets and employ certain
currency management techniques.
- -------------------------------------------------------------------------------------------
CAPITAL Long-term At least 90% of total assets in a S&P 500 Index
GROWTH FUND capital growth. diversified portfolio of equity
securities. The Investment Adviser
considers long-term capital
appreciation potential in selecting
investments.
- -------------------------------------------------------------------------------------------
MID CAP Long-term At least 65% of total assets in Russell Midcap
EQUITY FUND capital equity securities of companies ("Mid- Index
appreciation. Cap Companies") with public stock
market capitalizations of under $5
billion at the time of investment.
- -------------------------------------------------------------------------------------------
INTERNATIONAL Long-term Substantially all, and at least 65%, of FT/Actuaries
EQUITY FUND capital total assets in equity securities Europe and
appreciation. of companies organized outside Pacific Index
the United States or whose securities (unhedged)
are principally traded outside the
United States. The Fund may invest in
securities of issuers located in
countries with emerging economies or
securities markets and employ certain
currency management techniques.
- -------------------------------------------------------------------------------------------
SMALL CAP Long-term At least 65% of total assets in equity Russell 2000
EQUITY FUND capital growth. securities of companies with public
stock market capitalizations of $1
billion or less at the time of
investment. The Fund currently
emphasizes investments in companies
with public stock market
capitalizations of $500 million or less
at the time of investment.
- -------------------------------------------------------------------------------------------
EMERGING Long-term Substantially all, and at least 65%, of Morgan Stanley
MARKETS capital its total assets in equity securities Capital
EQUITY FUND appreciation. of emerging country issuers. The Fund International
may employ certain currency management Emerging Markets
techniques. Free Index
- -------------------------------------------------------------------------------------------
ASIA GROWTH Long-term Substantially all, and at least 65%, of Morgan Stanley
FUND capital total assets in equity securities Capital
appreciation. of companies in China, Hong International
Kong, India, Indonesia, Malaysia, All Country Asia
Pakistan, the Philippines, Singapore, Free ex Japan
South Korea, Sri Lanka, Taiwan and Index
Thailand. The Fund may employ certain
currency management techniques.
</TABLE>
4
<PAGE>
WHAT ARE THE RISK FACTORS AND SPECIAL CHARACTERISTICS THAT I SHOULD
CONSIDER BEFORE INVESTING?
Each Fund's share price will fluctuate with market, economic and, to the
extent applicable, foreign exchange conditions, so that an investment in
any of the Funds may be worth more or less when redeemed than when
purchased. None of the Funds should be relied upon as a complete investment
program. There can be no assurance that a Fund's investment objectives will
be achieved. See "Risk Factors."
Risk of Investments in Small Capitalization Companies. To the extent that
a Fund invests in the securities of small market capitalization companies,
the Fund may be exposed to a higher degree of risk and price volatility.
Securities of such issuers may lack sufficient market liquidity to enable a
Fund to effect sales at an advantageous time or without a substantial drop
in price.
Foreign Risks. Investments in securities of foreign issuers and
currencies involve risks that are different from those associated with
investments in domestic securities. The risks associated with foreign
investments and currencies include changes in relative currency exchange
rates, political and economic developments, the imposition of exchange
controls, confiscation and other governmental restrictions. Generally,
there is less availability of data on foreign companies and securities
markets as well as less regulation of foreign stock exchanges, brokers and
issuers. A Fund's investments in emerging markets and countries ("Emerging
Countries") involves greater risks than investments in the developed
countries of Western Europe, the U.S., Canada, Australia, New Zealand and
Japan. In addition, because the International Equity, Emerging Markets
Equity and Asia Growth Funds invest primarily outside the U.S., these Funds
may involve greater risks, since the securities markets of foreign
countries are generally less liquid and subject to greater price
volatility. The securities markets of emerging countries, including those
in Asia, Latin America, Eastern Europe and Africa are marked by a high
concentration of market capitalization and trading volume in a small number
of issuers representing a limited number of industries, as well as a high
concentration of ownership of such securities by a limited number of
investors.
Other. A Fund's use of certain investment techniques, including
derivatives, forward contracts, options and futures, will subject the Fund
to greater risk than funds that do not employ such techniques.
WHO MANAGES THE FUNDS?
Goldman Sachs Asset Management serves as Investment Adviser to the
Balanced, Growth and Income, CORE Large Cap Growth, CORE Small Cap Equity,
CORE International Equity, Mid Cap Equity and Small Cap Equity Funds.
Goldman Sachs Funds Management, L.P. serves as Investment Adviser to the
CORE U.S. Equity and Capital Growth Funds. Goldman Sachs Asset Management
International serves as Investment Adviser to the International Equity,
Emerging Markets Equity and Asia Growth Funds. As of June 30, 1997, the
Investment Advisers, together with their affiliates, acted as investment
adviser, administrator or distributor for assets in excess of $ billion.
WHO DISTRIBUTES THE FUNDS' SHARES?
Goldman Sachs acts as distributor of each Fund's shares.
5
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The Funds do not have any minimum purchase or account requirements with
respect to Service Shares. A Service Organization may, however, impose a
minimum amount for initial and subsequent investments in Service Shares,
and may establish other requirements such as a minimum account balance.
HOW DO I PURCHASE SERVICE SHARES?
Customers of Service Organizations may invest in Service Shares only
through their Service Organizations. Service Shares of a Fund are purchased
by Service Organizations through Goldman Sachs at the current net asset
value without any sales load. See "Purchase of Service Shares."
ADDITIONAL SERVICES. The Trust, on behalf of the Funds, has adopted a
Service Plan with respect to the Service Shares which authorizes a Fund to
compensate Service Organizations for providing account administration and
shareholder liaison services to their customers who are the beneficial
owners of such Shares. The Trust, on behalf of the Funds, will enter into
agreements with each Service Organization which will provide for
compensation to the Service Organization in an amount up to 0.50% (on an
annualized basis) of the average daily net assets of the Service Shares of
the Funds attributable to or held in the name of the Service Organization
for its customers. See "Additional Services."
HOW DO I SELL MY SERVICE SHARES?
You may redeem Service Shares upon request on any Business Day, as
defined under "Additional Information," at the net asset value next
determined after receipt of such request in proper form. See "Redemption of
Service Shares."
HOW DO I RECEIVE DIVIDENDS AND DISTRIBUTIONS?
<TABLE>
<CAPTION>
INVESTMENT INCOME DIVIDENDS CAPITAL GAINS
FUND DECLARED AND PAID DISTRIBUTIONS
- ---- ----------------- -------------
<S> <C> <C>
Balanced.............................. Quarterly Annually
Growth and Income..................... Quarterly Annually
CORE U.S. Equity...................... Annually Annually
CORE Large Cap Growth................. Annually Annually
CORE Small Cap Equity................. Annually Annually
CORE International Equity............. Annually Annually
Capital Growth........................ Annually Annually
Mid Cap Equity........................ Annually Annually
International Equity.................. Annually Annually
Small Cap Equity...................... Annually Annually
Emerging Markets Equity............... Annually Annually
Asia Growth........................... Annually Annually
</TABLE>
Recordholders of Service Shares may receive dividends in additional
Service Shares of the Fund in which you have invested or you may elect to
receive cash. For further information concerning dividends, see
"Dividends."
6
<PAGE>
FEES AND EXPENSES
(SERVICE SHARES)
<TABLE>
<CAPTION>
CORE CORE
GROWTH CORE LARGE SMALL CORE MID SMALL EMERGING
AND U.S. CAP CAP INTERNATIONAL CAPITAL CAP INT'L CAP MARKETS ASIA
BALANCED INCOME EQUITY GROWTH EQUITY EQUITY GROWTH EQUITY EQUITY EQUITY EQUITY GROWTH
FUND FUND FUND FUND/1/ FUND/1/ FUND/1/ FUND FUND FUND FUND FUND/1/ FUND
-------- ------ ------ ------- ------- ------------- ------- ------ ------ ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES:
Maximum Sales
Charge Imposed
on Purchases.... None None None None None None None None None None None None
Maximum Sales
Charge Imposed
on Reinvested
Dividends....... None None None None None None None None None None None None
Redemption Fees.. None None None None None None None None None None None None
Exchange Fees.... None None None None None None None None None None None None
ANNUAL FUND
OPERATING
EXPENSES: (as a
percentage of
average daily net
assets)
Management Fees
(after
applicable
limitations)/2/. 0.65% 0.70% 0.59% 0.60% 1.00% 1.00% 1.00% 0.75% 0.89% 1.00% 1.10% 0.86%
Service Fees/5/.. 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Other Expenses
(after
applicable limi-
tations)/3/..... 0.10% 0.12% 0.06% 0.05% 0.20% 0.20% 0.09% 0.10% 0.21% 0.15% 0.20% 0.24%
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
TOTAL FUND
OPERATING
EXPENSES (AFTER
FEE AND EXPENSE
LIMITATIONS)/4/. 1.25% 1.32% 1.15% 1.15% 1.70% 1.70% 1.59% 1.35% 1.60% 1.65% 1.80% 1.60%
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a hy-
pothetical $1,000 investment, assuming (1) a
5% annual return and (2) redemption at the
end of each time period:
Balanced Fund................................. $ 13 $ 40 $ 69 $151
Growth and Income Fund........................ $ 13 $ 42 $ 72 $159
CORE U.S. Equity Fund......................... $ 12 $ 37 $ 63 $140
CORE Large Cap Growth Fund.................... $ 12 $ 37 n/a n/a
CORE Small Cap Equity Fund.................... $ 17 $ 54 n/a n/a
CORE International Equity Fund................ $ 17 $ 54 n/a n/a
Capital Growth Fund........................... $ 16 $ 50 $ 87 $189
Mid Cap Equity Fund........................... $ 14 $ 43 $ 74 $162
International Equity Fund..................... $ 16 $ 50 $ 87 $190
Small Cap Equity Fund......................... $ 17 $ 52 $ 90 $195
Emerging Markets Equity Fund.................. $ 18 $ 57 n/a n/a
Asia Growth Fund.............................. $ 16 $ 50 $ 87 $190
</TABLE>
- ---------------------
/1/Based on estimated amounts for the current fiscal year for the CORE Large
Cap Growth, CORE Small Cap Equity, Mid Cap Equity, CORE International
Equity, Emerging Markets Equity and Asia Growth Funds.
/2/The Investment Advisers have voluntarily agreed that a portion of the
management fee would not be imposed on the CORE U.S. Equity, CORE Large Cap
Growth, [CORE Small Cap Equity,] CORE International Equity, International
Equity, Emerging Markets Equity and Asia Growth Funds equal to 0.16%, 0.15%,
[ %,] [ %,] 0.11%, 0.10% and 0.14%, respectively. Without such limitations,
management fees would be 0.75%, 0.75%, [ %,] [ %], 1.00%, 1.20% and 1.00% of
each Fund's average daily net assets, respectively.
/3/The Investment Advisers voluntarily have agreed to reduce or limit certain
other expenses (excluding management fees, service fees, taxes, interest and
brokerage fees and litigation, indemnification and other extraordinary
expenses (and transfer agency fees in the case of each Fund other than CORE
Large Cap Growth Fund)) for the following funds to the extent such expenses
exceed the following percentage of average daily net assets:
<TABLE>
<CAPTION>
OTHER
EXPENSES
--------
<S> <C>
Balanced......................................................... 0.10%
Growth and Income................................................ 0.11%
CORE U.S. Equity................................................. 0.06%
CORE Large Cap Growth............................................ 0.05%
CORE Small Cap Equity............................................ %
CORE International Equity........................................ %
Mid Cap Equity................................................... 0.06%
International Equity............................................. 0.20%
Emerging Markets Equity.......................................... 0.16%
Asia Growth...................................................... 0.24%
</TABLE>
7
<PAGE>
/4/Without the limitations described above, "Other Expenses" and "Total
Operating Expenses" of the CORE U.S. Equity, Growth and Income and
International Equity Funds for the fiscal year ended January 31, 1997, would
have been as follows:
<TABLE>
<CAPTION>
TOTAL
OTHER OPERATING
EXPENSES EXPENSES
-------- ---------
<S> <C> <C>
Growth and Income...................................... 0.12% 1.32%
CORE U.S. Equity....................................... 0.10% 1.35%
International Equity................................... 0.25% 1.75%
In addition, without the limitations described above, "Other Expenses" and
"Total Operating Expenses" of the Service Shares of the CORE Large Cap Growth,
CORE Small Cap Equity, CORE International Equity, [Balanced,] [Capital Growth,]
[Small Cap Equity,] Mid Cap Equity, Emerging Markets Equity and Asia Growth
Funds for the current fiscal year are estimated to be as follows:
<CAPTION>
TOTAL
OTHER OPERATING
EXPENSES EXPENSES
-------- ---------
<S> <C> <C>
Mid Cap Equity......................................... 0.16% 1.41%
CORE Large Cap Equity.................................. 0.65% 1.90%
CORE Small Cap Equity.................................. % %
CORE International Equity.............................. % %
Balanced .............................................. 0.62% %
Emerging Markets Equity................................ 0.82% 2.52%
Asia Growth............................................ 0.26% 1.76%
</TABLE>
/5/Service Organizations may charge other fees to their customers who are
beneficial owners of Service Shares in connection with their customer
accounts. Due to the service fees, a long-term shareholder may pay more than
the economic equivalent of the maximum front-end sales charges permitted by
the NASD's rules regarding investment companies. See "Additional Services."
The Investment Advisers have no current intention of modifying or
discontinuing any of the limitations set forth above but may do so in the
future at their discretion. The information set forth in the foregoing table
and hypothetical example relates only to Service Shares of the Funds. Each Fund
also offers Institutional Shares and, except for Mid Cap Equity Fund, Class A,
Class B and Class C Shares, which are subject to different fees and expenses
(which affect performance), have different minimum investment requirements and
are entitled to different services. Information regarding Institutional, Class
A, Class B and Class C Shares may be obtained from an investor's sales
representative or from Goldman Sachs by calling the number on the back of this
Prospectus.
The purpose of the foregoing table is to assist investors in understanding
the various fees and expenses of a Fund that an investor will bear directly or
indirectly. The information on the fees and expenses included in the table and
hypothetical example above is based on each Fund's fees and expenses (actual or
estimated) and should not be considered as representative of future expenses.
Actual fees and expenses may be greater or less than those indicated. Moreover,
while the example assumes a 5% annual return, a Fund's actual performance will
vary and may result in an actual return greater or less than 5%. See
"Management--Investment Advisers" and "Additional Services."
8
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
The following data with respect to a share (of the Class specified) of the
Funds outstanding during the period(s) indicated has been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report
incorporated by reference into the Additional Statement from the Annual Report
to shareholders for the Funds for the year ended January 31, 1997 (the "Annual
Report"). This information should be read in conjunction with the financial
statements and related notes incorporated by reference and attached to the
Additional Statement. The Annual Report also contains performance information
and is available upon request and without charge by calling the telephone
number or writing to one of the addresses on the back cover of this
Prospectus. During the periods shown, the Trust did not offer the CORE Large
Cap Growth, CORE Small Cap Equity, CORE International Equity and Emerging
Markets Equity Funds or Class C shares of any Fund. Accordingly, there are no
financial highlights for these Funds or Classes.
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
INCOME (LOSS) FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS(H) SHAREHOLDERS
------------------------------ -----------------------------------
NET REALIZED FROM NET
NET ASSET AND UNREALIZED FROM REALIZED GAIN IN EXCESS NET NET ASSET
VALUE, NET GAIN (LOSS) ON NET ON INVESTMENT OF NET INCREASE VALUE,
BEGINNING INVESTMENT INVESTMENTS, INVESTMENT AND FUTURE INVESTMENT IN NET END OF TOTAL
OF PERIOD INCOME OPTIONS AND FUTURES INCOME TRANSACTIONS INCOME ASSET VALUE PERIOD RETURN(A)
--------- ---------- ------------------- ---------- ------------- ---------- ----------- --------- ---------
BALANCED FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... $17.31 $0.66 $2.47 $(0.66) $(1.00) -- $1.47 $18.78 18.59%
1997--Class B
Shares(b)....... 17.46 0.42 2.34 (0.42) (1.00) (0.07) 1.27 18.73 16.22(c)
1996--Class A
Shares.......... 14.22 0.51 3.43 (0.50) (0.35) -- 3.09 17.31 28.10
FOR THE PERIOD
ENDED JANUARY
31,
1995--Class A
Shares(d)....... 14.18 0.10 0.02 (0.08) -- -- 0.04 14.22 0.87(c)
<CAPTION>
RATIOS ASSUMING
NO VOLUNTARY WAIVER
OF FEES OR
EXPENSE LIMITATIONS
------------------------
RATIO OF RATIO OF
NET RATIO OF NET NET
ASSETS AT NET INVESTMENT RATIO OF INVESTMENT
PORTFOLIO AVERAGE END OF EXPENSES TO INCOME TO EXPENSES INCOME (LOSS)
TURNOVER COMMISSION PERIOD AVERAGE NET AVERAGE NET TO AVERAGE TO AVERAGE
RATE RATE(G) IN (000'S) ASSETS ASSETS NET ASSETS NET ASSETS
----------- ---------- ---------- ----------- ----------- ---------- -------------
BALANCED FUND
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... 208.11(f) $.0587 $81,410 1.00% 3.76% 1.77% 2.99%
1997--Class B
Shares(b)....... 208.11(f) .0587 2,110 1.75(e) 2.59(e) 2.27(e) 2.07(e)
1996--Class A
Shares.......... 197.10(f) -- 50,928 1.00 3.65 1.90 2.75
FOR THE PERIOD
ENDED JANUARY
31,
1995--Class A
Shares(d)....... 14.71(c) -- 7,510 1.00(e) 3.39(e) 8.29(e) (3.90)(e)
</TABLE>
- -----------
(a) 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 or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
(b) For the period from May 1, 1996 (commencement of operations) to January
31, 1997.
(c) Not annualized.
(d) For the period from October 12, 1994 (commencement of operations) to
January 31, 1995.
(e) Annualized.
(f) Includes the effect of mortgage dollar roll transactions.
(g) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
(h) Includes the balancing effect of calculating per share amounts.
9
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM
INVESTMENT OPERATIONS(H) DISTRIBUTIONS TO SHAREHOLDERS
-------------------------- -----------------------------------
NET REALIZED FROM NET
NET ASSET AND UNREALIZED FROM REALIZED GAIN IN EXCESS NET NET ASSET
VALUE, NET GAIN (LOSS) ON NET ON INVESTMENT OF NET ADDITIONAL INCREASE VALUE,
BEGINNING INVESTMENT INVESTMENTS INVESTMENT AND OPTION INVESTMENT PAID-IN IN NET END OF
OF PERIOD INCOME AND OPTIONS INCOME TRANSACTIONS INCOME CAPITAL ASSET VALUE PERIOD
--------- ---------- -------------- ---------- ------------- ---------- ---------- ----------- ---------
GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... $19.98 $0.35 $5.18 $(0.35) $(1.97) $(0.01) $-- $3.20 $23.18
1997--Class B
Shares(f)....... 20.82 0.17 4.31 (0.17) (1.97) (0.06) -- 2.28 23.10
1997--Institu-
tional
Shares(f)....... 21.25 0.29 3.96 (0.30) (1.97) (0.04) -- 1.94 23.19
1997--Service
Shares(f)....... 20.71 0.28 4.50 (0.28) (1.97) (0.07) -- 2.46 23.17
1996--Class A
Shares.......... 15.80 0.33 4.75 (0.30) (0.60) -- -- 4.18 19.98
1995--Class A
Shares.......... 15.79 0.20(b) 0.30(b) (0.20) (0.33) (0.07) 0.11(b) 0.01 15.80
FOR THE PERIOD
ENDED JANUARY
31,
1994--Class A
Shares(c)....... 14.18 0.15 1.68 (0.15) (0.06) (0.01) -- 1.61 15.79
<CAPTION>
RATIOS ASSUMING
NO VOLUNTARY WAIVER
OF FEES OR
EXPENSE LIMITATIONS
------------------------
RATIO OF RATIO OF
NET RATIO OF NET NET
ASSETS AT NET INVESTMENT RATIO OF INVESTMENT
PORTFOLIO AVERAGE END OF EXPENSES TO INCOME TO EXPENSES INCOME (LOSS)
TOTAL TURNOVER COMMISSION PERIOD AVERAGE NET AVERAGE NET TO AVERAGE TO AVERAGE
RETURN(A) RATE RATE(G) (IN 000'S) ASSETS ASSETS NET ASSETS NET ASSETS
---------- ----------- ---------- ---------- ----------- ----------- ---------- -------------
GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... 28.42% 53.03% $.0586 $615,103 1.22% 1.60% 1.43% 1.39%
1997--Class B
Shares(f)....... 22.23(d) 53.03 .0586 17,346 1.93(e) 0.15(e) 1.93(e) 0.15(e)
1997--Institu-
tional
Shares(f)....... 20.77(d) 53.03 .0586 193 0.82(e) 1.36(e) 0.82(e) 1.36(e)
1997--Service
Shares(f)....... 23.87(d) 53.03 .0586 3,174 1.32(e) 0.94(e) 1.32(e) 0.94(e)
1996--Class A
Shares.......... 32.45 57.93 -- 436,757 1.20 1.67 1.45 1.42
1995--Class A
Shares.......... 3.97 71.80 -- 193,772 1.25 1.28 1.58 0.95
FOR THE PERIOD
ENDED JANUARY
31,
1994--Class A
Shares(c)....... 13.08(d) 102.23(d) -- 41,528 1.25(e) 1.23(e) 3.24(e) (0.76)(e)
</TABLE>
- -----------
(a) 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 or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
(b) Calculated based on the average shares outstanding methodology.
(c) For the period from February 5, 1993 (commencement of operations) to
January 31, 1994.
(d) Not annualized.
(e) Annualized.
(f) For the period from March 6, May 1 and June 3, 1996 (commencement of
operations) to January 31, 1997 for Service, Class B and Institutional
shares, respectively.
(g) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
(h) Includes the balancing effect of calculating per share amounts.
10
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS(H) SHAREHOLDERS
------------------------- -----------------------------------
NET REALIZED
AND UNREALIZED FROM NET NET
NET ASSET GAIN (LOSS) ON FROM REALIZED GAIN IN EXCESS (DECREASE) NET ASSET
VALUE, NET INVESTMENTS, NET ON INVESTMENT OF NET INCREASE VALUE,
BEGINNING INVESTMENT OPTIONS INVESTMENT AND FUTURES INVESTMENT IN NET END OF TOTAL
OF PERIOD INCOME AND FUTURES INCOME TRANSACTIONS INCOME ASSET VALUE PERIOD RETURN(A)
--------- ---------- -------------- ---------- ------------- ---------- ----------- --------- ---------
CORE U.S. EQUITY FUND
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... $19.66 $0.16 $4.46 $(0.16) $(0.80) -- $3.66 $23.32 23.75%
1997--Class B
Shares(f)....... 20.44 0.04 3.70 (0.04) (0.80) (0.16) 2.74 23.18 18.59(b)
1997--Institu-
tional Shares... 19.71 0.30 4.51 (0.28) (0.80) -- 3.73 23.44 24.63
1997--Service
Shares(f)....... 21.02 0.13 3.15 (0.13) (0.80) (0.10) 2.25 23.27 15.92(b)
1996--Class A
Shares.......... 14.61 0.19 5.43 (0.16) (0.41) -- 5.05 19.66 38.63
1996--Institu-
tional
Shares(d)....... 16.97 0.16 3.23 (0.24) (0.41) -- 2.74 19.71 20.14(b)
1995--Class A
Shares.......... 15.93 0.20 (0.38) (0.20) (0.94) -- (1.32) 14.61 (1.10)
1994--Class A
Shares.......... 15.46 0.17 2.08 (0.17) (1.61) -- 0.47 15.93 15.12
1993--Class A
Shares.......... 15.05 0.22 0.41 (0.22) -- -- 0.41 15.46 4.30
FOR THE PERIOD
ENDED JANUARY
31,
1992--Class A
Shares(e)....... 14.17 0.11 0.88 (0.11) -- -- 0.88 15.05 7.01(b)
<CAPTION>
RATIOS ASSUMING
NO VOLUNTARY WAIVER
OF FEES OR
EXPENSE LIMITATIONS
-----------------------
RATIO OF
RATIO OF NET
NET RATIO OF NET INVESTMENT
ASSETS AT NET INVESTMENT RATIO OF INCOME
PORTFOLIO AVERAGE END OF EXPENSES TO INCOME TO EXPENSES TO
TURNOVER COMMISSION PERIOD AVERAGE NET AVERAGE NET TO AVERAGE AVERAGE
RATE RATE(G) (IN 000'S) ASSETS ASSETS NET ASSETS NET ASSETS
----------- ---------- ---------- ----------- ----------- ---------- ------------
CORE U.S. EQUITY FUND
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... 37.28% $.0417 $225,968 1.29% 0.91% 1.53% 0.67%
1997--Class B
Shares(f)....... 37.28 .0417 17,258 1.83(c) 0.06(c) 2.00(c) (0.11)(c)
1997--Institu-
tional Shares... 37.28 .0417 148,942 0.65 1.52 0.85 1.32
1997--Service
Shares(f)....... 37.28 .0417 3,666 1.15(c) 0.69(c) 1.35(c) 0.49(c)
1996--Class A
Shares.......... 39.35 -- 129,045 1.25 1.01 1.55 0.71
1996--Institu-
tional
Shares(d)....... 39.35(b) -- 64,829 0.65(c) 1.49(c) 0.96(c) 1.18(c)
1995--Class A
Shares.......... 56.18 -- 94,968 1.38 1.33 1.63 1.08
1994--Class A
Shares.......... 87.73 -- 92,769 1.42 0.92 1.67 0.67
1993--Class A
Shares.......... 144.93 -- 117,757 1.28 1.30 1.53 1.05
FOR THE PERIOD
ENDED JANUARY
31,
1992--Class A
Shares(e)....... 135.02(c) -- 151,142 1.57(c) 1.24(c) 1.82(c) 0.99(c)
</TABLE>
- -----------
(a) 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 or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
(b) Not annualized.
(c) Annualized.
(d) For the period from June 15, 1995 (commencement of operations) to January
31, 1996.
(e) For the period from May 24, 1991 (commencement of operations) to January
31, 1992.
(f) For the period from May 1 and June 7, 1996 (commencement of operations) to
January 31, 1997 for Class B and Service shares, respectively.
(g) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
(h) Includes the balancing effect of calculating per share amounts.
11
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS(G) SHAREHOLDERS
------------------------------ ------------------------------------
NET REALIZED FROM NET NET
NET ASSET AND UNREALIZED FROM REALIZED GAIN IN EXCESS INCREASE NET ASSET
VALUE, NET GAIN (LOSS) ON NET ON INVESTMENTS OF NET (DECREASE) VALUE,
BEGINNING INVESTMENT INVESTMENTS, INVESTMENT OPTIONS INVESTMENT IN NET END OF TOTAL
OF PERIOD INCOME OPTIONS AND FUTURES INCOME AND FUTURES INCOME ASSET VALUE PERIOD RETURN(A)
--------- ---------- ------------------- ---------- -------------- ---------- ----------- --------- ---------
CAPITAL GROWTH FUND
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... $14.91 $0.10 $3.56 $(0.10) $(1.72) $(0.02) $1.82 $16.73 25.97%
1997--Class B
Shares(b)....... 15.67 0.01 2.81 (0.01) (1.72) (0.09) 1.00 16.67 19.39(d)
1996--Class A
Shares.......... 13.67 0.12 3.93 (0.12) (2.69) -- 1.24 14.91 30.45
1995--Class A
Shares.......... 15.96 0.03 (0.69) (0.01) (1.62) -- (2.29) 13.67 (4.38)
1994--Class A
Shares.......... 14.64 0.02 2.40 (0.01) (1.07) (0.02) 1.32 15.96 16.89
1993--Class A
Shares.......... 13.65 0.06 2.28 (0.07) (1.28) -- 0.99 14.64 18.01
1992--Class A
Shares.......... 11.10 0.28 2.90 (0.31) (0.32) -- 2.55 13.65 29.31
FOR THE PERIOD
ENDED JANUARY
31,
1991--Class A
Shares(c)....... 11.34 0.34 (0.27) (0.31) -- -- (0.24) 11.10 0.84(d)
<CAPTION>
RATIOS ASSUMING
NO VOLUNTARY WAIVER
OF FEES
RATIO OF ------------------------
NET RATIO OF
NET RATIO OF INVESTMENT NET
ASSETS AT NET INCOME RATIO OF INVESTMENT
PORTFOLIO AVERAGE END OF EXPENSES TO (LOSS) TO EXPENSES INCOME (LOSS)
TURNOVER COMMISSION PERIOD AVERAGE NET AVERAGE NET TO AVERAGE TO AVERAGE
RATE RATE(F) IN (000'S) ASSETS ASSETS NET ASSETS NET ASSETS
---------- ---------- ---------- ----------- ------------ ---------- -------------
CAPITAL GROWTH FUND
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... 52.92% $.0563 $920,646 1.40% 0.62% 1.65% 0.37%
1997--Class B
Shares(b)....... 52.92 .0563 3,221 2.15(e) (0.39)(e) 2.15(e) (0.39)(e)
1996--Class A
Shares.......... 63.90 -- 881,056 1.36 0.65 1.61 0.40
1995--Class A
Shares.......... 38.36 -- 862,105 1.38 0.16 1.63 (0.09)
1994--Class A
Shares.......... 36.12 -- 833,682 1.38 0.13 1.63 (0.12)
1993--Class A
Shares.......... 58.93 -- 665,976 1.41 0.42 1.66 0.17
1992--Class A
Shares.......... 48.93 -- 500,307 1.53 2.09 1.78 1.84
FOR THE PERIOD
ENDED JANUARY
31,
1991--Class A
Shares(c)....... 35.63(d) -- 437,533 1.27(d) 3.24(d) 1.47(d) 3.04(d)
</TABLE>
- -----------
(a) 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 or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
(b) For the period from May 1, 1996 (commencement of operations) to January
31, 1997.
(c) For the period from April 20, 1990 (commencement of operations) to January
31, 1991.
(d) Not annualized.
(e) Annualized.
(f) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
(g) Includes the balancing effect of calculating per share amounts.
12
<PAGE>
<TABLE>
<CAPTION>
INCOME FROM
INVESTMENT OPERATIONS DISTRIBUTIONS TO SHAREHOLDERS
--------------------------------- ------------------------------------------------
NET
REALIZED TOTAL FROM NET
AND INCOME REALIZED NET NET
NET ASSET UNREALIZED (LOSS) IN EXCESS GAIN ON TOTAL INCREASE ASSET
VALUE, NET GAIN ON FROM FROM NET OF NET INVESTMENTS DISTRIBUTIONS IN NET VALUE,
BEGINNING INVESTMENT INVESTMENTS INVESTMENT INVESTMENT INVESTMENT AND-OPTION TO ASSET END OF
OF PERIOD INCOME AND OPTIONS OPERATIONS INCOME INCOME TRANSACTIONS SHAREHOLDERS VALUE PERIOD
--------- ---------- ----------- ---------- ---------- ---------- ------------ ------------- -------- -------
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year
Ended January
31,
1997--Institu-
tional Shares... $15.91 $0.24 $3.77 $4.01 $(0.24) $(0.02) $(0.93) $(1.19) $2.82 $18.73
For the Period
Ended January
31,
1996--Institu-
tional
Shares(a)....... 15.00 0.13 0.90 1.03 (0.12) -- -- (0.12) 0.91 15.91
<CAPTION>
RATIOS ASSUMING NO
EXPENSE LIMITATION
--------------------
NET RATIO OF RATIO OF
ASSETS NET RATIO OF NET
AT END INVESTMENT EXPENSES INVESTMENT
OF RATIO OF NET INCOME TO TO INCOME TO
PORTFOLIO AVERAGE PERIOD EXPENSES TO AVERAGE AVERAGE AVERAGE
TOTAL TURNOVER COMMISSION (IN AVERAGE NET NET NET NET
RETURN(B) RATE RATE(E) 000'S) ASSETS(C) ASSETS(C) ASSETS(C) ASSETS(C)
---------- ----------- ---------- -------- ------------ ---------- --------- ----------
MID CAP EQUITY FUND
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year
Ended January
31,
1997--Institu-
tional Shares... 25.63% 74.03% $.0547 $145,253 0.85% 1.35% 0.91% 1.29%
For the Period
Ended January
31,
1996--Institu-
tional
Shares(a)....... 6.89(d) 58.77%(d) -- 135,670 0.85 1.67 0.98 1.54
</TABLE>
- -----------
(a) For the period from August 1, 1995 (commencement of operations) to January
31, 1996.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption
of the investment at the net asset value at the end of the period.
(c) Annualized.
(d) Not annualized.
(e) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
13
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS(G) SHAREHOLDERS
-------------------------------------------------- -----------------------
FROM NET
NET REALIZED REALIZED
NET REALIZED AND UNREALIZED GAIN ON NET
NET ASSET AND UNREALIZED GAIN (LOSS) ON FROM INVESTMENT, INCREASE NET ASSET
VALUE, NET GAIN (LOSS) ON FOREIGN NET OPTION AND (DECREASE) VALUE,
BEGINNING INVESTMENT INVESTMENTS, CURRENCY RELATED INVESTMENT FUTURES IN NET END OF
OF PERIOD INCOME (LOSS) OPTIONS AND FUTURES TRANSACTIONS INCOME TRANSACTIONS ASSET VALUE PERIOD
--------- ------------- ------------------- ---------------- ---------- ------------ ----------- ---------
INTERNATIONAL EQUITY FUND
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... $17.20 $0.10 $3.51 $(1.28) $ -- $(0.21) $2.12 $19.32
1997--Class B
Shares(e)....... 18.91 (0.06) 0.94 (0.34) -- (0.21) 0.33 19.24
1997--Institu-
tional
Shares(e)....... 17.45 0.04 3.39 (1.24) (0.03) (0.21) 1.95 19.40
1997--Service
Shares(e)....... 17.70 (0.02) 2.95 (1.08) -- (0.21) 1.64 19.34
1996--Class A
Shares.......... 14.52 0.13 2.58 1.42 (0.58) (0.87) 2.68 17.20
1995--Class A
Shares.......... 18.10 0.06 (3.04) (0.01) -- (0.59) (3.58) 14.52
1994--Class A
Shares.......... 14.35 0.05 4.08 (0.38) -- -- 3.75 18.10
FOR THE PERIOD
ENDED JANUARY
31,
1993--Class A
Shares(b)....... 14.18 (0.01) 0.29 (0.11) -- -- 0.17 14.35
<CAPTION>
RATIOS ASSUMING
NO VOLUNTARY WAIVER
OF FEES OR
EXPENSE LIMITATIONS
------------------------
RATIO OF RATIO OF
NET RATIO OF NET NET
ASSETS AT NET INVESTMENT RATIO OF INVESTMENT
PORTFOLIO AVERAGE END OF EXPENSES TO INCOME (LOSS) TO EXPENSES INCOME (LOSS)
TOTAL TURNOVER COMMISSION PERIOD AVERAGE NET AVERAGE NET TO AVERAGE TO AVERAGE
RETURN(A) RATE RATE(F) (IN 000S) ASSETS ASSETS NET ASSETS NET ASSETS
----------- --------- ---------- --------- ----------- ---------------- ---------- -------------
INTERNATIONAL EQUITY FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... 13.48% 38.01% $.0318 $536,283 1.69% (0.07)% 1.88% (0.26)%
1997--Class B
Shares(e)....... 2.83(c) 38.01 .0318 19,198 2.23(d) (0.97)(d) 2.38(d) (1.12)(d)
1997--Institu-
tional
Shares(e)....... 12.53(c) 38.01 .0318 68,374 1.10(d) 0.43(d) 1.25(d) 0.28(d)
1997--Service
Shares(e)....... 10.42(c) 38.01 .0318 674 1.60(d) (0.40)(d) 1.75(d) (0.55)(d)
1996--Class A
Shares.......... 28.68 68.48 -- 330,860 1.52 0.26 1.77 0.01
1995--Class A
Shares.......... (16.65) 84.54 -- 275,086 1.73 0.40 1.98 0.15
1994--Class A
Shares.......... 26.13 60.04 -- 269,091 1.76 0.51 2.01 0.26
FOR THE PERIOD
ENDED JANUARY
31,
1993--Class A
Shares(b)....... 1.23(c) 0.00 -- 66,063 1.80(d) (0.42)(d) 2.58(d) (1.20)(d)
</TABLE>
- -----------
(a) 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 or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
(b) For the period from December 1, 1992 (commencement of operations) to
January 31, 1993.
(c) Not annualized.
(d) Annualized.
(e) For the period from February 7, March 6 and May 1, 1996 (commencement of
operations) to January 31, 1997 for Institutional, Service and Class B
shares, respectively.
(f) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
(g) Includes the balancing effect of calculating per share amounts.
14
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS(G) SHAREHOLDERS
------------------------------ --------------------------------------
IN EXCESS OF
FROM NET REALIZED
NET REALIZED REALIZED GAIN GAINS ON NET
NET ASSET NET AND UNREALIZED FROM ON INVESTMENT, INVESTMENT, INCREASE NET ASSET
VALUE, INVESTMENT GAIN (LOSS) ON NET OPTION AND OPTION AND (DECREASE) VALUE,
BEGINNING INCOME INVESTMENTS, INVESTMENT FUTURES FUTURES IN NET END OF TOTAL
OF PERIOD (LOSS) OPTIONS AND FUTURES INCOME TRANSACTIONS TRANSACTIONS ASSET VALUE PERIOD RETURN(A)
--------- ---------- ------------------- ---------- -------------- ------------ ----------- --------- ---------
SMALL CAP EQUITY FUND
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... $17.29 $(0.21) $ 4.92 $ -- $(1.09) $ -- $ 3.62 $20.91 $ 27.28%
1997--Class B
Shares(b)....... 20.79 (0.11) 1.21 -- (1.09) -- 0.01 20.80 5.39(d)
1996--Class A
Shares.......... 16.14 (0.23) 1.39 -- (0.01) -- 1.15 17.29 7.20
1995--Class A
Shares.......... 20.67 (0.07) (3.53) -- (0.69) (0.24) (4.53) 16.14 (17.53)
1994--Class A
Shares.......... 16.68 (0.04) 5.03 -- (1.00) -- 3.99 20.67 30.13
FOR THE PERIOD
ENDED JANUARY
31,
1993--Class A
Shares(c)....... 14.18 0.03 2.50 (0.03) -- -- 2.50 16.68 17.86(d)
<CAPTION>
RATIOS ASSUMING NO
VOLUNTARY WAIVER
OF FEES
-----------------------
RATIO OF RATIO OF
NET RATIO OF NET NET
ASSETS AT NET INVESTMENT RATIO OF INVESTMENT
PORTFOLIO AVERAGE END OF EXPENSES TO INCOME (LOSS) EXPENSES LOSS
TURNOVER COMMISSION PERIOD AVERAGE NET TO AVERAGE TO AVERAGE TO AVERAGE
RATE RATE(F) (IN 000'S) ASSETS NET ASSETS NET ASSETS NET ASSETS
---------- ---------- ---------- ----------- ------------- ---------- ------------
SMALL CAP EQUITY FUND
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... 99.46% $.0461 $212,061 1.60% (0.72)% 1.85% (0.97)%
1997--Class B
Shares(b)....... 99.46 .0461 3,674 2.35(e) (1.63)(e) 2.35(e) (1.63)(e)
1996--Class A
Shares.......... 57.58 -- 204,994 1.41 (0.59) 1.66 (0.84)
1995--Class A
Shares.......... 43.67 -- 319,487 1.53 (0.53) 1.78 (0.78)
1994--Class A
Shares.......... 56.81 -- 261,074 1.60 (0.45) 1.85 (0.70)
FOR THE PERIOD
ENDED JANUARY
31,
1993--Class A
Shares(c)....... 7.12(e) -- 59,339 1.65(e) 0.62(e) 2.70(e) (0.43)(e)
</TABLE>
- -----------
(a) 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 or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
(b) For the period from May 1, 1996 (commencement of operations) to January
31, 1997.
(c) For the period from October 22, 1992 (commencement of operations) to
January 31, 1993.
(d) Not annualized.
(e) Annualized.
(f) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
(g) Includes the balancing effect of calculating per share amounts.
15
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS(G) SHAREHOLDERS
-------------------------------------- ---------------------
NET
REALIZED AND
UNREALIZED
GAIN ON NET
NET ASSET NET NET REALIZED FOREIGN FROM IN EXCESS INCREASE NET ASSET
VALUE, INVESTMENT AND UNREALIZED CURRENCY NET OF NET (DECREASE) VALUE,
BEGINNING INCOME GAIN (LOSS) ON RELATED INVESTMENT INVESTMENT IN NET END OF TOTAL
OF PERIOD (LOSS) INVESTMENTS TRANSACTIONS INCOME INCOME ASSET VALUE PERIOD RETURN(A)
--------- ---------- -------------- ------------ ---------- ---------- ----------- --------- ---------
ASIA GROWTH FUND
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... $16.49 $ 0.06 $(0.11) $(0.12) $(0.01) $ -- $(0.18) $16.31 (1.01)%
1997--Class B
Shares(e)....... 17.31 (0.05) (0.48) (0.51) -- (0.03) (1.07) 16.24 (6.02)(c)
1997--Institu-
tional
Shares(e)....... 16.61 0.04 (0.11) (0.11) (0.04) (0.06) (0.28) 16.33 (1.09)(c)
1996--Class A
Shares.......... 13.31 0.17 3.44 (0.12) (0.17) (0.14) 3.18 16.49 26.49
FOR THE PERIOD
ENDED JANUARY
31,
1995--Class A
Shares(b)....... 14.18 0.11 (0.89) 0.01 (0.10) -- (0.87) 13.31 (5.46)(c)
<CAPTION>
RATIOS ASSUMING
NO VOLUNTARY WAIVER
OF FEES OR
EXPENSE LIMITATIONS
------------------------
RATIO OF RATIO OF
NET RATIO OF NET NET
ASSETS AT NET INVESTMENT RATIO OF INVESTMENT
PORTFOLIO AVERAGE END OF EXPENSES TO INCOME (LOSS) EXPENSES INCOME (LOSS)
TURNOVER COMMISSION PERIOD AVERAGE NET TO AVERAGE TO AVERAGE TO AVERAGE
RATE RATE(F) (000'S) ASSETS NET ASSETS NET ASSETS NET ASSETS
---------- ---------- --------- ----------- ------------- ---------- -------------
ASIA GROWTH FUND
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED JANUARY
31,
1997--Class A
Shares.......... 48.40% $.0151 $263,014 1.67% 0.20% 1.87% 0.00%
1997--Class B
Shares(e)....... 48.40 .0151 3,354 2.21(d) (0.56)(d) 2.37(d) (0.72)(d)
1997--Institu-
tional
Shares(e)....... 48.40 .0151 13,322 1.10(d) 0.54(d) 1.26(d) 0.38(d)
1996--Class A
Shares.......... 88.80 -- 205,539 1.77 1.05 2.02 0.80
FOR THE PERIOD
ENDED JANUARY
31,
1995--Class A
Shares(b)....... 36.08(c) -- 124,298 1.90(d) 1.83(d) 2.38(d) 1.35(d)
</TABLE>
- -----------
(a) 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 or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
(b) For the period from July 8, 1994 (commencement of operations) to January
31, 1995.
(c) Not annualized.
(d) Annualized.
(e) For the period from February 2 and May 1, 1996 (commencement of
operations) to January 31, 1997 for Institutional and Class B shares,
respectively.
(f) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
(g) Includes the balancing effect of calculating per share amounts.
16
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and principal investment policies of each Fund are
described below. Other investment practices and management techniques, which
involve certain risks are described under "Description of Securities," "Risk
Factors" and "Investment Techniques." There can be no assurance that a Fund's
investment objectives will be achieved.
The Investment Advisers may purchase for the Funds common stocks, preferred
stocks, interests in real estate investment trusts, convertible debt
obligations, convertible preferred stocks, equity interests in trusts,
partnerships, joint ventures and similar enterprises, warrants and stock
purchase rights ("equity securities"). In choosing a Fund's securities, the
Investment Advisers utilize first-hand fundamental research, including
visiting company facilities to assess operations and to meet decision-makers.
The Investment Advisers may also use macro analysis of numerous economic and
valuation variables to anticipate changes in company earnings and the overall
investment climate. The Investment Advisers are able to draw on the research
and market expertise of the Goldman Sachs Global Investment Research
Department and other affiliates of the Investment Advisers, as well as
information provided by other securities dealers. Equity securities in a
Fund's portfolio will generally be sold when the Investment Adviser believes
that the market price fully reflects or exceeds the securities' fundamental
valuation or when other more attractive investments are identified.
Value Style Funds. The Growth and Income, Mid Cap Equity, Small Cap Equity
and the equity portion of the Balanced Funds are managed using a value
oriented approach. The Investment Adviser evaluates securities using
fundamental analysis and intends to purchase equity securities that are, in
its view, underpriced relative to a combination of such companies' long-term
earnings prospects, growth rate, free cash flow and/or dividend-paying
ability. Consideration will be given to the business quality of the issuer.
Factors positively affecting the Investment Adviser's view of that quality
include the competitiveness and degree of regulation in the markets in which
the company operates, the existence of a management team with a record of
success, the position of the company in the markets in which it operates, the
level of the company's financial leverage and the sustainable return on
capital invested in the business. The Funds may also purchase securities of
companies that have experienced difficulties and that, in the opinion of the
Investment Adviser, are available at attractive prices.
Growth Style Funds. The Capital Growth, International Equity, Emerging
Markets Equity and Asia Growth Funds are managed using a growth oriented
approach. Equity securities for these Funds are selected based on their
prospects for above average growth. The Investment Adviser will select
securities of growth companies trading, in the Investment Adviser's opinion,
at a reasonable price relative to other industries, competitors and historical
price/earnings multiples. These Funds will generally invest in companies whose
earnings are believed to be in a relatively strong growth trend, or, to a
lesser extent, in companies in which significant further growth is not
anticipated but whose market value per share is thought to be undervalued. In
order to determine whether a security has favorable growth prospects, the
Investment Adviser ordinarily looks for one or more of the following
characteristics in relation to the security's prevailing price: prospects for
above average sales and earnings growth per share; high return on invested
capital; free cash flow generation; sound balance sheet, financial and
accounting policies, and overall financial strength; strong competitive
advantages; effective research, product development, and marketing; pricing
flexibility; strength of management; and general operating characteristics
that will enable the company to compete successfully in its marketplace.
17
<PAGE>
Quantitative Style Funds. The CORE U.S. Equity, CORE Large Cap Growth, CORE
Small Cap Equity and CORE International Equity Funds (the "CORE Funds") are
managed using both quantitative and fundamental techniques. CORE is an acronym
for "Computer-Optimized, Research-Enhanced," which reflects the Funds'
investment process. This investment process and the proprietary multifactor
model used to implement it are discussed below.
Investment Process. The Investment Adviser begins with a broad universe of
U.S. equity securities for the CORE U.S. Equity, CORE Large Cap Growth and
CORE Small Cap Equity Funds (the "CORE U.S. Funds"), and a broad universe of
foreign equity securities for the CORE International Equity Fund. The
Investment Adviser uses a proprietary multifactor model (the "Multifactor
Model") to assign each equity security a rating. In the case of a U.S. equity
security followed by the Goldman Sachs Global Investment Research Department
(the "Research Department"), a second rating is assigned based upon the
Research Department's evaluation. In the discretion of the Investment Adviser,
such ratings may also be assigned to U.S. equity securities based on research
ratings obtained from other industry sources. In building a diversified
portfolio for each CORE Fund, the Investment Adviser utilizes optimization
techniques to seek to maximize the Fund's expected reward to risk ratio. The
resulting portfolio is primarily comprised of securities rated highest by the
foregoing investment process and has risk characteristics and industry
weightings similar to the relevant Fund's benchmark. Under normal conditions,
the securities of any one issuer may not exceed 5% of a Fund's total assets.
Multifactor Model. The Multifactor Model is a rigorous computerized rating
system for valuing equity securities according to fundamental investment
characteristics. The factors used by the Multifactor Model incorporate many
variables studied by traditional fundamental analysts, and cover measures of
value, growth, momentum and risk (e.g., price/earnings ratio, book/price
ratio, consensus growth forecasts, earnings estimate revisions, price
momentum, price volatility and earnings stability). All of the factors used in
the Multifactor Model have been shown to significantly impact the performance
of equity securities. The weightings assigned to the factors are derived using
a statistical formulation that considers each factor's historical performance
in different market environments. As such, the Multifactor Model is designed
to evaluate each security using only the factors that are statistically
related to returns in the anticipated market environment. Because it includes
many disparate factors, the Investment Adviser believes that the Multifactor
Model is broader in scope and provides a more thorough evaluation than most
conventional, value-oriented quantitative models. As a result, the securities
ranked highest by the Multifactor Model do not have one dominant investment
characteristic (such as a low price/earnings ratio); rather, they possess an
attractive combination of investment characteristics.
Research Department. In assigning ratings to U.S. equity securities, the
Research Department uses a four category rating system ranging from
"recommended for purchase" to "likely to underperform." The ratings reflect
the analyst's judgment as to the investment results of a specific security and
incorporate economic outlook, valuation, risk and a variety of other factors.
By employing both a quantitative (i.e., the Multifactor Model) and a
qualitative (i.e., research enhanced) method of selecting securities, each
CORE Fund seeks to capitalize on the strengths of each discipline.
BALANCED FUND
Objective. The Fund's investment objective is to provide investors with
long-term capital growth and current income. The Fund seeks capital
appreciation primarily through the equity component of its portfolio while
investing in fixed income securities primarily to provide income for regular
quarterly dividends.
18
<PAGE>
Primary Investment Focus. The Fund invests, under normal circumstances,
between 45% and 65% of its total assets in equity securities. The Fund also
invests at least 25% of its total assets in fixed income senior securities and
the remainder of its assets in other fixed income securities and cash. The
percentage of the portfolio invested in equity and fixed income securities
will vary from time to time as the Investment Adviser evaluates their relative
attractiveness based on market valuations, economic growth and inflation
prospects. This allocation is subject to the Fund's intention to pay regular
quarterly dividends. The amount of quarterly dividends can also be expected to
fluctuate in accordance with factors such as prevailing interest rates and the
percentage of the Fund's assets invested in fixed-income securities.
Other. Although the Fund's equity investments consist primarily of publicly
traded U.S. securities, the Fund may invest up to 10% of its total assets in
the equity securities of foreign issuers, including issuers in Emerging
Countries and equity securities quoted in foreign currencies. A portion of the
Fund's portfolio of equity securities may be selected primarily to provide
current income. Equity securities selected to provide current income may
include interests in real estate investment trusts, convertible securities,
preferred stocks, utility stocks and interests in limited partnerships.
The Fund's fixed income securities primarily include securities issued by
the U.S. Government, its agencies, instrumentalities or sponsored enterprises,
corporations or other entities, mortgage-backed and asset-backed securities,
municipal securities and custodial receipts. The Fund may also invest in debt
obligations (U.S. dollar and non-U.S. dollar denominated) issued or guaranteed
by one or more foreign governments or any of their political subdivisions,
agencies or instrumentalities and foreign corporations or other entities. Such
securities are collectively referred to herein as "fixed income securities."
The Fund's investments in fixed income securities that are issued by foreign
issuers, including issuers in Emerging Countries may not exceed 10% of the
Fund's total assets. The Fund may employ certain currency techniques to seek
to hedge against currency exchange rate fluctuations or to seek to increase
total return. When used to seek to enhance return, these management techniques
are considered speculative. Such currency management techniques involve risks
different from those associated with investing solely in securities of U.S.
issuers quoted in U.S. dollars. See "Description of Securities," "Investment
Techniques" and "Risk Factors."
GROWTH AND INCOME FUND
Objectives. The Fund's investment objectives are to provide investors with
long-term growth of capital and growth of income.
Primary Investment Focus. The Fund invests, under normal circumstances, at
least 65% of its total assets in equity securities that the Investment Adviser
considers to have favorable prospects for capital appreciation and/or
dividend-paying ability.
Other. The Fund may invest up to 35% of its total assets in fixed income
securities that, in the opinion of the Investment Adviser, offer the potential
to further the Fund's investment objectives. In addition, although the Fund
will invest primarily in publicly traded U.S. securities, it may invest up to
25% of its total assets in foreign securities, including securities of issuers
in Emerging Countries and securities quoted in foreign currencies.
CORE U.S. EQUITY FUND (FORMERLY, THE "SELECT EQUITY FUND")
Objective. The Fund's investment objective is to provide investors with
long-term growth of capital and dividend income. The Fund seeks to achieve its
objective through a broadly diversified portfolio of large cap and blue chip
equity securities representing all major sectors of the U.S. economy.
19
<PAGE>
Primary Investment Focus. The Fund invests, under normal circumstances, at
least 90% of its total assets in equity securities. The Fund may invest in
equity securities of foreign issuers that are traded in the United States and
that comply with U.S. accounting standards. The Fund's investments are
selected using both a variety of quantitative techniques and fundamental
research in seeking to maximize the Fund's reward to risk ratio. The Fund's
portfolio is designed to have risk, style, capitalization and industry
characteristics similar to the S&P 500 Index. The Fund seeks a broad
representation in most major sectors of the U.S. economy and a portfolio
comprised of companies with average long-term earnings growth expectations and
dividend yields. The Fund may invest only in fixed income securities that are
considered cash equivalents.
For a description of the investment process of the Fund, see "Investment
Process," "Multifactor Model" and "Research Department" under "INVESTMENT
OBJECTIVES AND POLICIES--Quantitative Style Funds."
CORE LARGE CAP GROWTH FUND
Objective. The Fund's investment objective is to provide investors with
long-term growth of capital. The Fund seeks to achieve its objective through a
broadly diversified portfolio of equity securities of large cap U.S. issuers
that are expected to have better prospects for earnings growth than the growth
rate of the general domestic economy. Dividend income is a secondary
consideration.
Primary Investment Focus. The Fund invests, under normal circumstances, at
least 90% of its total assets in equity securities. The Investment Adviser
emphasizes a company's growth prospects in analyzing equity securities to be
purchased by the Fund. The Fund may invest in equity securities of foreign
issuers that are traded in the United States and that comply with U.S.
accounting standards. The Fund's investments are selected using both a variety
of quantitative techniques and fundamental research in seeking to maximize the
Fund's reward to risk ratio. The Fund's portfolio is designed to have risk,
style, capitalization and industry characteristics similar to the Russell 1000
Growth Index. The Fund seeks a portfolio comprised of companies with above
average capitalizations and earnings growth expectations and below average
dividend yields. The Fund may invest only in fixed income securities that are
considered cash equivalents.
For a description of the investment process of the Fund, see "Investment
Process," "Multifactor Model" and "Research Department" under "INVESTMENT
OBJECTIVES AND POLICIES--Quantitative Style Funds."
CORE SMALL CAP EQUITY FUND
Objective. The Fund's investment objective is to provide investors with
long-term growth of capital. The Fund seeks to achieve its objective through a
broadly diversified portfolio of equity securities of U.S. companies with
public stock market capitalizations of $3 billion or less at the time of
investment.
Primary Investment Focus. The Fund invests, under normal circumstances, at
least 90% of its total assets in U.S. equity securities. The Fund may
occasionally invest in equity securities of foreign issuers that are traded in
the United States and that comply with U.S. accounting standards. The Fund's
investments are selected using both a variety of quantitative techniques and
fundamental research in seeking to maximize the Fund's reward to risk ratio.
The Fund's portfolio is designed to have risk, style, capitalization and
industry characteristics similar
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to the [Russell 2500 or Russell 2000] Index. The Fund seeks a portfolio
comprised of companies with small market capitalizations, strong expected
earnings growth and momentum, and better valuation and risk characteristics
than the [Russell 2000 or Russell 2500] Index. The Fund may invest only in
fixed income securities that are considered cash equivalents.
The Investment Adviser believes that companies in which the Fund may invest
offer greater opportunity for growth of capital than larger, more mature,
better known companies. Investment in small market capitalization issuers
involves special risks. See "Description of Securities" and "Risk Factors."
For a description of the investment process of the Fund, see "Investment
Process," "Multifactor Model" and "Research Department" under "INVESTMENT
OBJECTIVES AND POLICIES--Quantitative Style Funds."
CORE INTERNATIONAL EQUITY FUND
Objective. The Fund's investment objective is to provide investors with
long-term growth of capital.
Primary Investment Focus. The Fund invests, under normal circumstances, at
least 90%, of its total assets in equity securities of companies that are
organized outside the United States or whose securities are principally traded
outside the United States. The Fund's investments are selected using both a
variety of quantitative techniques and fundamental research in seeking to
maximize the Fund's reward to risk ratio. The Fund's portfolio is designed to
have risk, style, capitalization and industry characteristics similar to the
EAFE Index. The Fund seeks broad diversification across major countries and
sectors of the international economy. In addition, the Fund seeks attractive
valuations and stronger momentum characteristics than the EAFE Index.
The Fund may allocate its assets among countries as determined by the
Investment Adviser from time to time, provided the Fund's assets are invested
in at least three foreign countries. The Fund may invest in countries that
have emerging markets or economies which involve certain risks, as described
below under "Risk Factors--Special Risks of Investments in the Asian and Other
Emerging Markets," which are not present in investments in more developed
countries. The Fund may invest only in fixed income securities that are
considered to be cash equivalents.
For a description of the investment process of the Fund, see "Investment
Process," "Multifactor Model" and "Research Department" under "INVESTMENT
OBJECTIVES AND POLICIES--Quantitative Style Funds."
Other. The Fund may employ certain currency techniques to seek to hedge
against currency exchange rate fluctuations or to seek to increase total
return. When used to seek to enhance return, these management techniques are
considered speculative. Such currency management techniques involve risks
different from those associated with investing solely in securities of U.S.
issuers quoted in U.S. dollars. To the extent that the Fund is fully invested
in foreign securities while also maintaining currency positions, it may be
exposed to greater combined risk. The Fund's net currency positions may expose
it to risks independent of its securities positions. See "Description of
Securities," "Investment Techniques" and "Risk Factors."
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MID CAP EQUITY FUND
Objective. The Fund's investment objective is to provide investors with
long-term capital appreciation.
Primary Investment Focus. The Fund invests, under normal circumstances,
substantially all of its assets in equity securities and at least 65% of its
total assets in equity securities of Mid Cap Companies with public stock
market capitalizations (based upon shares available for trading on an
unrestricted basis) of between $500 million and $7 billion at the time of
investment. However, the Fund currently intends to emphasize investments in
Mid Cap Companies with public stock market capitalizations of below $5 billion
at the time of investment. Dividend income, if any, is an incidental
consideration.
Other. The Fund may invest up to 35% of its total assets in mortgage-backed,
asset-backed and fixed income securities. In addition, although the Fund will
invest primarily in publicly traded U.S. securities, it may invest up to 25%
of its total assets in foreign securities, including securities of issuers in
Emerging Countries and securities quoted in foreign currencies.
CAPITAL GROWTH FUND
Objective. The Fund's investment objective is to provide investors with
long-term growth of capital.
Primary Investment Focus. The Fund invests, under normal circumstances, at
least 90% of its total assets in equity securities. The Fund seeks to achieve
its investment objective by investing in a diversified portfolio of equity
securities that are considered by the Investment Adviser to have long-term
capital appreciation potential.
Other. Although the Fund will invest primarily in publicly traded U.S.
securities, it may invest up to 10% of its total assets in foreign securities,
including securities of issuers in Emerging Countries and securities quoted in
foreign currencies.
INTERNATIONAL EQUITY FUND
Objective. The Fund's investment objective is to provide investors with
long-term capital appreciation.
Primary Investment Focus. The Fund invests, under normal circumstances,
substantially all, and at least 65%, of its total assets in equity securities
of companies that are organized outside the United States or whose securities
are principally traded outside the United States. The Fund may allocate its
assets among countries as determined by the Investment Adviser from time to
time provided that the Fund's assets are invested in at least three foreign
countries. The Fund expects to invest a substantial portion of its assets in
the securities of issuers located in the developed countries of Western Europe
and in Japan. However, the Fund may also invest in the securities of issuers
located in Australia, Canada, New Zealand and the Emerging Countries in which
the Emerging Markets Equity Fund may invest. Many of the countries in which
the Fund may invest have emerging markets or economies which involve certain
risks, as described below under "Risk Factors--Special Risks of Investments in
the Asian and Other Emerging Markets," which are not present in investments in
more developed countries.
Other. The Fund may employ certain currency techniques to seek to hedge
against currency exchange rate fluctuations or to seek to increase total
return. When used to seek to enhance return, these management techniques are
considered speculative. Such currency management techniques involve risks
different from those
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associated with investing solely in securities of U.S. issuers quoted in U.S.
dollars. To the extent that the Fund is fully invested in foreign securities
while also maintaining currency positions, it may be exposed to greater
combined risk. The Fund's net currency positions may expose it to risks
independent of its securities positions. See "Description of Securities,"
"Investment Techniques" and "Risk Factors." Up to 35% of the Fund's total
assets may be invested in fixed income securities.
SMALL CAP EQUITY FUND
Objective. The Fund's investment objective is to provide investors with
long-term capital growth.
Primary Investment Focus. The Fund invests, under normal circumstances, at
least 65% of its total assets in equity securities of companies with public
stock market capitalizations of $1 billion or less at the time of investment.
However, the Fund currently emphasizes investments in companies with public
stock market capitalizations of $500 million or less at the time of
investment. Under normal circumstances, the Fund's investment horizon for
ownership of stocks will be two to three years. Dividend income, if any, is an
incidental consideration.
Small Capitalization Companies. The Fund invests in companies which the
Investment Adviser believes are well managed niche businesses that have the
potential to achieve high or improving returns on capital and/or above average
sustainable growth. The Fund may invest in securities of small market
capitalization companies which may have experienced financial difficulties.
Investments may also be made in companies that are in the early stages of
their life and that the Investment Adviser believes have significant growth
potential. The Investment Adviser believes that the companies in which the
Fund may invest offer greater opportunity for growth of capital than larger,
more mature, better known companies. However, investments in such small market
capitalization companies involve special risks. See "Description of
Securities" and "Risk Factors."
Other. The Fund may invest in the aggregate up to 35% of its total assets in
the equity securities of companies with public stock market capitalizations in
excess of $1 billion and in fixed income securities. In addition, although the
Fund will invest primarily in publicly traded U.S. securities, it may invest
up to 25% of its total assets in foreign securities, including securities of
issuers in Emerging Countries and securities quoted in foreign currencies.
EMERGING MARKETS EQUITY FUND
Objective. The Fund's investment objective is to provide investors with
long-term capital appreciation.
Primary Investment Focus. The Fund invests, under normal market
circumstances, substantially all, and at least 65%, of its total assets in
equity securities of Emerging Country issuers. For purposes of the Fund's
investment policies, Emerging Countries are countries with economies or
securities markets that are considered by the Investment Adviser not to be
fully developed. The Investment Adviser may consider, but is not bound by,
classifications by the World Bank, the International Finance Corporation or
the United Nations and its agencies in determining whether a country is
emerging or developed. Currently, Emerging Countries include among others,
most Latin American, African, Asian and Eastern European nations. The
Investment Adviser currently intends that the Fund's investment focus will be
in the following Emerging Countries: Argentina, Botswana, Brazil, Chile,
China, Colombia, the Czech Republic, Egypt, Greece, Hong Kong, Hungary, India,
Indonesia, Israel, Jordan, Kenya, Malaysia, Mexico, Morocco, Pakistan, Peru,
the Philippines, Poland, Portugal, Russia, Singapore, South Africa, South
Korea, Sri Lanka, Taiwan, Thailand, Turkey, Venezuela and Zimbabwe. At the
Investment Adviser's discretion, the Fund may invest in other Emerging
Countries.
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An Emerging Country issuer is any entity that satisfies at least one of the
following criteria: (i) it derives 50% or more of its total revenue from goods
produced, sales made or services performed in one or more Emerging Countries,
(ii) it is organized under the laws of, or has a principal office in, an
Emerging Country, (iii) it maintains 50% or more of its assets in one or more
of the Emerging Countries or (iv) the principal securities trading market for
a class of its securities is in an Emerging Country.
Investments in Emerging Countries involve certain risks as described under
"Risk Factors--Special Risks of Investments in the Asian and Other Emerging
Markets," which are not present in investments in more developed countries.
The Fund may purchase privately placed equity securities, equity securities of
companies that are in the process of being privatized by foreign governments,
securities of issuers that have not paid dividends on a timely basis, equity
securities of issuers that have experienced difficulties, and securities of
companies without performance records.
Other. The Fund may employ certain currency management techniques to seek to
hedge against currency exchange rate fluctuations or to seek to increase total
return. When used to seek to enhance return, these management techniques are
considered speculative. Such currency management techniques involve risks
different from those associated with investing solely in securities of U.S.
issuers quoted in U.S. dollars. To the extent that the Fund is fully invested
in foreign securities while also maintaining currency positions, it may be
exposed to greater combined risk. The Fund's net currency positions may expose
it to risks independent of its securities positions. See "Description of
Securities," "Investment Techniques" and "Risk Factors."
Under normal circumstances, the Fund maintains investments in at least six
Emerging Countries and will not invest more than 35% of its total assets in
securities of issuers in any one Emerging Country. Allocation of the Fund's
investments will depend upon the relative attractiveness of the Emerging
Country markets and particular issuers. In addition, macro-economic factors
and the portfolio manager's and Goldman Sachs economists' views of the
relative attractiveness of Emerging Countries and currencies are considered in
allocating the Fund's assets among Emerging Countries. Concentration of the
Fund's assets in one or a few Emerging Countries and currencies will subject
the Fund to greater risks than if the Fund's assets were not geographically
concentrated. See "Description of Securities--Foreign Transactions" and "Risk
Factors." The Fund may invest in the aggregate up to 35% of its total assets
in (i) fixed income securities of private and governmental Emerging Country
issuers, (ii) equity and fixed income securities of issuers in developed
countries and (iii) temporary investments.
ASIA GROWTH FUND
Objective. The Fund's investment objective is to provide investors with
long-term capital appreciation.
Primary Investment Focus. The Fund invests, under normal market
circumstances, substantially all, and at least 65%, of its total assets in
equity securities of companies that satisfy at least one of the following
criteria: (i) their securities are traded principally on stock exchanges in
one or more of the Asian countries, (ii) they derive 50% or more of their
total revenue from goods produced, sales made or services performed in one or
more of the Asian countries, (iii) they maintain 50% or more of their assets
in one or more of the Asian countries, or (iv) they are organized under the
laws of one of the Asian countries. The Fund seeks to achieve its objective by
investing primarily in equity securities of Asian companies which are
considered by the Investment Adviser to have long-term capital appreciation
potential. Many of the countries in which the Fund may invest have emerging
markets or economies which involve certain risks as described under "Risk
Factors--Special Risks of Investments in the Asian and Other Emerging
Markets," which are not present in investments in more developed
24
<PAGE>
countries. The Fund may purchase equity securities of issuers that have not
paid dividends on a timely basis, securities of companies that have
experienced difficulties, and securities of companies without performance
records.
Other. The Fund may employ certain currency management techniques to seek to
hedge against currency exchange rate fluctuations or to seek to increase total
return. When used to seek to enhance return, these management techniques are
considered speculative. Such currency management techniques involve risks
different from those associated with investing solely in securities of U.S.
issuers quoted in U.S. dollars. To the extent that the Fund is fully invested
in foreign securities while also maintaining currency positions, it may be
exposed to greater combined risk. The Fund's net currency positions may expose
it to risks independent of its securities positions. See "Description of
Securities," "Investment Techniques" and "Risk Factors."
The Fund may allocate its assets among the Asian countries as determined
from time to time by the Investment Adviser. For purposes of the Fund's
investment policies, Asian countries are China, Hong Kong, India, Indonesia,
Malaysia, Pakistan, the Philippines, Singapore, South Korea, Sri Lanka, Taiwan
and Thailand as well as any other country in the Asian region (other than
Japan) to the extent that foreign investors are permitted by applicable law to
make such investments. Allocation of the Fund's investments will depend upon
the relative attractiveness of the Asian markets and particular issuers.
Concentration of the Fund's assets in one or a few of the Asian countries and
Asian currencies will subject the Fund to greater risks than if the Fund's
assets were not geographically concentrated. See "Description of Securities--
Foreign Investments." The Fund may invest in the aggregate up to 35% of its
total assets in equity securities of issuers in other countries, including
Japan, and in fixed income securities.
DESCRIPTION OF SECURITIES
CONVERTIBLE SECURITIES
Each Fund may invest in convertible securities, including debt obligations
and preferred stock of the issuer convertible at a stated exchange rate into
common stock of the issuer. Convertible securities generally offer lower
interest or dividend yields than non-convertible securities of similar
quality. As with all fixed income securities, the market value of convertible
securities tends to decline as interest rates increase and, conversely, to
increase as interest rates decline. However, when the market price of the
common stock underlying a convertible security exceeds the conversion price,
the convertible security tends to reflect the market price 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 decline in price to the same extent as the underlying common stock.
Convertible securities rank senior to common stocks in an issuer's capital
structure and consequently entail less risk than the issuer's common stock. In
evaluating a convertible security, the Investment Adviser will give primary
emphasis to the attractiveness of the underlying common stock. The convertible
debt securities in which the Balanced Fund invests will be rated, at the time
of investment, B or better by Standard & Poor's Ratings Group ("Standard &
Poor's") or Moody's Investors Service, Inc. ("Moody's"), or if unrated by such
rating organizations, determined to be of comparable quality by the Investment
Adviser. The convertible securities in which the CORE U.S. Equity, CORE Large
Cap Growth, CORE Small Cap Equity and CORE International Equity Funds invest
are not subject to any minimum rating criteria. The convertible debt
securities in which the other Funds may invest are subject to the same rating
criteria as a Fund's investments in non-convertible debt securities.
Convertible debt securities are equity investments for purposes of each Fund's
investment policies.
FOREIGN INVESTMENTS
FOREIGN SECURITIES. Each Fund may invest in the securities of foreign
issuers (provided that the CORE U.S. Equity, CORE Large Cap Growth and CORE
Small Cap Equity Funds may only invest in equity securities
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<PAGE>
of foreign issuers that are traded in the U.S. and comply with U.S. accounting
standards). Investments in foreign securities may offer potential benefits
that are not available from investments exclusively in equity securities of
domestic issuers quoted in U.S. dollars. Foreign countries may have economic
policies or business cycles different from those of the U.S. and markets for
foreign securities do not necessarily move in a manner parallel to U.S.
markets.
Investing in the securities of foreign issuers involves risks that are not
typically associated with investing in equity securities of domestic issuers
quoted in U.S. dollars. Such investments may be affected by changes in
currency rates, changes in foreign or U.S. laws or restrictions applicable to
such investments and in exchange control regulations (e.g., currency
blockage). A decline in the exchange rate of the currency (i.e., weakening of
the currency against the U.S. dollar) in which a portfolio security is quoted
or denominated relative to the U.S. dollar would reduce the value of the
portfolio security. In addition, if the currency in which a Fund receives
dividends, interest or other payments declines in value against the U.S.
dollar before such income is distributed as dividends to shareholders or
converted to U.S. dollars, the Fund may have to sell portfolio securities to
obtain sufficient cash to pay such dividends. Commissions on transactions in
foreign securities may be higher than those for similar transactions on
domestic stock markets. In addition, clearance and settlement procedures may
be different in foreign countries and, in certain markets, such procedures
have on occasion been unable to keep pace with the volume of securities
transactions, thus making it difficult to conduct such transactions.
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to U.S.
issuers. There may be less publicly available information about a foreign
issuer than about a U.S. issuer. In addition, there is generally less
government regulation of foreign markets, companies and securities dealers
than in the U.S. Foreign securities markets may have substantially less volume
than U.S. securities markets and securities of many foreign issuers are less
liquid and more volatile than securities of comparable domestic issuers.
Furthermore, with respect to certain foreign countries, there is a possibility
of nationalization, expropriation or confiscatory taxation, imposition of
withholding or other taxes on dividend or interest payments (or, in some
cases, capital gains), limitations on the removal of funds or other assets of
the Funds, political or social instability or diplomatic developments which
could affect investments in those countries.
INVESTMENTS IN ADRS, EDRS AND GDRS. Each Fund may invest in foreign
securities which take the form of sponsored and unsponsored American
Depository Receipts ("ADRs") and Global Depository Receipts ("GDRs") and each
Fund, other than the CORE U.S. Equity, CORE Large Cap Growth and CORE Small
Cap Equity Funds, may also invest in European Depository Receipts ("EDRs") or
other similar instruments representing securities of foreign issuers
(together, "Depository Receipts"). ADRs represent the right to receive
securities of foreign issuers deposited in a domestic bank or a correspondent
bank. Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the
United States on exchanges or over-the-counter and are sponsored and issued by
domestic banks. EDRs and GDRs are receipts evidencing an arrangement with a
non-U.S. bank. EDRs and GDRs are not necessarily quoted in the same currency
as the underlying security. To the extent a Fund acquires Depository Receipts
through banks which do not have a contractual relationship with the foreign
issuer of the security underlying the Depository Receipts to issue and service
such Depository Receipts (unsponsored Depository Receipts), there may be an
increased possibility that the Fund would not become aware of and be able to
respond to corporate actions, such as stock splits or rights offerings
involving the foreign issuer, in a timely manner. In addition, the lack of
information may result in inefficiencies in the valuation of such instruments.
Investment in Depository Receipts does not eliminate all the risks inherent in
investing in securities of non-U.S. issuers. The market value of Depository
Receipts is dependent upon the market value of the underlying securities and
fluctuations in the relative value of the currencies in which the Depository
Receipt and
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the underlying securities are quoted. However, by investing in Depository
Receipts, such as ADRs, that are quoted in U.S. dollars, a Fund will avoid
currency risks during the settlement period for purchases and sales.
FOREIGN CURRENCY TRANSACTIONS. Because investment in foreign issuers will
usually involve currencies of foreign countries, and because the Balanced,
CORE International Equity, International Equity, Emerging Markets Equity and
Asia Growth Funds may have currency exposure independent of their securities
positions, the value of the assets of a Fund as measured in U.S. dollars will
be affected by changes in foreign currency exchange rates. A Fund may, to the
extent it invests in foreign securities, purchase or sell forward foreign
currency exchange contracts for hedging purposes and to seek to protect
against anticipated changes in future foreign currency exchange rates. In
addition, the Balanced, CORE International Equity, International Equity,
Emerging Markets Equity and Asia Growth Funds may enter into such contracts to
seek to increase total return when the Investment Adviser anticipates that the
foreign currency will appreciate or depreciate in value, but securities
denominated or quoted in that currency do not present attractive investment
opportunities and are not held in the Fund's portfolio. When entered into to
seek to enhance return, forward foreign currency exchange contracts are
considered speculative. The Balanced, CORE International Equity, International
Equity, Emerging Markets Equity and Asia Growth Funds may also engage in
cross-hedging by using forward contracts in a currency different from that in
which the hedged security is denominated or quoted if the Investment Adviser
determines that there is a pattern of correlation between the two currencies.
If a Fund enters into a forward foreign currency exchange contract to buy
foreign currency for any purpose or the Balanced, CORE International Equity,
International Equity, Emerging Markets Equity and Asia Growth Funds enter into
forward foreign currency exchange contracts to sell foreign currency to seek
to increase total return, the Fund will be required to place cash or liquid
assets in a segregated account with the Fund's custodian in an amount equal to
the value of the Fund's total assets committed to the consummation of the
forward contract. The Fund will incur costs in connection with conversions
between various currencies. A Fund may hold foreign currency received in
connection with investments in foreign securities when, in the judgment of the
Investment Adviser, it would be beneficial to convert such currency into U.S.
dollars at a later date, based on anticipated changes in the relevant exchange
rate.
Currency exchange rates may fluctuate significantly over short periods of
time causing, along with other factors, a Fund's net asset value to fluctuate.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments
in different countries, actual or anticipated changes in interest rates and
other complex factors, as seen from an international perspective. Currency
exchange rates also can be affected unpredictably by the intervention of U.S.
or foreign governments or central banks or the failure to intervene or by
currency controls or political developments in the U.S. or abroad. To the
extent that a substantial portion of a Fund's total assets, adjusted to
reflect the Fund's net position after giving effect to currency transactions,
is denominated or quoted in the currencies of foreign countries, the Fund will
be more susceptible to the risk of adverse economic and political developments
within those countries.
The market in forward foreign currency exchange contracts, currency swaps
and other privately negotiated currency instruments offers less protection
against defaults by the other party to such instruments than is available for
currency instruments traded on an exchange. Such contracts are subject to the
risk that the counterparty to the contract will default on its obligations.
Since these contracts are not guaranteed by an exchange or clearinghouse, a
default on the contract would deprive the 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 forward foreign currency exchange contracts, currency
swaps
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or other privately negotiated currency instruments 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 Investment Adviser.
The Balanced, CORE International Equity, International Equity, Emerging
Markets Equity and Asia Growth Funds may also engage in a variety of foreign
currency management techniques. However, due to the limited market for these
instruments with respect to the currencies of many Emerging Countries,
including certain Asian countries, the Investment Advisers do not currently
anticipate that a significant portion of Emerging Markets Equity and Asia
Growth Fund's currency exposure will be covered by such instruments. For a
discussion of such instruments and the risks associated with their use, see
"Investment Objective and Policies" in the Additional Statement.
FIXED INCOME SECURITIES
U.S. GOVERNMENT SECURITIES. Each Fund may invest in U.S. Government
securities. Generally, these securities include U.S. Treasury obligations and
obligations issued or guaranteed by U.S. Government agencies,
instrumentalities or sponsored enterprises. U.S. Government securities also
include Treasury receipts and other stripped U.S. Government securities, where
the interest and principal components of stripped U.S. Government securities
are traded independently. A Fund may also invest in zero coupon U.S. Treasury
securities and in zero coupon securities issued by financial institutions,
which represent a proportionate interest in underlying U.S. Treasury
securities. A zero coupon security pays no interest to its holder during its
life and its value consists of the difference between its face value at
maturity and its cost. The market prices of zero coupon securities generally
are more volatile than the market prices of securities that pay interest
periodically. See "Taxation" in the Additional Statement.
FOREIGN GOVERNMENT SECURITIES. The Balanced, CORE International Equity,
International Equity, Emerging Markets Equity and Asia Growth Funds may invest
in debt obligations of foreign governments and governmental agencies,
including those of Emerging Countries. Investment in sovereign debt
obligations involves special risks not present in debt obligations of
corporate issuers. The issuer of the debt or the governmental authorities that
control the repayment of the debt may be unable or unwilling to repay
principal or interest when due in accordance with the terms of such debt, and
a Fund may have limited recourse in the event of a default. Periods of
economic uncertainty may result in the volatility of market prices of
sovereign debt, and in turn a Fund's net asset value, to a greater extent than
the volatility inherent in debt obligations of U.S. issuers. A sovereign
debtor's willingness or ability to repay principal and pay interest in a
timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's
policy toward international lenders and the political constraints to which a
sovereign debtor may be subject.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. Each Fund (other than the CORE
U.S. Equity, CORE Large Cap Growth, CORE Small Cap Equity and CORE
International Equity Funds) may invest in mortgage-backed securities
("Mortgage-Backed Securities"), which represent direct or indirect
participations in, or are collateralized by and payable from, mortgage loans
secured by real property. Each Fund (other than the CORE U.S. Equity, CORE
Large Cap Growth, CORE Small Cap Equity and CORE International Equity Funds)
may also invest in asset-backed securities ("Asset-Backed Securities"). The
principal and interest payments on Asset-Backed Securities are collateralized
by pools of assets such as auto loans, credit card receivables, leases,
installment contracts and personal property. Such asset pools are securitized
through the use of special purpose trusts or corporations. Principal and
interest payments may be credit enhanced by a letter of credit, a pool
insurance policy or a senior/subordinated structure.
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The Balanced Fund may also invest in stripped Mortgage-Backed Securities
("SMBS") (including interest only and principal only securities), which are
derivative multiple class Mortgage-Backed Securities. SMBS are usually
structured with two different classes: one that receives 100% of the interest
payments and the other that receives 100% of the principal payments from a
pool of mortgage loans. If the underlying mortgage loans experience different
than anticipated prepayments of principal, a Fund may fail to fully recoup its
initial investment in these securities. 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 loans 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.
CORPORATE DEBT OBLIGATIONS. Each Fund may invest in corporate debt
obligations. Corporate debt obligations are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations.
BANK OBLIGATIONS. Each Fund may invest in obligations issued or guaranteed
by U.S. or 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 limited to the issuing branch by the
terms of the specific obligations or by government regulation. Banks are
subject to extensive but different governmental regulations which may limit
both the amount and types of loans which may be made and interest rates which
may be charged. In addition, the profitability of the banking industry is
largely dependent upon the availability and cost of funds for the purpose of
financing lending operations under prevailing money market conditions. General
economic conditions as well as exposure to credit losses arising from possible
financial difficulties of borrowers play an important part in the operation of
this industry.
STRUCTURED SECURITIES. Each Fund may invest in structured securities. The
value of the principal of and/or interest on such securities is determined by
reference to changes in the value of specific currencies, interest rates,
commodities, indices or other financial indicators (the "Reference") or the
relative change in two or more References. The interest rate or the principal
amount payable upon maturity or redemption may be increased or decreased
depending upon changes in the applicable Reference. The terms of the
structured securities may provide that in certain circumstances no principal
is due at maturity and, therefore, result in the loss of a Fund's investment.
Structured securities may be positively or negatively indexed, so that
appreciation of the Reference may produce an increase or decrease in the
interest rate or value of the security at maturity. In addition, changes in
the interest rates or the value of the security at maturity may be a multiple
of changes in the value of the Reference. Consequently, structured securities
may entail a greater degree of market risk than other types of fixed-income
securities. Structured securities may also be more volatile, less liquid and
more difficult to accurately price than less complex securities.
RATING CRITERIA. Except as noted below, each Fund (other than the CORE U.S.
Equity, CORE Large Cap Growth, CORE Small Cap Equity and CORE International
Equity Funds, which only invest in debt instruments that are cash equivalents)
may invest in debt securities rated at least investment grade at the time of
investment. Investment grade debt securities are securities rated BBB or
higher by Standard & Poor's or Baa or higher by Moody's. A security will be
deemed to have met a rating requirement if it receives the minimum required
rating from at least one such rating organization even though it has been
rated below the minimum rating by one or more other rating organizations, or
if unrated by such rating organizations, determined by the Investment Adviser
to be of comparable credit quality. The Balanced Fund may invest up to 10% of
its total assets on debt securities
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that are rated BB or B by Standard & Poor's or Ba or B by Moody's. The Growth
and Income, Capital Growth, Small Cap Equity, International Equity, Emerging
Markets Equity and Asia Growth Funds may invest up to 10%, 10%, 35%, 35%, 35%
and 35%, respectively, of their total assets in debt securities which are
unrated or rated in the lowest rating categories by Standard & Poor's or
Moody's (i.e., BB or lower by Standard & Poor's or Ba or lower by Moody's),
including securities rated D by Moody's or Standard & Poor's. Mid Cap Equity
Fund may invest up to 10% of its total assets in below investment grade debt
securities rated B or higher by Standard & Poor's or B or higher by Moody's.
Fixed income securities rated BBB or Baa are considered medium-grade
obligations with speculative characteristics, and adverse economic conditions
or changing circumstances may weaken their issuers' capacity to pay interest
and repay principal. Fixed income securities rated BB or Ba or below (or
comparable unrated securities) are commonly referred to as "junk bonds," are
considered predominately speculative and may be questionable as to principal
and interest payments. In some cases, such bonds may be highly speculative,
have poor prospects for reaching investment grade standing and be in default.
As a result, investment in such bonds will entail greater speculative risks
than those associated with investment in investment grade bonds. Also, to the
extent that the rating assigned to a security in a Fund's portfolio is
downgraded by a rating organization, the market price and liquidity of such
security may be adversely affected. See Appendix A to the Additional Statement
for a description of the corporate bond ratings assigned by Standard & Poor's
and Moody's.
REAL ESTATE INVESTMENT TRUSTS ("REITS")
Each Fund may invest in REITs, which are pooled investment vehicles that
invest primarily in either real estate or real estate related loans. The value
of a REIT is affected by changes in the value of the properties owned by the
REIT or securing mortgage loans held by the REIT. REITs are dependant upon
cash flow from their investments to repay financing costs and the ability of
the REITs' manager. REITs are also subject to risks generally associated with
investments in real estate. A Fund will indirectly bear its proportionate
share of any expenses, including management fees, paid by a REIT in which it
invests.
INVESTMENT TECHNIQUES
OPTIONS ON SECURITIES AND SECURITIES INDICES
Each Fund (other than the CORE U.S. Equity and CORE Large Cap Growth Funds)
may write (sell) covered call and put options and purchase call and put
options on any securities in which it may invest or on any securities index
composed of securities in which it may invest. 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 use of options to seek to increase total return involves the
risk of loss if the Investment Adviser is incorrect in its expectation of
fluctuations in securities prices or interest rates. The successful use of
options for hedging purposes also depends in part on the ability of the
Investment Adviser to manage future price fluctuations and the degree of
correlation between the options and securities markets. If the Investment
Adviser is incorrect in its expectation of changes in securities prices or
determination of the correlation between the securities indices on which
options are written and purchased and the securities in a Fund's investment
portfolio, the investment performance of the Fund will be less favorable than
it would have been in the absence of such options transactions. The writing of
options could significantly increase a Fund's portfolio turnover rate and,
therefore, associated brokerage commissions or spreads.
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OPTIONS ON FOREIGN CURRENCIES
A Fund may, to the extent it invests in foreign securities, purchase and
sell (write) call and put options on foreign currencies for the purpose of
protecting against declines in the U.S. dollar value of foreign portfolio
securities and anticipated dividends on such securities and against increases
in the U.S. dollar cost of foreign securities to be acquired. In addition, the
Balanced, CORE International Equity, International Equity, Emerging Markets
Equity and Asia Growth Funds may use options on currency to cross-hedge, which
involves writing or purchasing options on one currency to hedge against
changes in exchange rates for a different currency, if there is a pattern of
correlation between the two currencies. As with other kinds of option
transactions, however, the writing of an option on foreign currency will
constitute only a partial hedge, up to the amount of the premium received. If
an option that a Fund has written is exercised, the Fund could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on foreign currency may constitute
an effective hedge against exchange rate fluctuations; however, in the event
of exchange rate movements adverse to a Fund's position, the Fund may forfeit
the entire amount of the premium plus related transaction costs. In addition
to purchasing call and put options for hedging purposes, the Balanced, CORE
International Equity, International Equity, Emerging Markets Equity and Asia
Growth Funds may purchase call or put options on currency to seek to increase
total return when the Investment Adviser anticipates that the currency will
appreciate or depreciate in value, but the securities quoted or denominated in
that currency do not present attractive investment opportunities and are not
held in the Fund's portfolio. When purchased or sold to seek to increase total
return, options on currencies are considered speculative. Options on foreign
currencies written or purchased by the Funds are traded on U.S. and foreign
exchanges or over-the-counter.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
To seek to increase total return or to hedge against changes in interest
rates, securities prices or currency exchange rates, a 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 such contracts and
options. The futures contracts may be based on various securities (such as
U.S. Government securities), foreign currencies, securities indices and other
financial instruments and indices. The CORE U.S. Equity and CORE Large Cap
Growth Funds may enter into such transactions only with respect to the S&P 500
Index in the case of the CORE U.S. Equity Fund and a representative index in
the case of the CORE Large Cap Growth Fund. A Fund will engage in futures and
related options transactions for bona fide hedging purposes as defined in
regulations of the Commodity Futures Trading Commission or to seek to increase
total return to the extent permitted by such regulations. A Fund may not
purchase or sell futures contracts or purchase or sell related options to seek
to increase total return, except for closing purchase or sale transactions, if
immediately thereafter the sum of the amount of initial margin deposits and
premiums paid on the Fund's outstanding positions in futures and related
options entered into for the purpose of seeking to increase total return would
exceed 5% of the market value of the Fund's net assets. These transactions
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 segregate and maintain cash or liquid assets with a value equal to
the amount of the Fund's obligations.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. See
"Investment Objectives and Policies--Futures Contracts and Options on Future
Contracts" in the Additional Statement. Thus, while a Fund may benefit from
the use of futures and options on futures, unanticipated changes in interest
rates, securities prices or currency exchange rates may result
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in poorer overall performance than if the Fund had not entered into any
futures contracts or options transactions. Because perfect correlation between
a futures position and portfolio position that is intended to be protected is
impossible to achieve, the desired protection may not be obtained and a Fund
may be exposed to risk of loss. The loss incurred by a Fund in entering into
futures contracts and in writing call options on futures is potentially
unlimited and may exceed the amount of the premium received. Futures markets
are highly volatile and the use of futures may increase the volatility of a
Fund's net asset value. The profitability of a Fund's trading in futures to
seek to increase total return depends upon the ability of the Investment
Adviser to correctly analyze the futures markets. In addition, because of the
low margin deposits normally required in futures trading, a relatively small
price movement in a futures contract may result in substantial losses to a
Fund. Further, futures contracts and options on futures may be illiquid, and
exchanges may limit fluctuations in futures contract prices during a single
day.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
Each Fund may purchase when-issued securities. When-issued transactions
arise when securities are purchased by a Fund with payment and delivery taking
place in the future in order to secure what is considered to be an
advantageous price and yield to the Fund at the time of entering into the
transaction. Each Fund may also purchase securities on a forward commitment
basis; that is, make contracts to purchase securities for a fixed price at a
future date beyond the customary three-day settlement period. A Fund is
required to hold and maintain in a segregated account with the Fund's
custodian until three days prior to the settlement date, cash or liquid assets
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. The purchase of securities on a when-issued or forward
commitment basis involves a risk of loss if the value of the security to be
purchased declines prior to the settlement date. Although a Fund would
generally purchase securities on a when-issued or forward commitment basis
with the intention of acquiring securities for its portfolio, a Fund may
dispose of when-issued securities or forward commitments prior to settlement
if its Investment Adviser deems it appropriate to do so.
ILLIQUID AND RESTRICTED SECURITIES
A Fund will not invest more than 15% of its net assets in illiquid
investments, which include securities (both foreign and domestic) that are not
readily marketable, swap transactions, certain SMBS, repurchase agreements
maturing in more than seven days, time deposits with a notice or demand period
of more than seven days, and certain restricted securities, unless it is
determined, based upon the continuing review of the trading markets for a
specific restricted security, that such restricted security is eligible for
resale under Rule 144A under the Securities Act of 1933 and, therefore, is
liquid. The Trustees have adopted guidelines and delegated to the Investment
Advisers the daily function of determining and monitoring the liquidity of
portfolio securities. The Trustees, however, retain oversight focusing on
factors such as valuation, liquidity and availability of information and are
ultimately responsible for each determination. Investing in restricted
securities eligible for resale pursuant to Rule 144A may decrease the
liquidity of a Fund's portfolio 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 and
illiquid securities normally reflect a discount, which may be significant,
from the market price of comparable securities for which a liquid market
exists.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with dealers in U.S.
Government securities and member banks of the Federal Reserve System which
furnish collateral at least equal in value or market price to the amount
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of their repurchase obligation. The Balanced, CORE International Equity,
International Equity, Emerging Markets Equity and Asia Growth Funds may also
enter into repurchase agreements involving certain foreign government
securities. If the other party or "seller" defaults, a Fund might suffer a
loss to the extent that the proceeds from the sale of the underlying
securities and other collateral held by the Fund in connection with the
related repurchase agreement are less than the repurchase price. In addition,
in the event of bankruptcy of the seller or failure of the seller to
repurchase the securities as agreed, a Fund could suffer losses, including
loss of interest on or principal of the security and costs associated with
delay and enforcement of the repurchase agreement. The Trustees have reviewed
and approved certain counterparties whom they believe to be creditworthy and
have authorized the Funds to enter into repurchase agreements with such
counterparties. In addition, each Fund, together with other registered
investment companies having management agreements with an Investment Adviser,
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.
LENDING OF PORTFOLIO SECURITIES
Each Fund may also seek to increase its income by lending portfolio
securities. Under present regulatory policies, such loans may be made to
institutions, such as certain broker-dealers, and are required to be secured
continuously by collateral in cash, cash equivalents, 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. If an Investment Adviser determines to make securities loans, the
value of the securities loaned may not exceed 33 1/3% of the value of the
total assets of a Fund. A Fund may experience a loss or delay in the recovery
of its securities if the institution with which it has engaged in a portfolio
loan transaction breaches its agreement with the Fund.
SHORT SALES AGAINST-THE-BOX
Each Fund (other than the CORE U.S. Equity, CORE Large Cap Growth, CORE
Small Cap Equity and CORE International Equity Funds) may make short sales of
securities or maintain a short position, provided that 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 an equal amount of the securities of the same issuer as the
securities sold short (a short sale against-the-box). Not more than 25% of a
Fund's net assets (determined at the time of the short sale) may be subject to
such short sales. Short sales will be made primarily to defer realization of
gain or loss for federal tax purposes; a gain or loss in a Fund's long
position will be offset by a gain or loss in its short position.
MORTGAGE DOLLAR ROLLS
The Balanced Fund may enter into mortgage "dollar rolls" in which the Fund
sells securities for delivery in the current month and simultaneously
contracts with the same counterparty to repurchase substantially similar (same
type, coupon and maturity) but not identical securities on a specified future
date. During the roll period, the Fund loses the right to receive principal
and interest paid on the securities sold. However, the 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 or fee income plus
the interest earned on the cash proceeds of the securities sold until the
settlement date for 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
the Fund. The Fund will hold and maintain in a segregated account until the
settlement date cash or liquid assets in an amount equal to the forward
purchase price. Successful use of mortgage dollar rolls depends upon the
Investment Adviser's
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ability to predict correctly interest rates and mortgage prepayments. There is
no assurance that mortgage dollar rolls can be successfully employed. For
financial reporting and tax 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. The Fund does not currently intend to
enter into mortgage dollar rolls that are accounted for as a financing.
TEMPORARY INVESTMENTS
Each Fund may, for temporary defensive purposes, invest 100% of its total
assets (except that the CORE U.S. Equity, CORE Large Cap Growth, CORE Small
Cap Equity, CORE International Equity and Emerging Markets Equity Funds may
only hold up to 35% of their respective total assets) in U.S. Government
securities, repurchase agreements collateralized by U.S. Government
securities, commercial paper rated at least A-2 by Standard & Poor's or P-2 by
Moody's, certificates of deposit, bankers' acceptances, repurchase agreements,
non-convertible preferred stocks, non-convertible corporate bonds with a
remaining maturity of less than one year or, subject to certain tax
restrictions, foreign currencies. When a Fund's assets are invested in such
instruments, the Fund may not be achieving its investment objective.
MISCELLANEOUS TECHNIQUES
In addition to the techniques and investments described above, each Fund
may, with respect to no more than 5% of its net assets, engage in the
following techniques and investments: (i) warrants and stock purchase rights,
(ii) currency swaps (Balanced, CORE International Equity, International
Equity, Emerging Markets Equity and Asia Growth Funds only), (iii) mortgage
swaps, index swaps and interest rate swaps, caps, floors and collars (Balanced
Fund only), (iv) yield curve options and inverse floating rate securities
(Balanced Fund only), (v) other investment companies, (vi) unseasoned
companies and (vii) municipal securities (Balanced Fund only). For more
information see the Additional Statement.
RISK FACTORS
RISK OF INVESTING IN SMALL CAPITALIZATION COMPANIES. Investing in the
securities of such companies involves greater risk and the possibility of
greater portfolio price volatility. Historically, small market capitalization
stocks and stocks of recently organized companies have been more volatile in
price than the larger market capitalization stocks included in the S&P 500
Index. Among the reasons for the greater price volatility of these small
company and unseasoned stocks are the less certain growth prospects of smaller
firms and the lower degree of liquidity in the markets for such stocks.
SPECIAL RISKS OF INVESTMENTS IN THE ASIAN AND OTHER EMERGING
MARKETS. Investing in the securities of issuers in Emerging Countries involves
risks in addition to those discussed under "Description of Securities--
Foreign Investments." The International Equity, Emerging Markets Equity and
Asia Growth Funds may each invest without limit in the securities of issuers
in Emerging Countries. The Balanced, Growth and Income, Small Cap Equity and
Mid Cap Equity Funds may each invest up to 15%, the Capital Growth Fund may
invest up to 10% and the CORE International Equity Fund may invest up to 25%
of its total assets in securities of issuers in Emerging Countries. Emerging
Countries are generally located in the Asia-Pacific region, Eastern Europe,
Latin and South America and Africa. A Fund's purchase and sale of portfolio
securities in certain Emerging Countries may be constrained by limitations as
to daily changes in the prices of listed securities, periodic trading or
settlement volume and/or limitations on aggregate holdings of foreign
investors. Such limitations may be
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computed based on the aggregate trading volume by or holdings of a Fund, the
Investment Adviser, its affiliates and their respective clients and other
service providers. A Fund may not be able to sell securities in circumstances
where price, trading or settlement volume limitations have been reached.
Foreign investment in the securities markets of certain Emerging Countries
is restricted or controlled to varying degrees which may limit investment in
such countries or increase the administrative costs of such investments. For
example, certain Asian countries require governmental approval prior to
investments by foreign persons or limit investment by foreign persons to only
a specified percentage of an issuer's outstanding securities or a specific
class of securities which may have less advantageous terms (including price)
than securities of the issuer available for purchase by nationals. In
addition, certain countries may restrict or prohibit investment opportunities
in issuers or industries deemed important to national interests. Such
restrictions may affect the market price, liquidity and rights of securities
that may be purchased by a Fund. The repatriation of both investment income
and capital from certain Emerging Countries is subject to restrictions such as
the need for governmental consents. Due to restrictions on direct investment
in equity securities in certain Asian countries, such as Taiwan, it is
anticipated that a Fund may invest in such countries only through other
investment funds in such countries. See "Other Investment Companies" in the
Additional Statement.
Many Emerging Countries may be subject to a greater degree of economic,
political and social instability than is the case in Western Europe, the
United States, Canada, Australia, New Zealand and Japan. Many Emerging
Countries do not have fully democratic governments. For example, governments
of some Emerging Countries are authoritarian in nature or have been installed
or removed as a result of military coups, while governments in other Emerging
Countries have periodically used force to suppress civil dissent. Disparities
of wealth, the pace and success of democratization, and ethnic, religious and
racial disaffection, among other factors, have also led to social unrest,
violence and/or labor unrest in some Asian and other Emerging Countries.
Unanticipated political or social developments may affect the values of a
Fund's investments. Investing in Emerging Countries involves the risk of loss
due to expropriation, nationalization, confiscation of assets and property or
the imposition of restrictions on foreign investments and on repatriation of
capital invested. Economies in individual Emerging Countries may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross domestic product, rates of inflation, currency valuation, capital
reinvestment, resource self-sufficiency and balance of payments positions.
Many Emerging Countries have experienced currency devaluations and substantial
and, in some cases, extremely high rates of inflation, which have a negative
effect on the economies and securities markets of such Emerging Countries.
Economies in Emerging Countries generally are dependent heavily upon commodity
prices and international trade and, accordingly, have been and may continue to
be affected adversely by the economies of their trading partners, trade
barriers, exchange controls, managed adjustments in relative currency values
and other protectionist measures imposed or negotiated by the countries with
which they trade.
Brokerage commissions, custodial services and other costs relating to
investment in international securities markets generally are more expensive
than in the U.S. A Fund's investment in Emerging Countries may also be subject
to withholding or other taxes, which may be significant and may reduce the
return from an investment in such country to the Fund. Settlement procedures
in Emerging Countries are frequently less developed and reliable than those in
the United States and may involve a Fund's delivery of securities before
receipt of payment for their sale. In addition, significant delays are common
in certain markets in registering the transfer of securities. Settlement or
registration problems may make it more difficult for a Fund to value its
portfolio securities and could cause the Fund to miss attractive investment
opportunities, to have a portion of its assets uninvested or to incur losses
due to the failure of a counterparty to pay for securities the Fund has
delivered or the Fund's inability to complete its contractual obligations.
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Currently, there is no market or only a limited market for many of the
management techniques and instruments with respect to the currencies and
securities markets of the Emerging Countries. Consequently, there can be no
assurance that suitable instruments for hedging currency and market-related
risks will be available at the times when a Fund wishes to use them.
RISK OF INVESTING IN FIXED INCOME SECURITIES. When interest rates decline,
the market value of fixed income securities tends to increase. Conversely,
when interest rates increase, the market value of fixed income securities
tends to decline. Volatility of a security's market value will differ
depending upon the security's duration, the issuer and the type of instrument.
Investments in fixed income securities are subject to the risk that the issuer
could default on its obligations and a Fund could sustain losses on such
investments. A default could impact both interest and principal payments.
RISKS OF DERIVATIVE TRANSACTIONS. A Fund's transactions, if any, in options,
futures, options on futures, swap transactions, structured securities and
currency forward contracts involve certain risks, including a possible lack of
correlation between changes in the value of hedging instruments and the
portfolio assets being hedged, the potential illiquidity of the markets for
derivative instruments, the risks arising from the margin requirements and
related leverage factors associated with such transactions. The use of these
management techniques to seek to increase total return may be regarded as a
speculative practice and involves the risk of loss if the Investment Adviser
is incorrect in its expectation of fluctuations in securities prices, interest
rates or currency prices. A Fund's use of certain derivative transactions may
be limited by the requirements of the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company.
INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions that are described
in detail under "Investment Restrictions" in the Additional Statement.
Fundamental investment restrictions of a Fund can not be changed without
approval of a majority of the outstanding shares of that Fund. Each Fund's
investment objectives and all policies not specifically designated as
fundamental are non-fundamental and may be changed without shareholder
approval. If there is a change in a Fund's investment objectives, shareholders
should consider whether that Fund remains an appropriate investment in light
of their then current financial positions and needs.
PORTFOLIO TURNOVER
A high rate of portfolio turnover (100% or more) involves correspondingly
greater expenses which must be borne by a Fund and its shareholders and may
under certain circumstances make it more difficult for a Fund to qualify as a
regulated investment company under the Code. See "Financial Highlights" for a
statement of each Fund's (other than the CORE Large Cap Growth, CORE Small Cap
Equity, CORE International Equity and Emerging Markets Equity Funds)
historical portfolio turnover ratio. It is anticipated that the annual
portfolio turnover rates of the CORE Large Cap Growth, CORE Small Cap Equity,
CORE International Equity and Emerging Markets Equity Funds will generally not
exceed 70%, 70%, 70% and 100%, respectively. The portfolio turnover rate is
calculated by dividing the lesser of the dollar amount of sales or purchases
of portfolio securities by the average monthly value of a Fund's portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less. Notwithstanding the foregoing, the Investment Adviser may,
from time to time, make short-term investments when it believes such
investments are in the best interest of a Fund.
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MANAGEMENT
TRUSTEES AND OFFICERS
The Trustees are responsible for deciding matters of general policy and
reviewing the actions of the Investment Advisers, distributor and transfer
agent. The officers of the Trust conduct and supervise the Funds' daily
business operations. The Additional Statement contains information as to the
identity of, and other information about, the Trustees and officers of the
Trust.
INVESTMENT ADVISERS
INVESTMENT ADVISERS. Goldman Sachs Asset Management, One New York Plaza, New
York, New York 10004, a separate operating division of Goldman Sachs, serves
as the investment adviser to the Balanced, CORE Large Cap Growth, CORE Small
Cap Equity, CORE International Equity, Growth and Income, Mid Cap Equity and
Small Cap Equity Funds. Goldman Sachs registered as an investment adviser in
1981. Goldman Sachs Funds Management, L.P., One New York Plaza, New York, New
York 10004, a Delaware limited partnership which is an affiliate of Goldman
Sachs, serves as the investment adviser to the CORE U.S. Equity and Capital
Growth Funds. Goldman Sachs Funds Management, L.P. registered as an investment
adviser in 1990. Goldman Sachs Asset Management International, 133
Peterborough Court, London EC4A 2BB, England, an affiliate of Goldman Sachs,
serves as the investment adviser to the International Equity, Emerging Markets
Equity and Asia Growth Funds. Goldman Sachs Asset Management International
became a member of the Investment Management Regulatory Organisation Limited
in 1990 and registered as an investment adviser in 1991. As of June 30, 1997,
Goldman Sachs Asset Management, Goldman Sachs Funds Management, L.P. and
Goldman Sachs Asset Management International, together with their affiliates,
acted as investment adviser, administrator or distributor for assets in excess
of $ billion.
Under a Management Agreement with each Fund, the applicable Investment
Adviser, subject to the general supervision of the Trustees, provides day-to-
day advice as to the Fund's portfolio transactions. Goldman Sachs has agreed
to permit the Trust to use the name "Goldman Sachs" or a derivative thereof as
part of each Fund's name for as long as a Fund's Management Agreement is in
effect.
In performing its investment advisory services, each Investment Adviser,
while remaining ultimately responsible for the management of the Funds, may
rely upon the asset management division of its Singapore and Tokyo affiliates
for portfolio decisions and management with respect to certain portfolio
securities and is able to draw upon the research and expertise of its other
affiliate offices. In addition, the Investment Advisers will haveaccess to the
research of, and proprietary technical models developed by, Goldman Sachs and
may apply quantitative and qualitative analysis in determining the appropriate
allocations among the categories of issuers and types of securities.
Under the Management Agreement, each Investment Adviser also: (i) supervises
all non-advisory operations of each Fund that it advises; (ii) provides
personnel to perform such executive, administrative and clerical services as
are reasonably necessary to provide effective administration of each Fund;
(iii) arranges for at each Fund's expense (a) the preparation of all required
tax returns, (b) the preparation and submission of reports to existing
shareholders, (c) the periodic updating of prospectuses and statements of
additional information and (d) the preparation of reports to be filed with the
SEC and other regulatory authorities; (iv) maintains each Fund's records; and
(v) provides office space and all necessary office equipment and services.
37
<PAGE>
FUND MANAGERS
<TABLE>
<CAPTION>
YEARS
PRIMARILY
NAME AND TITLE FUND RESPONSIBILITY RESPONSIBLE FIVE YEAR EMPLOYMENT HISTORY
-------------- ------------------- ----------- ----------------------------
<C> <C> <C> <S>
George D. Adler Portfolio Manager-- Since Mr. Adler joined the
Vice President Capital Growth 1997 Investment Adviser in
1997. Prior to 1997, he
was a portfolio manager
at Liberty Investment
Management, Inc. and its
predecessor firm
("Liberty").
- ----------------------------------------------------------------------------------------------------------
G. Lee Anderson Portfolio Manager-- Since Mr. Anderson joined the
Vice President Growth and Income 1996 Investment Adviser in
Mid Cap Equity 1997 1992. Prior to 1992, he
Balanced (Equity) 1996 was a research analyst
in the Investment
Research Department of
Goldman, Sachs & Co.
- ----------------------------------------------------------------------------------------------------------
Eileen A. Aptman Portfolio Manager-- Since Ms. Aptman jointed the
Vice President Mid Cap Equity 1996 Investment Adviser in
Growth and Income 1996 1993. Prior to 1993, she
Balanced (Equity) 1996 was an equity analyst at
Delphi Management.
- ----------------------------------------------------------------------------------------------------------
Robert Beckwitt Portfolio Manager Since Mr. Beckwitt joined the
Vice President Emerging Markets Equity 1997 Investment Adviser in
1996. Prior to 1996, he
was Chief Investment
Strategist--Portfolio
Advisory at Fidelity
Investments.
- ----------------------------------------------------------------------------------------------------------
Jonathan A. Beinner Portfolio Manager-- Since Mr. Beinner joined the
Vice President and Co-Head Balanced (Fixed Income) 1994 Investment Adviser in
U.S. Fixed Income 1990.
Department
- ----------------------------------------------------------------------------------------------------------
Kent A. Clark Portfolio Manager-- Since Mr. Clark joined the
Vice President CORE U.S. Equity 1996 Investment Adviser in
CORE Large-Cap Growth 1997 1992. Prior to 1992, he
CORE Small Cap Equity 1997 was studying for a Ph.D.
CORE International Equity 1997 in finance at the
University of Chicago.
- ----------------------------------------------------------------------------------------------------------
Robert G. Collins Portfolio Manager-- Since Mr. Collins joined the
Vice President Capital Growth 1997 Investment Adviser in
1997. Prior to 1997, he
was a portfolio manager
at Liberty.
- ----------------------------------------------------------------------------------------------------------
Herbert E. Ehlers Senior Portfolio Manager-- Since Mr. Ehlers joined the
Managing Director Capital Growth 1997 Investment Adviser in
1997. Prior to 1997, he
was the Chief Investment
Officer of Liberty.
- ----------------------------------------------------------------------------------------------------------
Gregory H. Ekizian Portfolio Manager-- Since Mr. Ekizian joined the
Vice President Capital Growth 1997 Investment Adviser in
1997. Prior to 1997, he
was a portfolio manager
at Liberty.
- ----------------------------------------------------------------------------------------------------------
Paul D. Farrell Senior Portfolio Manager-- Since Mr. Farrell joined the
Vice President Small Cap Equity 1992 Investment Adviser in
1991.
- ----------------------------------------------------------------------------------------------------------
Ronald E. Gutfleish Senior Portfolio Manager-- Since Mr. Gutfleish joined the
Vice President Growth and Income Investment Adviser in
Mid Cap Equity 1993 1993. Prior to 1993, he
Balanced (Equity) 1995 was a principal of
1994 Sanford C. Bernstein &
Co. in its Investment
Management Research
Department.
- ----------------------------------------------------------------------------------------------------------
Roderick D. Jack Portfolio Manager-- Since Mr. Jack joined the
Managing Director International Equity 1992 Investment Adviser in
1992. Prior to 1992, he
worked in the advisory
and financing group for
S.G. Warburg in London.
- ----------------------------------------------------------------------------------------------------------
Robert C. Jones Senior Portfolio Manager-- Since Mr. Jones joined the
Managing Director CORE U.S. Equity 1991 Investment Adviser in
CORE Large Cap Growth 1997 1989. From 1987 to 1989,
CORE Small Cap Equity 1997 Mr. Jones was a senior
CORE International Equity 1997 quantitative analyst in
the Research Department.
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
YEARS
PRIMARILY
NAME AND TITLE FUND RESPONSIBILITY RESPONSIBLE FIVE YEAR EMPLOYMENT HISTORY
-------------- ------------------- ----------- ----------------------------
<C> <C> <C> <S>
Marcel Jongen Portfolio Manager-- Since Mr. Jongen joined the
Executive Director International Equity 1992 Investment Adviser in
1992. Prior to 1992, he
was head of equities at
Philips Pension Fund in
Eindhoven.
- ----------------------------------------------------------------------------------------------------
Richard C. Lucy Portfolio Manager-- Since Mr. Lucy joined the
Vice President Balanced (Fixed Income) 1994 Investment Adviser in
Co-Head U.S. 1992. Prior to 1992, he
Fixed Income managed fixed income
Department assets at Brown Brothers
Harriman & Co.
- ----------------------------------------------------------------------------------------------------
Alice Lui Portfolio Manager-- Since Ms. Lui joined the
Vice President Asia Growth 1994 Investment Adviser in
1990.
- ----------------------------------------------------------------------------------------------------
Shogo Maeda Portfolio Manager-- Since Mr. Maeda joined the
Vice President International Equity 1994 Investment Adviser in
1994. Prior to 1994, he
worked at Nomura
Investment Management
Incorporated and for a
period at Manufacturers
Hanover Bank in New
York.
- ----------------------------------------------------------------------------------------------------
Matthew B. McLennan Assistant Portfolio Since Mr. McLennan joined the
Associate Manager-- 1996 Investment Adviser in
Small Cap Equity 1995. Prior to 1995, he
worked in the Investment
Banking Division of
Goldman, Sachs & Co. in
Australia. Prior to
that, Mr. McLennan
worked at Queensland
Investment Corporation
in Australia.
- ----------------------------------------------------------------------------------------------------
Warwick M. Negus Senior Portfolio Manager-- Since Mr. Negus joined the
Managing Director Asia Growth 1994 Investment Adviser in
Portfolio Manager-- 1994. Prior to 1994, he
International Equity 1994 was a vice president of
Emerging Markets Equity 1997 Bankers Trust Australia
Ltd.
- ----------------------------------------------------------------------------------------------------
Victor H. Pinter Portfolio Manager-- Since Mr. Pinter joined the
Vice President CORE U.S. Equity 1996 Investment Adviser in
CORE Large Cap Growth 1997 1990.
CORE Small Cap Equity 1997
CORE International Equity 1997
- ----------------------------------------------------------------------------------------------------
Ramakrishna Shanker Portfolio Manager-- Since Mr. Shanker joined the
Vice President Asia Growth 1997 Investment Adviser in
1997. Prior to 1997, he
worked for the
Investment Banking
Division of Goldman,
Sachs & Co. in
Singapore.
- ----------------------------------------------------------------------------------------------------
David G. Shell Portfolio Manager-- Since Mr. Shell joined the
Vice President Capital Growth 1997 Investment Adviser in
1997. Prior to 1997, he
was a portfolio manager
at Liberty.
- ----------------------------------------------------------------------------------------------------
Ernest C. Segundo, Jr. Portfolio Manager-- Since Mr. Segundo joined the
Vice President Capital Growth 1997 Investment Adviser in
1997. Prior to 1997, he
was a portfolio manager
at Liberty.
- ----------------------------------------------------------------------------------------------------
Karma Wilson Portfolio Manager-- Since Ms. Wilson joined the
Vice President Asia Growth 1995 Investment Adviser in
1994. Prior to 1994, she
was an investment
analyst with Bankers
Trust Australia Ltd.
Before 1992 she was
employed by Arthur
Andersen LLP.
</TABLE>
It is the responsibility of the Investment Adviser to make investment
decisions for a Fund and to place the purchase and sale orders for the Fund's
portfolio transactions in U.S. and foreign securities and currency markets.
Such orders may be directed to any broker including, to the extent and in the
manner permitted by applicable law, Goldman Sachs or its affiliates. In
effecting purchases and sales of portfolio securities for the Funds, the
Investment Advisers will seek the best price and execution of a Fund's orders.
In doing so, where two or more
39
<PAGE>
brokers or dealers offer comparable prices and execution for a particular
trade, consideration may be given to whether the broker or dealer provides
investment research or brokerage services or sells shares of any Goldman Sachs
Fund. See the Additional Statement for a further description of the Investment
Advisers' brokerage allocation practices.
As compensation for its services rendered and assumption of certain expenses
pursuant to separate Management Agreements, GSAM, GSFM and GSAMI are entitled
to the following fees, computed daily and payable monthly at the annual rates
listed below:
<TABLE>
<CAPTION>
FOR THE FISCAL
CONTRACTUAL YEAR ENDED
RATE* JANUARY 31, 1997*
----------- -----------------
<S> <C> <C>
GSAM
Balanced..................................... 0.65% 0.65%
Growth and Income............................ 0.70% 0.70%
CORE Large Cap Growth........................ 0.75% n/a
CORE Small Cap Equity........................ 1.00% n/a
CORE International Equity ................... 1.00% n/a
Mid Cap Equity............................... 0.75% 0.75%
Small Cap Equity............................. 1.00% 1.00%
GSFM
CORE U.S. Equity............................. 0.75% 0.59%
Capital Growth............................... 1.00% 1.00%
GSAMI
International Equity......................... 1.00% 0.89%
Emerging Markets Equity...................... 1.20% n/a
Asia Growth.................................. 1.00% 0.86%
</TABLE>
- ---------------------
*With respect to the Balanced, Growth and Income, CORE U.S. Equity, Capital
Growth, Mid Cap Equity, International Equity, Small Cap Equity and Asia Growth
Funds, a Management Agreement combining both advisory and administrative
services was adopted effective April 30, 1997. The contractual rate set forth
in the table is the rate payable under the Management Agreements and is
identical to the aggregate advisory and administration fees payable by each
Fund under the previous separate investment advisory (including subadvisory in
the case of International Equity Fund) and administration agreements. For the
fiscal year ended January 31, 1997, the annual rate expressed is the combined
advisory and administration fees paid (after voluntary fee limitations). The
difference, if any, between the stated fees and the actual fees paid by the
Funds reflects that the applicable Investment Adviser did not charge the full
amount of the fees to which it would have been entitled. The Investment
Advisers may discontinue or modify such voluntary limitations in the future at
their discretion, although they have no current intention to do so.
The Investment Advisers to the Balanced, Growth and Income, CORE U.S.
Equity, CORE Large Cap Growth, [CORE Small Cap Equity, CORE International
Equity], Mid Cap International Equity, Emerging Markets Equity and Asia Growth
Funds have voluntarily agreed to reduce or limit certain "Other Expenses" of
such Funds (excluding management fees, service fees, taxes, interest and
brokerage fees and litigation, indemnification and other extraordinary
expenses and, in the case of each Fund other than Balanced and CORE Large Cap
Growth Funds, transfer agency fees) to the extent such expenses exceed 0.10%,
0.11%, 0.06%, 0.05%, [ %,] [ %,] 0.06%, 0.20%, 0.16% and 0.24% per annum of
such Funds' average daily net assets, respectively. Such reductions or limits,
if any, are calculated monthly on a cumulative basis and may be discontinued
or modified by the applicable Investment Adviser in its discretion at any
time.
40
<PAGE>
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
GOLDMAN SACHS. The involvement of the Investment Advisers, 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 a Fund or limit a Fund's investment activities. Goldman Sachs and
its affiliates engage in proprietary trading and advise accounts and funds
which have investment objectives similar to those of the Funds and/or which
engage in and compete for transactions in the same type of securities,
currencies and instruments as the Funds. Goldman Sachs and its affiliates will
not 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 in general it is not anticipated that the Investment Advisers will have
access to proprietary information for the purpose of managing a Fund. The
results of a Fund's investment activities, therefore, may differ from those of
Goldman Sachs and its affiliates and it is possible that a Fund could sustain
losses during periods in which Goldman Sachs and its affiliates and other
accounts achieve significant profits on their trading for proprietary or other
accounts. From time to time, a Fund's activities may be limited because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. See
"Management--Activities of Goldman Sachs and its Affiliates and Other Accounts
Managed by Goldman Sachs" in the Additional Statement for further information.
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York, serves as the exclusive
distributor (the "Distributor") of each Fund's shares. Goldman Sachs, 4900
Sears Tower, Chicago, Illinois, also serves as each Fund's transfer agent (the
"Transfer Agent") and as such performs various shareholder servicing
functions. Shareholders with inquiries regarding a Fund should contact Goldman
Sachs (as Transfer Agent) at the address or the telephone number set forth on
the back cover page of this Prospectus. Goldman Sachs is not entitled to
receive a transfer agency fee from the CORE U.S. Equity, International Equity
and Asia Growth Funds with respect to Institutional or Service Shares. Goldman
Sachs is entitled to receive a transfer agency fee from the Capital Growth,
Growth and Income, Mid Cap Equity, Small Cap Equity and Emerging Markets
Equity Funds equal to 0.04% of the average daily net assets of the
Institutional and Service Shares of such Funds. Goldman Sachs is entitled to
receive a fee from the Balanced, CORE International Equity, CORE Large Cap
Growth and CORE Small Cap Equity Funds, with respect to Institutional and
Service shares, equal to the fixed per account charge of $12,000 per year plus
$7.50 per account, together with out-of-pocket and transaction related
expenses (including those out-of-pocket expenses payable to servicing and/or
sub-transfer agents) applicable to Class A and B shares plus 0.04% of the
average daily net assets of the Institutional and Service classes of the CORE
Large Cap Growth Fund.
NET ASSET VALUE
The net asset value per share of each class of a Fund is calculated by the
Fund's custodian as of the close of regular trading on the New York Stock
Exchange (normally 3:00 p.m. Chicago time, 4:00 p.m. New York time), on each
Business Day (as such term is defined under "Additional Information"). Net
asset value per share of each class is calculated by determining the net
assets attributable to each class and dividing by the number of outstanding
shares of that class. Portfolio securities are valued based on market
quotations or, if accurate quotations are not readily available, at fair value
as determined in good faith under procedures established by the Trustees.
41
<PAGE>
PERFORMANCE INFORMATION
From time to time each Fund may publish average annual total return and the
Balanced and Growth and Income Funds may publish their yield and distribution
rates in advertisements and communications to shareholders or prospective
investors. Average annual total return is determined by computing the average
annual percentage change in value of $1,000 invested at the maximum public
offering price for specified periods ending with the most recent calendar
quarter, assuming reinvestment of all dividends and distributions at net asset
value. The total return calculation assumes a complete redemption of the
investment at the end of the relevant period. Each Fund may also from time to
time advertise total return on a cumulative, average, year-by-year or other
basis for various specified periods by means of quotations, charts, graphs or
schedules. In addition, each Fund may furnish total return calculations based
on investments at various sales charge levels or at net asset value. Any
performance data which are based on the net asset value per share would be
reduced if any applicable sales charge were taken into account. In addition to
the above, each Fund may from time to time advertise its performance relative
to certain averages, performance rankings, indices, other information prepared
by recognized mutual fund statistical services and investments for which
reliable performance data is available.
The Balanced and Growth and Income Funds computes their yield by dividing
net investment income earned during a recent thirty-day period by the product
of the average daily number of shares outstanding and entitled to receive
dividends during the period and the maximum offering price per share on the
last day of the relevant period. The results are compounded on a bond
equivalent (semi-annual) basis and then annualized. 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. The Balanced and Growth and Income Funds' quotations of
distribution rate are calculated by annualizing the most recent distribution
of net investment income for a monthly, quarterly or other relevant period and
dividing this amount by the net asset value per share on the last day of the
period for which the distribution rates are being calculated.
Each Fund's total return, yield and distribution rate will be calculated
separately for each class of shares in existence. Because each class of shares
may be subject to different expenses, the total return, yield and distribution
rate calculations with respect to each class of shares for the same period
will differ. See "Shares of the Trust."
The investment results of a Fund will fluctuate over time and any
presentation of investment results for any prior period should not be
considered a representation of what an investment may earn or what the Fund's
performance may be in any future period. In addition to information provided
in shareholder reports, the Funds may, in their discretion, from time to time
make a list of their holdings available to investors upon request.
SHARES OF THE TRUST
Each Fund is a series of Goldman Sachs Trust, which was formed under the
laws of the State of Delaware on January 28, 1997. The Funds were formerly
series of Goldman Sachs Equity Portfolios, Inc., a Maryland corporation, and
were reorganized into the Trust as of April 30, 1997. The Trustees have
authority under the Trust's Declaration of Trust to create and classify shares
of beneficial interests in separate series, without further action by
shareholders. Additional series may be added in the future. The Trustees also
have authority to classify and reclassify any series or portfolio of shares
into one or more classes.
42
<PAGE>
When issued, shares are fully paid and non-assessable. In the event of
liquidation, shareholders are entitled to share pro rata in the net assets of
the applicable Fund available for distribution to such shareholders. All
shares, are freely transferable and have no preemptive, subscription or
conversion rights. Shareholders are entitled to one vote per share, provided
that, at the option of the Trustees, shareholders will be entitled to a number
of votes based upon the net asset values represented by their shares.
As of , 1997, State Street Bank and Trust Company as Trustee for
Goldman Sachs Profit Sharing Master Trust, Attention: Louis Pereira, P.O. Box
1992, Boston, MA 02105-1992 was recordholder of 97.88% of Mid Cap Equity
Fund's outstanding shares.
The Trust does not intend to hold annual meetings of shareholders. However,
pursuant to the Trust's By-Laws, the recordholders of at least 10% of the
shares outstanding and entitled to vote at a special meeting may require the
Trust to hold such special meeting of shareholders for any purpose and
recordholders may, under certain circumstances, as permitted by the Act,
communicate with other shareholders in connection with requiring a special
meeting of shareholders. The Trustees will call a special meeting of
shareholders for the purpose of electing Trustees if, at any time, less than a
majority of Trustees holding office at the time were elected by shareholders.
In the interest of economy and convenience, the Trust does not issue
certificates representing the Funds' shares. Instead, the Transfer Agent
maintains a record of each shareholder's ownership. Each shareholder receives
confirmation of purchase and redemption orders from the Transfer Agent. Fund
shares and any dividends and distributions paid by the Fund are reflected in
account statements from the Transfer Agent.
TAXATION
FEDERAL TAXES
Each Fund is treated as a separate entity for tax purposes. The CORE Large
Cap Growth, CORE Small Cap Equity, CORE International Equity and Emerging
Markets Equity Funds intend to elect and each other Fund has elected to be
treated as a regulated investment company and each Fund intends to qualify for
such treatment for each taxable year under Subchapter M of the Code. To
qualify as such, a Fund must satisfy certain requirements relating to the
sources of its income, diversification of its assets and distribution of its
income to shareholders. As a regulated investment company, a Fund will not be
subject to federal income or excise tax on any net investment income and net
realized capital gains that are distributed to its shareholders in accordance
with certain timing requirements of the Code.
Dividends paid by a Fund from net investment income, certain net realized
foreign exchange gains, the excess of net short-term capital gain over net
long-term capital loss and original issue discount or market discount income
will be taxable to its shareholders as ordinary income. Dividends paid by a
Fund from the excess of net long-term capital gain over net short-term capital
loss will be taxable as long-term capital gains regardless of how long the
shareholders have held their shares. These tax consequences will apply
regardless of whether distributions are received in cash or reinvested in
shares. A Fund's dividends that are paid to its corporate shareholders and are
attributable to qualifying dividends such Fund receives from U.S. domestic
corporations may be eligible, in the hands of such corporate shareholders, for
the corporate dividends-received deduction, subject to certain holding period
requirements and debt financing limitations under the Code. Dividends paid by
CORE International Equity, International Equity, Emerging Markets Equity and
Asia Growth Funds are not
43
<PAGE>
generally expected to qualify, in the hands of corporate shareholders, for the
corporate dividends-received deduction, but a portion of each other Fund's
dividends may generally so qualify. Certain distributions paid by a Fund in
January of a given year may be taxable to shareholders as if received the
prior December 31. Shareholders will be informed annually about the amount and
character of distributions received from the Funds for federal income tax
purposes.
Investors should consider the tax implications of buying shares immediately
prior to a distribution. Investors who purchase shares shortly before the
record date for a distribution will pay a per share price that includes the
value of the anticipated distribution and will be taxed on the distribution
even though the distribution represents a return of a portion of the purchase
price.
Redemptions and exchanges of shares are taxable events.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on distributions, redemptions and
exchanges if they fail to furnish their correct taxpayer identification number
and certain certifications required by the Internal Revenue Service or if they
are otherwise subject to backup withholding. Individuals, corporations and
other shareholders that are not U.S. persons under the Code are subject to
different tax rules and may be subject to nonresident alien withholding at the
rate of 30% (or a lower rate provided by an applicable tax treaty) on amounts
treated as ordinary dividends from the Funds.
Each Fund may be subject to foreign withholding or other foreign taxes on
income or gain from certain foreign securities. The Funds do not anticipate
that they will elect to pass such foreign taxes through to their shareholders,
who therefore will generally not take such taxes into account on their own tax
returns. The Funds will generally deduct such taxes in determining the amounts
available for distribution to shareholders.
OTHER TAXES
In addition to federal taxes, a shareholder may be subject to state, local
or foreign taxes on payments received from the Funds. A state income (and
possibly local income and/or intangible property) tax exemption is generally
available to the extent (if any) a Fund's distributions are derived from
interest on (or, in the case of intangible property taxes, the value of its
assets is attributable to) certain U.S. Government obligations, provided in
some states that certain thresholds for holdings of such obligations and/or
reporting requirements are satisfied. For a further discussion of certain tax
consequences of investing in shares of the Funds, see "Taxation" in the
Additional Statement. Shareholders are urged to consult their own tax advisers
regarding specific questions as to federal, state and local taxes as well as
to any foreign taxes.
ADDITIONAL INFORMATION
The term "a vote of the majority of the outstanding shares" of a Fund means
the vote of the lesser of (i) 67% or more of the shares 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 (ii) more than 50% of the outstanding
shares of the Fund.
As used in this Prospectus, the term "Business Day" means any day the New
York Stock Exchange is open for trading, which is Monday through Friday except
for holidays. The New York Stock Exchange is closed on the following holidays:
New Year's Day, Presidents' Day (observed), Good Friday, Memorial Day
(observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
44
<PAGE>
ADDITIONAL SERVICES
The Trust, on behalf of the Funds, has adopted a Service Plan with respect to
the Service Shares which authorizes a Fund to compensate certain institutions
("Service Organizations") for providing account administration and personal and
account maintenance services to their customers who are beneficial owners of
such Shares. The Trust, on behalf of the Funds, enters into agreements with
Service Organizations which purchase Service Shares on behalf of their custom-
ers ("Service Agreements"). The Service Agreements provide for compensation to
the Service Organizations in an amount up to 0.50% (on an annualized basis) of
the average daily net assets of the Service Shares of the Fund attributable to
or held in the name of the Service Organization for its customers; provided,
however, that the fee paid for personal and account maintenance services shall
not exceed 0.25% of such average daily net assets. The services provided by the
Service Organizations may include acting, directly or through an agent, as the
sole shareholder of record, maintaining account records for customers, process-
ing orders to purchase, redeem or exchange Service Shares for customers, re-
sponding to inquiries from prospective and existing shareholders and assisting
customers with investment procedures.
For the fiscal year ended January 31, 1997, the Trust paid the Service
Organizations fees at the annual rate of 0.50% of each Fund's average daily net
assets attributable to Service Shares. No Service Shares of the Asia Growth
Fund was outstanding during the period.
Holders of Service Shares of a Fund bear all expenses and fees paid to Serv-
ice Organizations for their services with respect to such Shares as well as any
other expenses which are directly attributable to such Shares.
Service Organizations may charge other fees to their customers who are the
beneficial owners of Service Shares in connection with their customer accounts.
These fees would be in addition to any amounts received by the Service Organi-
zation under a Service Agreement and may affect the return earned on an invest-
ment in a Fund. The Trust, on behalf of the Funds, accrues payments made pursu-
ant to a Service Agreement daily. All inquiries of beneficial owners of Service
Shares should be directed to such owners' Service Organization.
REPORTS TO SHAREHOLDERS
Recordholders of Service Shares of the Funds will receive an annual report
containing audited financial statements and a semi-annual report. Each
recordholder of Service Shares will also be provided with a printed confirma-
tion for each transaction in its account and a quarterly account statement. A
year-to-date statement for any account will be provided to a Service Organiza-
tion upon request made to Goldman Sachs.
Service Organizations will be responsible for providing services similar to
those described above to their customers who are the beneficial owners of such
Shares. For example, Service Organizations are responsible for providing each
customer exercising investment discretion with monthly statements with respect
to such customer's account in lieu of an immediate confirmation of each trans-
action.
38
<PAGE>
DIVIDENDS
Each dividend from net investment income and capital gain distributions, if
any, declared by a Fund on its outstanding Service Shares will, at the election
of each shareholder, be paid (i) in cash or (ii) in additional Service Shares
of such Fund. This election should initially be made on a shareholder's Account
Information Form and may be changed upon written notice to Goldman Sachs at any
time prior to the record date for a particular dividend or distribution. If no
election is made, all dividends from net investment income and capital gain
distributions will be reinvested in Service Shares of the applicable Fund.
The election to reinvest dividends and distributions paid by a Fund in addi-
tional Service Shares of the Fund will not affect the tax treatment of such
dividends and distributions, which will be treated as received by the share-
holder and then used to purchase Service Shares of a Fund.
Each Fund intends that all or substantially all its net investment income and
net realized long-term and short-term capital gains, after reduction by
available capital losses, including any capital losses carried forward from
prior years, will be declared as dividends for each taxable year. The Balanced
and Growth and Income Fund will pay dividends from net investment income
quarterly. Each other Fund will pay dividends from net investment income at
least annually. All of the Funds will pay dividends from net realized long-term
and short-term capital gains, reduced by available capital losses, at least
annually. From time to time, a portion of a Fund's dividends may constitute a
return of capital.
At the time of an investor's purchase of shares of a Fund a portion of the
net asset value per share may be represented by undistributed income of the
Fund or realized or unrealized appreciation of the Fund's portfolio securities.
Therefore, subsequent distributions on such shares from such income or realized
appreciation may be taxable to the investor even if the net asset value of the
investor's shares is, as a result of the distributions, reduced below the cost
of such shares and the distributions (or portions thereof) represent a return
of a portion of the purchase price.
PURCHASE OF SERVICE SHARES
Customers of Service Organizations may invest in Service Shares only through
Service Organizations. Service Shares may be purchased on any Business Day by a
Service Organization through Goldman Sachs at the net asset value per share
next determined after receipt of an order. No sales load will be charged. If,
by the close of regular trading on the New York Stock Exchange (normally 3:00
p.m. Chicago time, 4:00 p.m. New York time), an order is received from a Serv-
ice Organization by Goldman Sachs, the price per share will be the net asset
value per share computed on the day the purchase order is received. See "Net
Asset Value." Purchases of Service Shares of the Fund must be settled within
three (3) Business Days of the receipt of a complete purchase order. Payment of
the proceeds of redemption of shares purchased by check may be delayed for a
period of time as described under "Redemption of Service Shares."
The Service Organizations are responsible for the timely transmittal of
purchase orders to Goldman Sachs and payments to State Street. In order to
facilitate timely transmittal, the Service Organizations have established times
by which purchase orders and payments must be received by them.
39
<PAGE>
PURCHASE PROCEDURES
Purchases of Service Shares may be made by a Service Organization placing an
order with Goldman Sachs at 800-621-2550 and either wiring federal funds to
State Street Bank and Trust Company ("State Street") or initiating an ACH
transfer. Purchases may also be made by a Service Organization by check (except
that the Trust will not accept a check drawn on a foreign bank or a third party
check) or Federal Reserve draft made payable to "Goldman Sachs Equity Funds--
Name of Fund and Class of shares" and should be directed to "Goldman Sachs
Equity Funds--Name of Fund and Class of shares," c/o National Financial Data
Services, Inc. ("NFDS"), P.O. Box 419711, Kansas City, MO 64141-6711.
OTHER PURCHASE INFORMATION
The Funds do not have any minimum purchase or account requirements with
respect to Service Shares. A Service Organization may, however, impose a
minimum amount for initial and subsequent investments in Service Shares, and
may establish other requirements such as a minimum account balance. A Service
Organization may effect redemptions of noncomplying accounts, and may impose a
charge for any special services rendered to its customers. Customers should
contact their Service Organization for further information concerning such
requirements and charges.
The Funds reserve the right to redeem Service Shares of any Service Organiza-
tion whose account balance is less than $50 as a result of earlier redemptions.
Such redemptions will not be implemented if the value of such shareholder's ac-
count falls below the minimum account balance solely as a result of market con-
ditions. The Trust will give sixty (60) days' prior written notice to Service
Organizations whose Service Shares are being redeemed to allow them to purchase
sufficient additional Service Shares to avoid such redemption.
The Funds and Goldman Sachs each reserves the right to reject any specific
purchase order (including exchanges) or to restrict purchases or exchanges by a
particular purchaser (or group of related purchasers). This may occur, for ex-
ample, when a purchaser or group of purchaser's pattern of frequent purchases,
sales or exchanges of Service Shares of a Fund is evident, or if purchases,
sales, or exchanges are, or a subsequent abrupt redemption might be, of a size
that would disrupt management of a Fund.
In the sole discretion of Goldman Sachs, a Fund may accept securities instead
of cash for the purchase of shares of the Fund. Such purchases will be
permitted only if the Investment Adviser determines that any securities
acquired in this manner are consistent with the Fund's investment objectives,
restrictions and policies and are desirable investments for the Fund.
EXCHANGE PRIVILEGE
Service Shares of the Funds may be exchanged by a Service Organization for
(i) Service Shares of any other mutual fund sponsored by Goldman Sachs and des-
ignated as an eligible fund for this purpose and (ii) the corresponding class
of any Goldman Sachs Money Market Fund at the net asset value next determined
either by writing to Goldman Sachs, Attention: Goldman Sachs Equity Funds--Name
of Fund and Class of shares, c/o GSAM Shareholder Services, 4900 Sears Tower,
Chicago, Illinois 60606 or, if previously elected in the Fund's Account Infor-
mation Form, by telephone at 800-621-2550 (7:00 a.m. to 5:30 p.m. Chicago
time). A shareholder
40
<PAGE>
should obtain and read the prospectus relating to any other fund and its shares
and consider its investment objective, policies and applicable fees before mak-
ing an exchange. Service Shares acquired by telephone exchange must be regis-
tered in the same name(s) and have the same address as Service Shares of the
Fund for which the exchange is being made.
In an effort to prevent unauthorized or fraudulent exchanges by telephone,
Goldman Sachs employs reasonable procedures as set forth under "Redemption of
Service Shares" to confirm that such instructions are genuine. In times of
drastic economic or market changes the telephone exchange privilege may be dif-
ficult to implement. For federal income tax purposes, an exchange is treated as
a sale of the Service Shares surrendered in the exchange, on which an investor
may realize a gain or loss, followed by a purchase of Service Shares or the
corresponding class of any Goldman Sachs Money Market Fund received in the ex-
change. Shareholders should consult their own tax advisers concerning the tax
consequences of an exchange. Exchanges are available only in states where ex-
changes may legally be made. The exchange privilege may be modified or with-
drawn at any time on sixty (60) days' written notice to recordholders of Serv-
ice Shares and is subject to certain limitations. See "Purchase of Service
Shares."
REDEMPTION OF SERVICE SHARES
The Funds will redeem their Service Shares upon request of the recordholder
of such Shares on any Business Day at the net asset value next determined after
the receipt by the Transfer Agent of such request in proper form. See "Net As-
set Value." If Service Shares to be redeemed were recently purchased by check,
a Fund may delay transmittal of redemption proceeds until such time as it has
assured itself that good funds have been collected for the purchase of such
Service Shares. This may take up to fifteen (15) days. Redemption requests may
be made by writing to or calling the Transfer Agent at the address or telephone
number set forth on the back cover of this Prospectus. A Service Organization
may request redemptions by telephone if the optional telephone redemption priv-
ilege is elected on the Account Information Form. It may be difficult to imple-
ment redemptions by telephone in times of drastic economic or market changes.
In an effort to prevent unauthorized or fraudulent redemption or exchange
requests by telephone, Goldman Sachs employs reasonable procedures specified by
the Trust to confirm that such instructions are genuine. Among other things,
any redemption request that requires money to go to an account or address other
than that designated on the Account Information Form must be in writing and
signed by an authorized person designated on the Account Information Form. Any
such written request is also confirmed by telephone with both the requesting
party and the designated bank account to verify instructions. Exchanges among
accounts with different names, addresses and social security or other taxpayer
identification numbers must be in writing and signed by an authorized person
designated on the Account Information Form. Other procedures may be implemented
from time to time. If reasonable procedures are not implemented, the Trust may
be liable for any loss due to unauthorized or fraudulent transactions. In all
other cases, neither the Funds, the Trust nor Goldman Sachs will be responsible
for the authenticity of redemption or exchange instructions received by
telephone.
The Funds will arrange for the proceeds of redemptions effected by any means
to be wired to the recordholder of Service Shares, or if the recordholder
elects in writing, by check. Redemption proceeds paid by wire transfer will
normally be wired on the next Business Day in federal funds (for a total one-
day delay),
41
<PAGE>
but may be paid up to three (3) days after receipt of a properly executed
redemption request. Wiring of redemption proceeds may be delayed one additional
Business Day if the Federal Reserve Bank is closed on the day redemption
proceeds would ordinarily be wired. Redemption proceeds paid by check will
normally be mailed to the address of record within three (3) Business Days of
receipt of a properly executed redemption request. Once wire transfer
instructions have been given by Goldman Sachs, neither the Funds, the Trust nor
Goldman Sachs assumes any further responsibility for the performance of
intermediaries or the customer's Service Organization in the transfer process.
If a problem with such performance arises, the customer should deal directly
with such intermediaries or Service Organizations.
Additional documentation regarding a redemption by any means may be required
to effect a redemption when deemed appropriate by the Transfer Agent. The
request for such redemption will not be considered to have been received in
proper form until such additional documentation has been submitted to the
Transfer Agent by the recordholder of Service Shares.
Service Organizations are responsible for the timely transmittal of
redemption requests by their customers to the Transfer Agent. In order to
facilitate timely transmittal of redemption requests, Service Organizations
have established times by which redemption requests must be received by them.
Additional documentation may be required when deemed appropriate by a Service
Organization.
--------------------
42
<PAGE>
APPENDIX
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON ACCOUNT
INFORMATION FORM
You are required by law to provide the Fund with your correct Taxpayer
Identification Number (TIN), regardless of whether you file tax returns.
Failure to do so may subject you to penalties. Failure to provide your correct
TIN and to sign your name in the Certification section of the Account
Information Form could result in withholding of 31% by the Fund for the
federal backup withholding tax on distributions, redemptions, exchanges and
other payments relating to your account.
Any tax withheld may be credited against taxes owed on your federal income
tax return.
If you do not have a TIN, you should apply for one immediately by contacting
your local office of the Social Security Administration or the Internal
Revenue Service (IRS). Backup withholding could also apply to payments
relating to your account prior to the Fund's receipt of your TIN.
Special rules apply for certain entities. For example, for an account
established under a Uniform Gifts or Transfers to Minors Act, the TIN of the
minor should be furnished.
If you have been notified by the IRS that you are subject to backup
withholding because you failed to report all your interest and/or dividend
income on your tax return and you have not been notified by the IRS that such
withholding should cease, you must cross out item (2) in the Certification
section of the Account Information Form.
If you are an exempt recipient, you should furnish your TIN and certify your
exemption by signing the Certification section and writing "exempt" after your
signature. Exempt recipients include: corporations, tax-exempt pension plans
and IRA's, governmental agencies, financial institutions, registered
securities and commodities dealers and others.
If you are a nonresident alien or foreign entity, you must provide a
completed Form W-8 to the Fund in order to avoid backup withholding on certain
payments. Other payments to you may be subject to nonresident alien
withholding of up to 30%.
For further information regarding backup and nonresident alien withholding,
see Sections 3406, 1441 and 1442 of the Internal Revenue Code and consult your
tax adviser.
A-1
<PAGE>
- --------------------------------------------------------------------------------
GOLDMAN SACHS ASSET
MANAGEMENT
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS FUNDS
MANAGEMENT, L.P.
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS ASSET
MANAGEMENT INTERNATIONAL
133 PETERBOROUGH COURT
LONDON, ENGLAND EC4A 2BB
GOLDMAN, SACHS & CO.
DISTRIBUTOR
85 BROAD STREET
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
TRANSFER AGENT
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN
1776 HERITAGE DRIVE
NORTH QUINCY, MASSACHUSETTS 02110
TOLL FREE (IN U.S.) . . . . . . . . 800-621-2550
EQPROSVC
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GOLDMAN SACHS EQUITY FUNDS
- --------------------------------------------------------------------------------
PROSPECTUS
SERVICE SHARES
[LOGO] GOLDMAN
SACHS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED
PROSPECTUS
, 1997
GOLDMAN SACHS REAL ESTATE SECURITIES FUND INSTITUTIONAL SHARES
The Goldman Sachs Real Estate Securities Fund (the "Fund") seeks total return
comprised of long-term growth of capital and dividend income through
investments in equity securities of issuers that are primarily engaged in or
related to the real estate industry. The Fund expects that a substantial
portion of its total assets will be invested in real estate investment trusts.
Goldman Sachs Asset Management ("GSAM"), New York, New York, a separate
operating division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as
investment adviser to the Fund. GSAM is referred to in this Prospectus as the
"Investment Adviser." Goldman Sachs serves as the Fund's distributor and
transfer agent.
This Prospectus provides information about Goldman Sachs Trust (the "Trust")
and the Fund that a prospective investor should understand before investing.
This Prospectus should be retained for future reference. A Statement of
Additional Information (the "Additional Statement"), dated , 1997,
containing further information about the Trust and the Fund which may be of
interest to investors, has been filed with the Securities and Exchange
Commission ("SEC"), is incorporated herein by reference in its entirety, and
may be obtained without charge from Goldman Sachs by calling the telephone
number, or writing to one of the addresses, listed on the back cover of this
Prospectus. The SEC maintains a Web site (http://www.sec.gov) that contains the
Additional Statement and other information regarding the Trust.
-----------------
INSTITUTIONAL SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION AND
ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN THE FUND
INVOLVES INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Highlights.................... 3
Fees and Expenses.................. 5
Investment Objective and Policies.. 6
Description of Securities.......... 7
Investment Techniques.............. 9
Risk Factors....................... 12
Investment Restrictions............ 13
Portfolio Turnover................. 13
Management......................... 13
Net Asset Value.................... 16
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Performance Information............. 16
Shares of the Trust................. 17
Taxation............................ 17
Additional Information.............. 19
Reports to Shareholders............. 20
Dividends........................... 20
Purchase of Institutional Shares.... 20
Exchange Privilege.................. 22
Redemption of Institutional Shares.. 23
Appendix ........................... A-1
Account Information Form
</TABLE>
2
<PAGE>
FUND HIGHLIGHTS
The following is intended to highlight certain information contained in this
Prospectus and is qualified in its entirety by the more detailed information
contained herein.
WHAT IS THE GOLDMAN SACHS TRUST?
The Goldman Sachs Trust is an open-end management investment company that
offers its shares in several investment funds (mutual funds). The Fund is a
separate investment fund that pools the monies of investors by selling its
shares to the public and investing these monies in a portfolio of securities
designed to achieve the Fund's stated investment objectives.
WHAT ARE THE INVESTMENT OBJECTIVE AND POLICIES OF THE FUND?
The Fund has distinct investment objectives and policies. There can be no
assurance that the Fund's objective will be achieved. For a complete
description of the Fund's investment objective and policies, see "Investment
Objectives and Policies," "Description of Securities" and "Investment
Techniques."
<TABLE>
<S> <C>
Investment Objective................. Total return comprised of long-term
growth of capital and dividend
income.
Investment Criteria.................. Substantially all, and at least 80%,
of total assets in a diversified
portfolio of equity securities of
issuers that are primarily engaged in
or related to the real estate
industry. The Fund expects that a
substantial portion of its total
assets will be invested in real
estate investment trusts ("REITs").
Benchmark............................ National Association of Real Estate
Investment Trusts Index ("NAREIT").
</TABLE>
WHAT ARE THE RISK FACTORS AND SPECIAL CHARACTERISTICS THAT I SHOULD CONSIDER
BEFORE INVESTING?
The Fund's share price will fluctuate with market and conditions, so that
an investment in the Fund may be worth more or less when redeemed than when
purchased. The Fund should not be relied upon as a complete investment
program. There can be no assurance that the Fund's investment objective
will be achieved. See "Risk Factors."
Risk Factors Associated with the Real Estate Industry. Although the Fund
does not invest directly in real estate, it does invest primarily in common
stocks and other equity securities of REITs and other real estate industry
companies and does have a policy of concentrating its investments in the
real estate industry. Therefore, an investment in the Fund is subject to
certain risks associated with the direct ownership of real estate and with
the real estate industry in general, including possible declines in the
value of real estate, general and local economic conditions, environmental
problems and changes in interest rates. To the extent that assets
underlying the Fund's investments are concentrated geographically, by
property type or in certain other respects, these risks may be heightened.
In addition, if the Fund has rental income or income from the disposition
of real property acquired as a result of a default on securities the Fund
owns, the receipt of such income may adversely affect its ability to retain
its tax status as a regulated investment company.
3
<PAGE>
Risks of Investing in REITs. Investing in REITs involves certain unique risks
in addition to those risks associated with investing in the real estate
industry in general. Equity REITs may be affected by changes in the value of,
and income produced by, the underlying property owned by the REITs. Mortgage
REITs may be affected by the quality of any credit extended and interest rate
risk. REITs are dependent upon management skills, are not diversified, are
subject to heavy cash flow dependency, default by borrowers and self-
liquidation.
Other. The Fund's use of certain investment techniques, including
derivatives, forward contracts, options and futures, will subject the Fund
to greater risk than funds that do not employ such techniques.
WHO MANAGES THE FUND?
Goldman Sachs Asset Management serves as Investment Adviser to the Fund.
As of June 30, 1997, the Investment Adviser, together with its affiliates,
acted as investment adviser, administrator or distributor for assets in
excess of $ billion.
WHO DISTRIBUTES THE FUND'S SHARES?
Goldman Sachs acts as distributor of the Fund's shares.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000,000 in Institutional Shares of
the Fund alone or in combination with Institutional Shares (or the
corresponding class) of any other mutual fund sponsored by Goldman Sachs
and designated as an eligible fund for this purpose.
HOW DO I PURCHASE INSTITUTIONAL SHARES?
You may purchase Institutional Shares of the Fund through Goldman Sachs.
Institutional Shares are purchased at the current net asset value without
any sales load. See "Purchase of Institutional Shares."
HOW DO I SELL MY INSTITUTIONAL SHARES?
You may redeem Institutional Shares upon request on any Business Day, as
defined under "Additional Information," at the net asset value next
determined after receipt of such request in proper form. See "Redemption of
Institutional Shares."
HOW DO I RECEIVE DIVIDENDS AND DISTRIBUTIONS?
<TABLE>
<CAPTION>
INVESTMENT INCOME DIVIDENDS
--------------------------- CAPITAL GAINS
DECLARED AND PAID DISTRIBUTIONS
----------------- -------------
<S> <C> <C>
Quarterly Annually
</TABLE>
Recordholders of Institutional Shares may receive dividends in additional
Institutional Shares of the Fund in which you have invested or you may
elect to receive cash. For further information concerning dividends, see
"Dividends."
4
<PAGE>
FEES AND EXPENSES
(INSTITUTIONAL SHARES)
<TABLE>
<CAPTION>
FUND
----
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases.............................. None
Maximum Sales Charge Imposed on Reinvested Dividends................... None
Redemption Fees........................................................ None
Exchange Fees.......................................................... None
ANNUAL FUND OPERATING EXPENSES: (as a percentage of average daily net
assets)
Management Fees (after applicable limitations)/2/...................... 1.25%
Distribution (Rule 12b-1) Fees......................................... None
Other Expenses (after applicable limitations)/3/....................... 0.25%
----
TOTAL FUND OPERATING EXPENSES (AFTER FEE AND EXPENSE LIMITATIONS)/4/.. 1.50%
====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS
- -------- ------ -------
<S> <C> <C>
You would pay the following expenses on a hypothetical $1,000
investment, assuming (1) a 5% annual return and (2) redemption
at the end of each time period:............................... $15 $47
</TABLE>
- ---------------------
/1/ Based on estimated amounts for the current fiscal year.
/2/ The Investment Adviser has voluntarily agreed that a portion of the
management fee would not be imposed on the Fund equal to %. Without such
limitation, management fees would be the Fund's average daily net assets.
[CONFIRM]
/3/ The Investment Adviser voluntarily has agreed to reduce or limit certain
other expenses (excluding management fees, taxes, interest and brokerage
fees and litigation, indemnification and other extraordinary expenses and
transfer agency fees) to the extent such expenses exceed % of the Fund's
average daily net assets:
4 Without the limitations described above, "Other Expenses" and "Total
Operating Expenses" of the Fund for the current fiscal year are estimated to
be % and %, respectively.
The Investment Adviser has no current intention of modifying or
discontinuing any of the limitations set forth above but may do so in the
future at its discretion. The information set forth in the foregoing table and
hypothetical example relates only to Institutional Shares of the Fund. The
Fund also offers Service Shares, Class A, Class B and Class C Shares, which
are subject to different fees and expenses (which affect performance), have
different minimum investment requirements and are entitled to different
services. Information regarding Service, Class A, Class B and Class C Shares
may be obtained from an investor's sales representative or from Goldman Sachs
by calling the number on the back cover of this Prospectus.
The purpose of the foregoing table is to assist investors in understanding
the various fees and expenses of the Fund that an investor will bear directly
or indirectly. The information on the fees and expenses included in the table
and hypothetical example above are based on the Fund's estimated fees and
expenses and should not be considered as representative of past or future
expenses. Actual fees and expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, the Fund's
actual performance will vary and may result in an actual return greater or
less than 5%. See "Management--Investment Adviser."
5
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective and principal investment policies of the Fund are
described below. Other investment practices and management techniques, which
involve certain risks are described under "Description of Securities," "Risk
Factors" and "Investment Techniques." There can be no assurance that the
Fund's investment objectives will be achieved.
The Investment Adviser may purchase for the Fund interests in real estate
investment trusts, common stocks, preferred stocks, convertible debt
obligations, convertible preferred stocks, equity interests in trusts,
partnerships, joint ventures and similar enterprises, warrants and stock
purchase rights ("equity securities"). In choosing the Fund's securities, the
Investment Adviser may utilize first-hand fundamental research, including
visiting company facilities to assess operations and to meet decision-makers.
The Investment Adviser may also use macro analysis of numerous economic and
valuation variables to anticipate changes in company earnings and the overall
investment climate. The Investment Adviser is able to draw on the research and
market expertise of the Goldman Sachs Global Investment Research Department
and other affiliates of the Investment Adviser, as well as information
provided by other securities dealers. Equity securities in the Fund's
portfolio will generally be sold when the Investment Adviser believes that the
market price fully reflects or exceeds the securities' fundamental valuation
or when other more attractive investments are identified.
The Fund's investment strategy is based on the premise that property market
fundamentals are the primary determinant of growth underlying the success of
companies in the real estate industry. The Fund's research and investment
process is designed to identify those companies with strong property
fundamentals and strong management teams. This process is comprised of real
estate market research and securities analysis. The Investment Adviser's
analysis will focus on determining the degree to which a company can achieve
sustainable growth in cash flow and dividend paying capability. The Investment
Adviser will take into account fundamental trends in underlying property
markets as determined by proprietary models, research of local real estate
markets, earnings, cash flow growth and stability, the relationship between
asset values and market prices of the securities and dividend payment history.
The Investment Adviser will attempt to purchase securities of companies whose
underlying portfolios are diversified geographically and by property type.
REAL ESTATE SECURITIES FUND
Objectives. The Fund's investment objective is to provide investors with
total return comprised of long-term growth of capital and dividend income.
Primary Investment Focus. The Fund invests, under normal circumstances,
substantially all, and at least 80% of its total assets in issuers that are
primarily engaged in or related to the real estate industry. The Fund seeks to
achieve its investment objective by investing in a diversified portfolio of
equity securities of REITs and other real estate industry companies. A "real
estate industry company" is a company that derives at least 50% of its gross
revenues or net profits from the ownership, development, construction,
financing, management or sale of commercial, industrial or residential real
estate or interests therein.
6
<PAGE>
Shares of REITs. The Fund may invest without limitation in shares of REITs.
REITs are pooled investment vehicles which invest primarily in income
producing real estate or real estate related loans or interests. REITs are
generally classified as equity REITs, mortgage REITs or a combination of
equity and mortgage REITs. Equity REITs invest the majority of their assets
directly in real property and derive income primarily from the collection of
rents. Equity REITs can also realize capital gains by selling properties that
have appreciated in value. Mortgage REITs invest the majority of their assets
in real estate mortgages and derive income from the collection of interest
payments. Similar to investment companies such as the Fund, REITs are not
taxed on income distributed to shareholders provided they comply with several
requirements of the Internal Revenue Code of 1986, as amended (the "Code").
The Fund will indirectly bear its proportionate share of expenses incurred by
REITs in which the Fund invests in addition to the expenses incurred directly
by the Fund.
Other. The Fund may invest up to 20% of its total assets in fixed income
securities that, in the opinion of the Investment Adviser, offer the potential
to further the Fund's investment objectives. In addition, although the Fund
will invest primarily in publicly traded U.S. securities, it may invest up to
5% of its net assets in foreign securities.
DESCRIPTION OF SECURITIES
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities, including debt obligations
and preferred stock of the issuer convertible at a stated exchange rate into
common stock of the issuer. Convertible securities generally offer lower
interest or dividend yields than non-convertible securities of similar
quality. As with all fixed income securities, the market value of convertible
securities tends to decline as interest rates increase and, conversely, to
increase as interest rates decline. However, when the market price of the
common stock underlying a convertible security exceeds the conversion price,
the convertible security tends to reflect the market price 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 decline in price to the same extent as the underlying common stock.
Convertible securities rank senior to common stocks in an issuer's capital
structure and consequently entail less risk than the issuer's common stock. In
evaluating a convertible security, the Investment Adviser will give primary
emphasis to the attractiveness of the underlying common stock. The convertible
debt securities in which the Fund may invest are not subject to any minimum
rating criteria. Convertible debt securities are equity investments for
purposes of the Fund's investment policies.
FIXED INCOME SECURITIES
U.S. GOVERNMENT SECURITIES. The Fund may invest in U.S. Government
securities. Generally, these securities include U.S. Treasury obligations and
obligations issued or guaranteed by U.S. Government agencies,
instrumentalities or sponsored enterprises. U.S. Government securities also
include Treasury receipts and other stripped U.S. Government securities, where
the interest and principal components of stripped U.S. Government securities
are traded independently. The Fund may also invest in zero coupon U.S.
Treasury securities and in zero coupon securities issued by financial
institutions, which represent a proportionate interest in underlying U.S.
Treasury securities. A zero coupon security pays no interest to its holder
during its life and its value consists of the difference between its face
value at maturity and its cost. The market prices of zero coupon securities
generally are more volatile than the market prices of securities that pay
interest periodically. See "Taxation" in the Additional Statement.
7
<PAGE>
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. The Fund may invest in
mortgage-backed securities ("Mortgage-Backed Securities"), which represent
direct or indirect participations in, or are collateralized by and payable
from, mortgage loans secured by real property. The Fund may also invest in
asset-backed securities ("Asset-Backed Securities"). The principal and
interest payments on Asset-Backed Securities are collateralized by pools of
assets such as auto loans, credit card receivables, leases, installment
contracts and personal property. Such asset pools are securitized through the
use of special purpose trusts or corporations. Principal and interest payments
may be credit enhanced by a letter of credit, a pool insurance policy or a
senior/subordinated structure.
The Fund may also invest in stripped Mortgage-Backed Securities ("SMBS")
(including interest only and principal only securities), which are derivative
multiple class Mortgage-Backed Securities. SMBS are usually structured with
two different classes: one that receives 100% of the interest payments and the
other that receives 100% of the principal payments from a pool of mortgage
loans. If the underlying mortgage loans experience different than anticipated
prepayments of principal, the Fund may fail to fully recoup its initial
investment in these securities. 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 loans 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.
CORPORATE DEBT OBLIGATIONS. The Fund may invest in corporate debt
obligations. Corporate debt obligations are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations.
BANK OBLIGATIONS. The Fund may invest in obligations issued or guaranteed by
U.S. or 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 limited to the issuing branch by the
terms of the specific obligations or by government regulation. Banks are
subject to extensive but different governmental regulations which may limit
both the amount and types of loans which may be made and interest rates which
may be charged. In addition, the profitability of the banking industry is
largely dependent upon the availability and cost of funds for the purpose of
financing lending operations under prevailing money market conditions. General
economic conditions as well as exposure to credit losses arising from possible
financial difficulties of borrowers play an important part in the operation of
this industry.
STRUCTURED SECURITIES. The Fund may invest in structured securities. The
value of the principal of and/or interest on such securities is determined by
reference to changes in the value of specific currencies, interest rates,
commodities, indices or other financial indicators (the "Reference") or the
relative change in two or more References. The interest rate or the principal
amount payable upon maturity or redemption may be increased or decreased
depending upon changes in the applicable Reference. The terms of the
structured securities may provide that in certain circumstances no principal
is due at maturity and, therefore, result in the loss of the Fund's
investment. Structured securities may be positively or negatively indexed, so
that appreciation of the Reference may produce an increase or decrease in the
interest rate or value of the security at maturity. In addition, changes in
the interest rates or the value of the security at maturity may be a multiple
of changes in the value of the Reference. Consequently, structured securities
may entail a greater degree of market risk than other types of fixed-income
securities. Structured securities may also be more volatile, less liquid and
more difficult to accurately price than less complex securities.
RATING CRITERIA. The Fund may invest up to 20% of its total assets in debt
securities, including securities which are unrated or rated in the lowest
rating categories by Standard & Poor's Ratings Group ("Standard & Poor's") or
Moody's Investors Service, Inc. ("Moody's") (i.e., BB or lower by Standard &
Poor's or Ba or lower by Moody's), including securities rated D by Moody's or
Standard & Poor's. Fixed income securities rated
8
<PAGE>
BBB or Baa are considered medium-grade obligations with speculative
characteristics, and adverse economic conditions or changing circumstances may
weaken their issuers' capacity to pay interest and repay principal. Fixed
income securities rated BB or Ba or below (or comparable unrated securities)
are commonly referred to as "junk bonds," and are considered predominately
speculative and may be questionable as to principal and interest payments. In
some cases, such bonds may be highly speculative, have poor prospects for
reaching investment grade standing and be in default. As a result, investment
in such bonds will entail greater speculative risks than those associated with
investment in investment grade bonds. Also, to the extent that the rating
assigned to a security in the Fund's portfolio is downgraded by a rating
organization, the market price and liquidity of such security may be adversely
affected. See Appendix A to the Additional Statement for a description of the
corporate bond ratings assigned by Standard & Poor's and Moody's.
INVESTMENT TECHNIQUES
OPTIONS ON SECURITIES AND SECURITIES INDICES
The Fund may write (sell) covered call and put options and purchase call and
put options on any securities in which it may invest or on any securities
index composed of securities in which it may invest. 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 use of options to seek to increase total return
involves the risk of loss if the Investment Adviser is incorrect in its
expectation of fluctuations in securities prices or interest rates. The
successful use of options for hedging purposes also depends in part on the
ability of the Investment Adviser to manage future price fluctuations and the
degree of correlation between the options and securities markets. If the
Investment Adviser is incorrect in its expectation of changes in securities
prices or determination of the correlation between the securities indices on
which options are written and purchased and the securities in the Fund's
investment portfolio, the investment performance of the Fund will be less
favorable than it would have been in the absence of such options transactions.
The writing of options could significantly increase the Fund's portfolio
turnover rate and, therefore, associated brokerage commissions or spreads.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
To seek to increase total return or to hedge against changes in interest
rates or securities prices, the Fund may purchase and sell various kinds of
futures contracts, and purchase and write call and put options on any of such
futures contracts. The Fund may also enter into closing purchase and sale
transactions with respect to any such contracts and options. The futures
contracts may be based on various securities (such as U.S. Government
securities), securities indices and other financial instruments and indices.
The Fund will engage in futures and related options transactions for bona fide
hedging purposes as defined in regulations of the Commodity Futures Trading
Commission or to seek to increase total return to the extent permitted by such
regulations. The Fund may not purchase or sell futures contracts or purchase
or sell related options to seek to increase total return, except for closing
purchase or sale transactions, if immediately thereafter the sum of the amount
of initial margin deposits and premiums paid on the Fund's outstanding
positions in futures and related options entered into for the purpose of
seeking to increase total return would exceed 5% of the market value of the
Fund's net assets. These transactions involve brokerage costs, require margin
deposits and, in the case of contracts and options obligating the Fund to
purchase securities, require the Fund to segregate and maintain cash or liquid
assets with a value equal to the amount of the Fund's obligations.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. See
"Investment Objectives and Policies--Futures Contracts and Options
9
<PAGE>
on Futures Contracts" in the Additional Statement. Thus, while the Fund may
benefit from the use of futures and options on futures, unanticipated changes
in interest rates or securities prices may result in poorer overall
performance than if the Fund had not entered into any futures contracts or
options transactions. Because perfect correlation between a futures position
and portfolio position that is intended to be protected is impossible to
achieve, the desired protection may not be obtained and the Fund may be
exposed to risk of loss. The loss incurred by the Fund in entering into
futures contracts and in writing call options on futures is potentially
unlimited and may exceed the amount of the premium received. Futures markets
are highly volatile and the use of futures may increase the volatility of the
Fund's net asset value. The profitability of the Fund's trading in futures to
seek to increase total return depends upon the ability of the Investment
Adviser to correctly analyze the futures markets. In addition, because of the
low margin deposits normally required in futures trading, a relatively small
price movement in a futures contract may result in substantial losses to the
Fund. Further, futures contracts and options on futures may be illiquid, and
exchanges may limit fluctuations in futures contract prices during a single
day.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
The Fund may purchase when-issued securities. When-issued transactions arise
when securities are purchased by a Fund with payment and delivery taking place
in the future in order to secure what is considered to be an advantageous
price and yield to the Fund at the time of entering into the transaction. The
Fund may also purchase securities on a forward commitment basis; that is, make
contracts to purchase securities for a fixed price at a future date beyond the
customary three-day settlement period. The Fund is required to hold and
maintain in a segregated account with the Fund's custodian until three days
prior to the settlement date, cash or liquid assets in an amount sufficient to
meet the purchase price. Alternatively, the Fund may enter into offsetting
contracts for the forward sale of other securities that it owns. The purchase
of securities on a when-issued or forward commitment basis involves a risk of
loss if the value of the security to be purchased declines prior to the
settlement date. Although the Fund would generally purchase securities on a
when-issued or forward commitment basis with the intention of acquiring
securities for its portfolio, the Fund may dispose of when-issued securities
or forward commitments prior to settlement if the Investment Adviser deems it
appropriate to do so.
ILLIQUID AND RESTRICTED SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
investments, which include securities (both foreign and domestic) that are not
readily marketable, swap transactions, certain SMBS, repurchase agreements
maturing in more than seven days, time deposits with a notice or demand period
of more than seven days, and certain over-the-counter options, and certain
restricted securities, unless it is determined, based upon the continuing
review of the trading markets for a specific restricted security, that such
restricted security is eligible for resale under Rule 144A under the
Securities Act of 1933 and, therefore, is liquid. The Trustees have adopted
guidelines and delegated to the Investment Adviser the daily function of
determining and monitoring the liquidity of portfolio securities. The
Trustees, however, retain oversight focusing on factors such as valuation,
liquidity and availability of information and are ultimately responsible for
each determination. Investing in restricted securities eligible for resale
pursuant to Rule 144A may decrease the liquidity of the Fund's portfolio 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 and illiquid securities normally reflect a discount,
which may be significant, from the market price of comparable securities for
which a liquid market exists.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with dealers in U.S.
Government securities and member banks of the Federal Reserve System which
furnish collateral at least equal in value or market price to the amount
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<PAGE>
of their repurchase obligation. If the other party or "seller" defaults, the
Fund might suffer a loss to the extent that the proceeds from the sale of the
underlying securities and other collateral held by the Fund in connection with
the related repurchase agreement are less than the repurchase price. In
addition, in the event of bankruptcy of the seller or failure of the seller to
repurchase the securities as agreed, the Fund could suffer losses, including
loss of interest on or principal of the security and costs associated with
delay and enforcement of the repurchase agreement. The Trustees have reviewed
and approved certain counterparties whom they believe to be creditworthy and
have authorized the Fund to enter into repurchase agreements with such
counterparties. In addition, the Fund, together with other registered
investment companies having management agreements with the Investment Adviser
or its affiliates, may transfer uninvested cash balances into a single joint
account, the daily aggregate balance of which will be invested in one or more
repurchase agreements.
LENDING OF PORTFOLIO SECURITIES
The Fund may also seek to increase its income by lending portfolio
securities. Under present regulatory policies, such loans may be made to
institutions, such as certain broker-dealers, and are required to be secured
continuously by collateral in cash, cash equivalents, 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. If the Investment Adviser determines to make securities loans,
the value of the securities loaned may not exceed 33 1/3% of the value of the
total assets of the Fund. The Fund may experience a loss or delay in the
recovery of its securities if the institution with which it has engaged in a
portfolio loan transaction breaches its agreement with the Fund.
SHORT SALES AGAINST-THE-BOX
The Fund may make short sales of securities or maintain a short position,
provided that 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 an equal
amount of the securities of the same issuer as the securities sold short (a
short sale against-the-box). Not more than 25% of the Fund's net assets
(determined at the time of the short sale) may be subject to such short sales.
Short sales will be made primarily to defer realization of gain or loss for
federal tax purposes; a gain or loss in the Fund's long position will be
offset by a gain or loss in its short position.
TEMPORARY INVESTMENTS
The Fund may, for temporary defensive purposes, invest 100% of its total
assets in U.S. Government securities, repurchase agreements collateralized by
U.S. Government securities, commercial paper rated at least A-2 by Standard &
Poor's or P-2 by Moody's, certificates of deposit, bankers' acceptances,
repurchase agreements, non-convertible preferred stocks and non-convertible
corporate bonds with a remaining maturity of less than one year. When the
Fund's assets are invested in such instruments, the Fund may not be achieving
its investment objectives.
MISCELLANEOUS TECHNIQUES
In addition to the techniques and investments described above, the Fund may,
with respect to no more than 5% of its net assets, engage in the following
techniques and investments (i) warrants and stock purchase rights,
(ii) foreign securities (including options and futures transactions), (iii)
foreign currency transactions, (iv) mortgage swaps, index swaps and interest
rate swaps, caps, floors and collars, (v) yield curve options and inverse
floating rate securities, (vi) other investment companies, (vii) mortgage
dollar rolls and (viii) unseasoned companies. For more information see the
Additional Statement.
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<PAGE>
RISK FACTORS
RISK FACTORS ASSOCIATED WITH THE REAL ESTATE INDUSTRY. Although the Fund
does not invest directly in real estate, it does invest primarily in
securities of issuers that are primarily engaged in or related to the real
estate industry, and does have a policy of concentrating its investments in
the real estate industry. Therefore, an investment in the Fund is subject to
certain risks associated with the direct ownership of real estate and with the
real estate industry in general. These risks include, among others: possible
declines in the value of real estate; risks related to general and local
economic conditions; possible lack of availability of mortgage funds;
overbuilding; extended vacancies of properties; increases in competition,
property taxes and operating expenses; changes in zoning laws; costs resulting
from the clean-up of, and liability to third parties for damages resulting
from, environmental problems; casualty or condemnation losses; uninsured
damages from floods, earthquakes or other natural disasters; limitations on
and variations in rents; and changes in interest rates. To the extent that
assets underlying the Fund's investments are concentrated geographically, by
property type or in certain other respects, the Fund may be subject to certain
of the foregoing risks to a greater extent.
In addition, if the Fund receives rental income or income from the
disposition of real property acquired as a result of a default on securities
the Fund owns, the receipt of such income or the ownership of such property
may adversely affect the Fund's ability to retain its tax status as a
regulated investment company. Investments by the Fund in securities of
companies providing mortgage servicing will be subject to the risks associated
with refinancings and their impact on servicing rights.
RISKS OF INVESTING IN REITS. Investing in REITs involves certain unique
risks in addition to those risks associated with investing in the real estate
industry in general. Equity REITs may be affected by changes in the value of
the underlying property owned by the REITs. Mortgage REITs may be affected by
the quality of any credit extended. REITs are dependent upon management
skills, are not diversified, are subject to heavy cash flow dependency,
default by borrowers and self-liquidation. REITs are also subject to the
possibilities of failing to qualify for tax free pass-through of income under
the Code and failing to maintain their exemptions from registration under the
Investment Company Act of 1940, as amended (the "1940 Act"). REITs whose
underlying properties are concentrated in a particular industry or geographic
region are also subject to risks affecting such industries and regions.
REITs (especially mortgage REITs) are also subject to interest rate risks.
When interest rates decline, the value of a REIT's investment in fixed rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a REIT's investment in fixed rate obligations can be expected to
decline. In contrast, as interest rates on adjustable rate mortgage loans are
reset periodically, yields on a REIT's investments in such loans will
gradually align themselves to reflect changes in market interest rates,
causing the value of such investments to fluctuate less dramatically in
response to interest rate fluctuations than would investments in fixed rate
obligations.
Investing in REITs involves risks similar to those associated with investing
in small capitalization companies. REITs may have limited financial resources,
may trade less frequently and in a limited volume and may be subject to more
abrupt or erratic price movements than larger company securities.
Historically, small capitalization stocks, such as REITs have been more
volatile in price than the larger capitalization stocks included in the
Standard & Poor's Index of 500 Common Stocks.
RISK OF INVESTING IN FIXED INCOME SECURITIES. When interest rates decline,
the market value of fixed income securities tends to increase. Conversely,
when interest rates increase, the market value of fixed income
12
<PAGE>
securities tends to decline. Volatility of a security's market value will
differ depending upon the security's duration, the issuer and the type of
instrument. Investments in fixed income securities are subject to the risk
that the issuer could default on its obligations and the Fund could sustain
losses on such investments. A default could impact both interest and principal
payments.
RISKS OF DERIVATIVE TRANSACTIONS. The Fund's transactions, if any, in
options, futures, options on futures, swap transactions and structured
securities involve certain risks, including a possible lack of correlation
between changes in the value of hedging instruments and the portfolio assets
being hedged, the potential illiquidity of the markets for derivative
instruments, the risks arising from the margin requirements and related
leverage factors associated with such transactions. The use of these
management techniques to seek to increase total return may be regarded as a
speculative practice and involves the risk of loss if the Investment Adviser
is incorrect in its expectation of fluctuations in securities prices or
interest rates. The Fund's use of certain derivative transactions may be
limited by the requirements of the Code, for qualification as a regulated
investment company.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions that are described in
detail under "Investment Restrictions" in the Additional Statement.
Fundamental investment restrictions of the Fund can not be changed without
approval of a majority of the outstanding shares of the Fund. The Fund's
investment objectives and all policies not specifically designated as
fundamental are non-fundamental and may be changed without shareholder
approval. If there is a change in the Fund's investment objectives,
shareholders should consider whether the Fund remains an appropriate
investment in light of their then current financial positions and needs.
PORTFOLIO TURNOVER
A high rate of portfolio turnover (100% or more) involves correspondingly
greater expenses which must be borne by the Fund and its shareholders and may
under certain circumstances make it more difficult for the Fund to qualify as
a regulated investment company under the Code. It is anticipated that the
annual portfolio turnover rate of the Fund will generally not exceed 100%. The
portfolio turnover rate is calculated by dividing the lesser of the dollar
amount of sales or purchases of portfolio securities by the average monthly
value of the Fund's portfolio securities, excluding securities having a
maturity at the date of purchase of one year or less. Notwithstanding the
foregoing, the Investment Adviser may, from time to time, make short-term
investments when it believes such investments are in the best interests of the
Fund.
MANAGEMENT
TRUSTEES AND OFFICERS
The Trustees are responsible for deciding matters of general policy and
reviewing the actions of the Investment Adviser, distributor and transfer
agent. The officers of the Trust conduct and supervise the Fund's daily
business operations. The Additional Statement contains information as to the
identity of, and other information about, the Trustees and officers of the
Trust.
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<PAGE>
INVESTMENT ADVISER
INVESTMENT ADVISER. Goldman Sachs Asset Management, One New York Plaza, New
York, New York 10004, a separate operating division of Goldman Sachs, serves
as the investment adviser to the Fund. Goldman Sachs registered as an
investment adviser in 1981. As of June 30, 1997, GSAM, together with its
affiliates, acted as investment adviser, administrator or distributor for
assets in excess of $ billion.
Under a Management Agreement with the Fund, the Investment Adviser, subject
to the general supervision of the Trustees, provides day-to-day advice as to
the Fund's portfolio transactions. Goldman Sachs has agreed to permit the
Trust to use the name "Goldman Sachs" or a derivative thereof as part of the
Fund's name for as long as the Fund's Management Agreement is in effect.
In performing its investment advisory services, the Investment Adviser,
while remaining ultimately responsible for the management of the Fund, may
rely upon its asset management affiliates for portfolio decisions and
management with respect to certain portfolio securities and is able to draw
upon the research and expertise of its other affiliate offices. In addition,
the Investment Adviser will have access to the research of, and proprietary
technical models developed by, Goldman Sachs and may apply quantitative and
qualitative analysis in determining the appropriate allocations among the
categories of issuers and types of securities.
Under the Management Agreement, the Investment Adviser also: (i) supervises
all non-advisory operations of the Fund that it advises; (ii) provides
personnel to perform such executive, administrative and clerical services as
are reasonably necessary to provide effective administration of the Fund;
(iii) arranges for at the Fund's expense (a) the preparation of all required
tax returns, (b) the preparation and submission of reports to existing
shareholders, (c) the periodic updating of prospectuses and statements of
additional information and (d) the preparation of reports to be filed with the
SEC and other regulatory authorities; (iv) maintains the Fund's records; and
(v) provides office space and all necessary office equipment and services.
FUND MANAGERS
<TABLE>
<CAPTION>
YEARS
PRIMARILY
NAME AND TITLE RESPONSIBLE FIVE YEAR EMPLOYMENT HISTORY
-------------- ----------- ----------------------------
<C> <C> <S>
</TABLE>
[TO COME]
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<PAGE>
It is the responsibility of the Investment Adviser to make investment
decisions for the Fund and to place the purchase and sale orders for the
Fund's portfolio transactions. Such orders may be directed to any broker
including, to the extent and in the manner permitted by applicable law,
Goldman Sachs or its affiliates. In effecting purchases and sales of portfolio
securities for the Fund, the Investment Adviser will seek the best price and
execution of the Fund's orders. In doing so, where two or more brokers or
dealers offer comparable prices and execution for a particular trade,
consideration may be given to whether the broker or dealer provides investment
research or brokerage services or sells shares of any Goldman Sachs Fund. See
the Additional Statement for a further description of the Investment Adviser's
brokerage allocation practices.
As compensation for its services rendered and assumption of certain expenses
pursuant to the Management Agreement, GSAM is entitled to a fee, computed
daily and payable monthly at a rate equal to % of the Fund's average daily
net assets.
The Investment Adviser has voluntarily agreed to reduce or limit certain
"Other Expenses" of the Fund (excluding management fees, service fees, taxes,
interest and brokerage fees and litigation, indemnification and other
extraordinary expenses [and transfer agency fees] to the extent such expenses
exceed % per annum of the Fund's average daily net assets. Such reductions or
limits, if any, are calculated monthly on a cumulative basis and may be
discontinued or modified by the Investment Adviser in its discretion at any
time.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
GOLDMAN SACHS. The involvement of the Investment Adviser, 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 Fund or limit the Fund's investment activities. Goldman Sachs
and its affiliates engage in proprietary trading and advise accounts and funds
which have investment objectives similar to those of the Fund and/or which
engage in and compete for transactions in the same type of securities,
currencies and instruments as the Fund. Goldman Sachs and its affiliates will
not 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 Fund
and in general it is not anticipated that the Investment Adviser will have
access to proprietary information for the purpose of managing the Fund. The
results of the Fund's investment activities, therefore, may differ from those
of Goldman Sachs and its affiliates and it is possible that the Fund could
sustain losses during periods in which Goldman Sachs and its affiliates and
other accounts achieve significant profits on their trading for proprietary or
other accounts. From time to time, the Fund's activities may be limited
because of regulatory restrictions applicable to Goldman Sachs and its
affiliates, and/or their internal policies designed to comply with such
restrictions. See "Management--Activities of Goldman Sachs and its Affiliates
and Other Accounts Managed by Goldman Sachs" in the Additional Statement for
further information.
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York, serves as the exclusive
distributor (the "Distributor") of the Fund's shares. Goldman Sachs, 4900
Sears Tower, Chicago, Illinois, also serves as each Fund's transfer agent (the
"Transfer Agent") and as such performs various shareholder servicing
functions. As compensation for the services rendered to the Fund by Goldman
Sachs (as Transfer Agent) and the assumption by Goldman Sachs of the expenses
related thereto, Goldman Sachs is entitled to receive a fee from the Fund,
with respect to Class A shares, Class B and Class C shares of [$12,000] per
year plus [$7.50] per account, together with out-of-pocket and transaction-
related expenses (including those out-of-pocket expenses payable to servicing
and/or sub-transfer agents). Shareholders with inquiries regarding the Fund
should contact Goldman Sachs (as Transfer Agent) at the address or the
telephone number set forth on the back cover page of this Prospectus.
15
<PAGE>
NET ASSET VALUE
The net asset value per share of the class of the Fund is calculated by the
Fund's custodian as of the close of regular trading on the New York Stock
Exchange (normally 3:00 p.m. Chicago time, 4:00 p.m. New York time), on each
Business Day (as such term is defined under "Additional Information"). Net
asset value per share of each class is calculated by determining the net
assets attributable to each class and dividing by the number of outstanding
shares of that class. Portfolio securities are valued based on market
quotations or, if accurate quotations are not readily available, at fair value
as determined in good faith under procedures established by the Trustees.
PERFORMANCE INFORMATION
From time to time the Fund may publish average annual total return, yield
and distribution rates in advertisements and communications to shareholders or
prospective investors. Average annual total return is determined by computing
the average annual percentage change in value of $1,000 invested at the
maximum public offering price for specified periods ending with the most
recent calendar quarter, assuming reinvestment of all dividends and
distributions at net asset value. The total return calculation assumes a
complete redemption of the investment at the end of the relevant period. The
Fund may also from time to time advertise total return on a cumulative,
average, year-by-year or other basis for various specified periods by means of
quotations, charts, graphs or schedules. In addition, the Fund may furnish
total return calculations based on investments at various sales charge levels
or at net asset value. Any performance data which is based on the Fund's net
asset value per share would be reduced if any applicable sales charge were
taken into account. In addition to the above, the Fund may from time to time
advertise its performance relative to certain averages, performance rankings,
indices, other information prepared by recognized mutual fund statistical
services and investments for which reliable performance data is available.
The Fund computes its yield by dividing net investment income earned during
a recent thirty-day period by the product of the average daily number of
shares outstanding and entitled to receive dividends during the period and the
maximum offering price per share on the last day of the relevant period. The
results are compounded on a bond equivalent (semi-annual) basis and then
annualized. 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. The Fund's
quotations of distribution rate are calculated by annualizing the most recent
distribution of net investment income for a monthly, quarterly or other
relevant period and dividing this amount by the net asset value per share on
the last day of the period for which the distribution rates are being
calculated.
The Fund's yield, total return and distribution rate will be calculated
separately for each class of shares in existence. Because each class of shares
may be subject to different expenses, yield, the total return and distribution
rate calculations with respect to each class of shares for the same period
will differ. See "Shares of the Trust."
The investment results of the Fund will fluctuate over time and any
presentation of investment results for any prior period should not be
considered a representation of what an investment may earn or what the Fund's
performance may be in any future period. In addition to information provided
in shareholder reports, the Fund may, in its discretion, from time to time
make a list of its holdings available to investors upon request.
16
<PAGE>
SHARES OF THE TRUST
The Fund is a series of Goldman Sachs Trust, which was formed under the laws
of the State of Delaware on January 28, 1997. The Trust was formerly a
Maryland corporation, and reorganized into the Trust as of April 30, 1997. The
Trustees have authority under the Trust's Declaration of Trust to create and
classify shares of beneficial interests in separate series, without further
action by shareholders. Additional series may be added in the future. The
Trustees also have authority to classify and reclassify any series or
portfolio of shares into one or more classes.
When issued, shares are fully paid and non-assessable. In the event of
liquidation, shareholders are entitled to share pro rata in the net assets of
the Fund available for distribution to such shareholders. All shares are
freely transferable and have no preemptive, subscription or conversion rights.
Shareholders are entitled to one vote per share, provided that, at the option
of the Trustees, shareholders will be entitled to a number of votes based upon
the net asset values represented by their shares.
The Trust does not intend to hold annual meetings of shareholders. However,
pursuant to the Trust's By-Laws, the recordholders of at least 10% of the
shares outstanding and entitled to vote at a special meeting may require the
Trust to hold such special meeting of shareholders for any purpose and
recordholders may, under certain circumstances, as permitted by the Act,
communicate with other shareholders in connection with requiring a special
meeting of shareholders. The Trustees will call a special meeting of
shareholders for the purpose of electing Trustees if, at any time, less than a
majority of Trustees holding office at the time were elected by shareholders.
In the interest of economy and convenience, the Trust does not issue
certificates representing the Fund's shares. Instead, the Transfer Agent
maintains a record of each shareholder's ownership. Each shareholder receives
confirmation of purchase and redemption orders from the Transfer Agent. Fund
shares and any dividends and distributions paid by the Fund are reflected in
account statements from the Transfer Agent.
TAXATION
FEDERAL TAXES
The Fund is treated as a separate entity for tax purposes. The Fund intends
to elect to be treated as a regulated investment company and intends to
qualify for such treatment for each taxable year under Subchapter M of the
Code. To qualify as such, the Fund must satisfy certain requirements relating
to the sources of its income, diversification of its assets and distribution
of its income to shareholders. As a regulated investment company, the Fund
will not be subject to federal income or excise tax on any net investment
income and net realized capital gains that are distributed to its shareholders
in accordance with certain timing requirements of the Code.
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<PAGE>
Dividends paid by the Fund from net investment income, certain net realized
foreign exchange gains, the excess of net short-term capital gain over net
long-term capital loss and original issue discount or market discount income
will be taxable to its shareholders as ordinary income. Dividends paid by the
Fund from the excess of net long-term capital gain over net short-term capital
loss will be taxable as long-term capital gains regardless of how long the
shareholders have held their shares. These tax consequences will apply
regardless of whether distributions are received in cash or reinvested in
shares. The Fund's dividends that are paid to its corporate shareholders and
are attributable to qualifying dividends the Fund receives from U.S. domestic
corporations may be eligible, in the hands of such corporate shareholders, for
the corporate dividends-received deduction, subject to certain holding period
requirements and debt financing limitations under the Code. Since dividends
the Fund receives from REITs are not qualifying dividends for this purpose, it
is not likely that a substantial portion of the Fund's dividends will
generally qualify for the corporate dividends-received deduction. Certain
distributions paid by the Fund in January of a given year may be taxable to
shareholders as if received the prior December 31. Shareholders will be
informed annually about the amount and character of distributions received
from the Fund for federal income tax purposes.
Investors should consider the tax implications of buying shares immediately
prior to a distribution. Investors who purchase shares shortly before the
record date for a distribution will pay a per share price that includes the
value of the anticipated distribution and will be taxed on the distribution
even though the distribution represents a return of a portion of the purchase
price.
Redemptions and exchanges of shares are taxable events.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on distributions, redemptions and
exchanges if they fail to furnish their correct taxpayer identification number
and certain certifications required by the Internal Revenue Service or if they
are otherwise subject to backup withholding. Individuals, corporations and
other shareholders that are not U.S. persons under the Code are subject to
different tax rules and may be subject to nonresident alien withholding at the
rate of 30% (or a lower rate provided by an applicable tax treaty) on amounts
treated as ordinary dividends from the Fund.
The Fund may be subject to foreign withholding or other foreign taxes on
income or gain from certain foreign securities. The Fund will not be eligible
to elect to pass such foreign taxes through to shareholders, who therefore
will generally not take such taxes into account on their own tax returns. The
Fund will generally deduct such taxes in determining the amounts available for
distribution to shareholders.
OTHER TAXES
In addition to federal taxes, a shareholder may be subject to state, local
or foreign taxes on payments received from the Fund. A state income (and
possibly local income and/or intangible property) tax exemption is generally
available to the extent (if any) the Fund's distributions are derived from
interest on (or, in the case of intangible property taxes, the value of its
assets is attributable to) certain U.S. Government obligations, provided in
some states that certain thresholds for holdings of such obligations and/or
reporting requirements are satisfied. For a further discussion of certain tax
consequences of investing in shares of the Fund, see "Taxation" in the
Additional Statement. Shareholders are urged to consult their own tax advisers
regarding specific questions as to federal, state and local taxes as well as
to any foreign taxes.
18
<PAGE>
ADDITIONAL INFORMATION
The term "a vote of the majority of the outstanding shares" of the Fund
means the vote of the lesser of (i) 67% or more of the shares 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 (ii) more than 50% of the outstanding
shares of the Fund.
As used in this Prospectus, the term "Business Day" means any day the New
York Stock Exchange is open for trading, which is Monday through Friday except
for holidays. The New York Stock Exchange is closed on the following holidays:
New Year's Day, Presidents' Day (observed), Good Friday, Memorial Day
(observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
19
<PAGE>
REPORTS TO SHAREHOLDERS
Recordholders of Institutional Shares of the Fund will receive an annual
report containing audited financial statements and a semi-annual report. Each
recordholder of Institutional Shares will also be provided with a printed
confirmation for each transaction in its account and a quarterly account
statement. A year-to-date statement for any account will be provided upon
request made to Goldman Sachs. The Fund does not generally provide
subaccounting services.
DIVIDENDS
Each dividend from net investment income and capital gain distributions, if
any, declared by the Fund on its outstanding Institutional Shares will, at the
election of each shareholder, be paid (i) in cash or (ii) in additional
Institutional Shares of the Fund. This election should initially be made on a
shareholder's Account Information Form and may be changed upon written notice
to Goldman Sachs at any time prior to the record date for a particular dividend
or distribution. If no election is made, all dividends from net investment
income and capital gain distributions will be reinvested in Institutional
Shares of the Fund.
The election to reinvest dividends and distributions paid by the Fund in
additional Institutional Shares of the Fund 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 Institutional Shares of the Fund.
The Fund intends that all or substantially all its net investment income and
net realized long-term and short-term capital gains, after reduction by
available capital losses, including any capital losses carried forward from
prior years, will be declared as dividends for each taxable year. The Fund will
pay dividends from net investment income quarterly. The Fund will pay dividends
from net realized long-term and short-term capital gains, reduced by available
capital losses, at least annually. From time to time, a portion of the Fund's
dividends may constitute a return of capital.
At the time of an investor's purchase of shares of the Fund a portion of the
net asset value per share may be represented by undistributed income of the
Fund or realized or unrealized appreciation of the Fund's portfolio securities.
Therefore, subsequent distributions on such shares from such income or realized
appreciation may be taxable to the investor even if the net asset value of the
investor's shares is, as a result of the distributions, reduced below the cost
of such shares and the distributions (or portions thereof) represent a return
of a portion of the purchase price.
PURCHASE OF INSTITUTIONAL SHARES
Institutional Shares may be purchased on any Business Day through Goldman
Sachs at the net asset value per share next determined after receipt of an
order. No sales load will be charged. If, by the close of regular trading on
the New York Stock Exchange (normally 3:00 p.m. Chicago time, 4:00 p.m. New
York time), an order is received by Goldman Sachs, the price per share will be
the net asset value per share computed on the
20
<PAGE>
day the purchase order is received. See "Net Asset Value." Purchases of
Institutional Shares of the Fund must be settled within three (3) Business Days
of the receipt of a complete purchase order. Payment of the proceeds of
redemption of shares purchased by check may be delayed for a period of time as
described under "Redemption of Institutional Shares."
Prior to making an initial investment in the Fund, an investor must open an
account with the Fund by furnishing necessary information to the Fund or
Goldman Sachs. An Account Information Form, a copy of which is attached to this
Prospectus, should be used to open such an account. Subsequent purchases may be
made in the manner set forth below.
PURCHASE PROCEDURES
Purchases of Institutional Shares may be made by placing an order with
Goldman Sachs at 800-621-2550 and either wiring federal funds to State Street
Bank and Trust Company ("State Street") or initiating an ACH transfer.
Purchases may also be made by check (except that the Trust will not accept a
check drawn on a foreign bank or a third party check) or Federal Reserve draft
made payable to "Goldman Sachs Real Estate Securities Fund--Name of Class of
shares" and should be directed to "Goldman Sachs Real Estate Securities Fund--
Name of Class of shares," c/o National Financial Data Services, Inc. ("NFDS"),
P.O. Box 419711, Kansas City, MO 64141-6711.
The minimum initial investment is $1,000,000 in Institutional Shares of the
Fund alone or in combination with other assets under the management of GSAM and
its affiliates. Institutional Shares of the Fund are offered to (a) banks,
trust companies or other types of depository institutions investing for their
own account or on behalf of their clients; (b) pension and profit sharing
plans, pension funds and other company-sponsored benefit plans; (c) qualified
non-profit organizations, charitable trusts, foundations and endowments; (d)
any state, county, city or any instrumentality, department, authority or agency
thereof; (e) corporations and other for-profit business organizations with
assets of at least $100 million or publicly traded securities outstanding; (f)
"wrap" accounts for the benefit of clients of broker-dealers, financial
institutions or financial planners, provided that they have entered into an
agreement with GSAM specifying aggregate minimums and certain operating
policies and standards; (g) registered investment advisers investing for
accounts for which they receive asset-based fees; and (h) accounts over which
GSAM or its advisory affiliates have investment discretion. The minimum
investment requirement may be waived at the discretion of the Trust's officers.
No minimum amount is required for subsequent investments.
OTHER PURCHASE INFORMATION
The Fund reserves the right to redeem the Institutional Shares of any
Institutional Shareholder whose account balance is less than $50 as a result of
earlier redemptions. Such redemptions will not be implemented if the value of
an Institutional Shareholder's account falls below the minimum account balance
solely as a result of market conditions. The Trust will give sixty (60) days'
prior written notice to Institutional Shareholders whose Institutional Shares
are being redeemed to allow them to purchase sufficient additional
Institutional Shares of the Fund to avoid such redemption.
Banks, trust companies or other institutions through which investors acquire
Institutional Shares may impose charges in connection with transactions in
Institutional Shares. Such institutions should be consulted for information
regarding such charges.
21
<PAGE>
The Fund and Goldman Sachs each reserves the right to reject any specific
purchase order (including exchanges) or to restrict purchases or exchanges by a
particular purchaser (or group of related purchasers). This may occur, for
example, when a purchaser or group of purchasers' pattern of frequent
purchases, sales or exchanges of Institutional Shares of the Fund is evident,
or if purchases, sales or exchanges are, or a subsequent abrupt redemption
might be, of a size that would disrupt management of the Fund.
In the sole discretion of Goldman Sachs, the Fund may accept securities
instead of cash for the purchase of shares of the Fund. Such purchases will be
permitted only if the Investment Adviser determines that any securities
acquired in this manner are consistent with the Fund's investment objectives,
restrictions and policies and are desirable investments for the Fund.
EXCHANGE PRIVILEGE
Institutional Shares of the Fund may be exchanged for (i) Institutional
Shares of any other mutual fund sponsored by Goldman Sachs and designated as an
eligible fund for this purpose and (ii) the corresponding class of any Goldman
Sachs Money Market Fund at the net asset value next determined either by
writing to Goldman Sachs, Attention: Goldman Sachs Real Estate Securities
Fund--Name of Class of Shares, c/o GSAM Shareholder Services, 4900 Sears Tower,
Chicago, Illinois 60606 or, if previously elected in the Fund's Account
Information Form, by telephone at 800-621-2550 (7:00 a.m. to 5:30 p.m. Chicago
time). A shareholder should obtain and read the prospectus relating to any
other fund and its shares and consider its investment objective, policies and
applicable fees before making an exchange. Under the telephone exchange
privilege, Institutional Shares may be exchanged among accounts with different
names, addresses and social security or other taxpayer identification numbers
only if the exchange request is in writing and is received in accordance with
the procedures set forth under "Redemptions of Institutional Shares."
In an effort to prevent unauthorized or fraudulent exchanges by telephone,
Goldman Sachs employs reasonable procedures as set forth under "Redemption of
Institutional Shares" to confirm that such instructions are genuine. In times
of drastic economic or market changes the telephone exchange privilege may be
difficult to implement. For federal income tax purposes, an exchange is treated
as a sale of the Institutional Shares surrendered in the exchange on which an
investor may realize a gain or loss, followed by a purchase of Institutional
Shares, or the corresponding class of any Goldman Sachs Money Market Fund
received in the exchange. Shareholders should consult their own tax adviser
concerning the tax consequences of an exchange.
Each exchange which represents an initial investment in the fund must satisfy
the minimum investment requirements of the fund into which the Institutional
Shares are being exchanged, except that this requirement may be waived at the
discretion of the officers of the fund. Exchanges are available only in states
where exchanges may legally be made. The exchange privilege may be modified or
withdrawn at any time on sixty (60) days' written notice to Institutional
Shareholders and is subject to certain limitations. See "Purchase of
Institutional Shares."
22
<PAGE>
REDEMPTION OF INSTITUTIONAL SHARES
The Fund will redeem its Institutional Shares upon request of an
Institutional Shareholder on any Business Day at the net asset value next
determined after the receipt by the Transfer Agent of such request in proper
form. See "Net Asset Value." If Institutional Shares to be redeemed were
recently purchased by check, the Fund may delay transmittal of redemption
proceeds until such time as it has assured itself that good funds have been
collected for the purchase of such Institutional Shares. This may take up to
fifteen (15) days. Redemption requests may be made by writing to or calling the
Transfer Agent at the address or telephone number set forth on the back cover
of this Prospectus. An Institutional Shareholder may request redemptions by
telephone if the optional telephone redemption privilege is elected on the
Account Information Form accompanying this Prospectus. It may be difficult to
implement redemptions by telephone in times of drastic economic or market
changes.
In an effort to prevent unauthorized or fraudulent redemption or exchange
requests by telephone, Goldman Sachs employs reasonable procedures specified by
the Trust to confirm that such instructions are genuine. Among other things,
any redemption request that requires money to go to an account or address other
than that designated on the Account Information Form must be in writing and
signed by an authorized person designated on the Account Information Form. Any
such written request is also confirmed by telephone with both the requesting
party and the designated bank account to verify instructions. Exchanges among
accounts with different names, addresses and social security or other taxpayer
identification numbers must be in writing and signed by an authorized person
designated on the Account Information Form. Other procedures may be implemented
from time to time. If reasonable procedures are not implemented, the Trust may
be liable for any loss due to unauthorized or fraudulent transactions. In all
other cases, neither the Fund, the Trust nor Goldman Sachs will be responsible
for the authenticity of redemption or exchange instructions received by
telephone.
Written requests for redemptions must be signed by each Institutional
Shareholder whose signature has been guaranteed by a bank, a securities broker
or dealer, a credit union having authority to issue signature guarantees, a
savings and loan association, a building and loan association, a cooperative
bank, a federal savings bank or association, a national securities exchange, a
registered securities association or a clearing agency, provided that such
institution satisfies the standards established by the Transfer Agent.
The Fund will arrange for the proceeds of redemptions effected by any means
to be wired as federal funds to the bank account designated in the
Institutional Shareholder's Account Information Form or, if the shareholder
elects in writing, by check. Redemption proceeds paid by wire transfer will
normally be wired on the next Business Day in federal funds (for a total one-
day delay), but may be paid up to three (3) Business Days after receipt of a
properly executed redemption request. Wiring of redemption proceeds may be
delayed one additional Business Day if the Federal Reserve Bank is closed on
the day redemption proceeds would originally be wired. Redemption proceeds paid
by check will normally be mailed to the address of record within three (3)
Business Days of receipt of a properly executed redemption request. In order to
change the bank designated on the Account Information Form to receive
redemption proceeds, a written request must be received by the Transfer Agent.
This request must be signature guaranteed as set forth above. Further
documentation may be required for executors, trustees or corporations. Once
wire transfer instructions have been given by Goldman Sachs, neither the Fund,
the Trust nor Goldman Sachs assumes any further responsibility for the
performance of intermediaries
23
<PAGE>
or the Institutional Shareholder's bank in the transfer process. If a problem
with such performance arises, the Institutional Shareholder should deal
directly with such intermediaries or bank.
Additional documentation regarding a redemption by any means may be required
to effect a redemption when deemed appropriate by Goldman Sachs. The request
for such redemption will not be considered to have been received in proper form
until such additional documentation has been received.
--------------------
24
<PAGE>
APPENDIX
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON ACCOUNT
INFORMATION FORM
You are required by law to provide the Fund with your correct Taxpayer
Identification Number (TIN), regardless of whether you file tax returns.
Failure to do so may subject you to penalties. Failure to provide your correct
TIN and to sign your name in the Certification section of the Account
Information Form could result in withholding of 31% by the Fund for the
federal backup withholding tax on distributions, redemptions, exchanges and
other payments relating to your account.
Any tax withheld may be credited against taxes owed on your federal income
tax return.
If you do not have a TIN, you should apply for one immediately by contacting
your local office of the Social Security Administration or the Internal
Revenue Service (IRS). Backup withholding could also apply to payments
relating to your account prior to the Fund's receipt of your TIN.
Special rules apply for certain entities. For example, for an account
established under a Uniform Gifts or Transfers to Minors Act, the TIN of the
minor should be furnished.
If you have been notified by the IRS that you are subject to backup
withholding because you failed to report all your interest and/or dividend
income on your tax return and you have not been notified by the IRS that such
withholding should cease, you must cross out item (2) in the Certification
section of the Account Information Form.
If you are an exempt recipient, you should furnish your TIN and certify your
exemption by signing the Certification section and writing "exempt" after your
signature. Exempt recipients include: corporations, tax-exempt pension plans
and IRA's, governmental agencies, financial institutions, registered
securities and commodities dealers and others.
If you are a nonresident alien or foreign entity, you must provide a
completed Form W-8 to the Fund in order to avoid backup withholding on certain
payments. Other payments to you may be subject to nonresident alien
withholding of up to 30%.
For further information regarding backup and nonresident alien withholding,
see Sections 3406, 1441 and 1442 of the Internal Revenue Code and consult your
tax adviser.
A-1
<PAGE>
- --------------------------------------------------------------------------------
GOLDMAN SACHS ASSET
MANAGEMENT
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
DISTRIBUTOR
85 BROAD STREET
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
TRANSFER AGENT
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN
1776 HERITAGE DRIVE
NORTH QUINCY, MASSACHUSETTS 02110
TOLL FREE (IN U.S.) . . . . . . . . 800-621-2550
REPROINST
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GOLDMAN SACHS
REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
PROSPECTUS
INSTITUTIONAL SHARES
[LOGO] GOLDMAN
SACHS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED
PROSPECTUS
, 1997
GOLDMAN SACHS REAL ESTATE SECURITIES FUND
SERVICE SHARES
The Goldman Sachs Real Estate Securities Fund (the "Fund") seeks total return
comprised of long-term growth of capital and dividend income through
investments in equity securities of issuers that are primarily engaged in or
related to the real estate industry. The Fund expects that a substantial
portion of its total assets will be invested in real estate investment trusts.
Goldman Sachs Asset Management ("GSAM"), New York, New York, a separate
operating division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as
investment adviser to the Fund. GSAM is referred to in this Prospectus as the
"Investment Adviser." Goldman Sachs serves as the Fund's distributor and
transfer agent.
This Prospectus provides information about Goldman Sachs Trust (the "Trust")
and the Fund that a prospective investor should understand before investing.
This Prospectus should be retained for future reference. A Statement of
Additional Information (the "Additional Statement"), dated , 1997,
containing further information about the Trust and the Fund which may be of
interest to investors, has been filed with the Securities and Exchange
Commission ("SEC"), is incorporated herein by reference in its entirety, and
may be obtained without charge from Service Organizations (as defined herein),
or Goldman Sachs by calling the telephone number, or writing to one of the
addresses, listed on the back cover of this Prospectus. The SEC maintains a Web
site (http://www.sec.gov) that contains the Additional Statement and other
information regarding the Trust.
-----------------
SERVICE SHARE OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN THE FUND INVOLVES INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Highlights.................... 3
Fees and Expenses.................. 5
Investment Objective and Policies.. 6
Description of Securities.......... 7
Investment Techniques.............. 9
Risk Factors....................... 12
Investment Restrictions............ 13
Portfolio Turnover................. 13
Management......................... 13
Net Asset Value.................... 16
Performance Information............ 16
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Shares of the Trust........... 17
Taxation...................... 17
Additional Information........ 19
Additional Services........... 20
Reports to Shareholders....... 20
Dividends..................... 20
Purchase of Service Shares.... 21
Exchange Privilege............ 22
Redemption of Service Shares.. 23
Appendix...................... A-1
</TABLE>
2
<PAGE>
FUND HIGHLIGHTS
The following is intended to highlight certain information contained in this
Prospectus and is qualified in its entirety by the more detailed information
contained herein.
WHAT IS THE GOLDMAN SACHS TRUST?
Goldman Sachs Trust is an open-end management investment company that offers
its shares in several investment funds (mutual funds). The Fund is a separate
investment fund that pools the monies of investors by selling its shares to the
public and investing these monies in a portfolio of securities designed to
achieve the Fund's stated investment objectives.
WHAT ARE THE INVESTMENT OBJECTIVE AND POLICIES OF THE FUND?
The Fund has distinct investment objectives and policies. There can be no
assurance that the Fund's objective will be achieved. For a complete
description of the Fund's investment objective and policies, see "Investment
Objectives and Policies," "Description of Securities" and "Investment
Techniques."
<TABLE>
<S> <C>
Investment Objective................. Total return comprised of long-term
growth of capital and dividend
income.
Investment Criteria.................. Substantially all, and at least 80%,
of total assets in a diversified
portfolio of equity securities of
issuers that are primarily engaged in
or related to the real estate
industry. The Fund expects that a
substantial portion of its total
assets will be invested in a real
estate investment trusts ("REITs").
Benchmark............................ National Association of Real Estate
Investment Trusts Index ("NAREIT").
</TABLE>
WHAT ARE THE RISK FACTORS AND SPECIAL CHARACTERISTICS THAT I SHOULD
CONSIDER BEFORE INVESTING?
The Fund's share price will fluctuate with market and economic
conditions, so that an investment in the Fund may be worth more or less
when redeemed than when purchased. The Fund should not be relied upon as a
complete investment program. There can be no assurance that the Fund's
investment objectives will be achieved. See "Risk Factors."
Risk Factors Associated with the Real Estate Industry. Although the Fund does
not invest directly in real estate, it does invest primarily in common stocks
and other equity securities of REITs and other real estate industry companies
and does have a policy of concentrating its investments in the real estate
industry. Therefore, an investment in the Fund is subject to certain risks
associated with the direct ownership of real estate and with the real estate
industry in general, including possible declines in the value of real estate,
general and local economic conditions, environmental problems and changes in
interest rates. To the extent that assets underlying the Fund's investments are
concentrated geographically, by property type or in certain other respects,
these risks may be heightened. In addition, if the Fund has rental income or
income from the disposition of real property acquired as a result of a default
on securities the Fund owns, the receipt of such income may adversely affect
its ability to retain its tax status as a regulated investment company.
3
<PAGE>
Risks of Investing in REITs. Investing in REITs involves certain unique risks
in addition to those risks associated with investing in the real estate
industry in general. Equity REITs may be affected by changes in the value of,
and income produced by, the underlying property owned by the REITs. Mortgage
REITs may be affected by the quality of any credit extended and interest rate
risk. REITs are dependent upon management skills, are not diversified, are
subject to heavy cash flow dependency, default by borrowers and self-
liquidation.
Other. The Fund's use of certain investment techniques, including
derivatives, forward contracts, options and futures, will subject the Fund to
greater risk than funds that do not employ such techniques.
WHO MANAGES THE FUND?
Goldman Sachs Asset Management serves as Investment Adviser to the Fund.
As of June 30, 1997, the Investment Adviser, together with its affiliates,
acted as investment adviser, administrator or distributor for assets in
excess of $ billion.
WHO DISTRIBUTES THE FUND'S SHARES?
Goldman Sachs acts as distributor of the Fund's shares.
WHAT IS THE MINIMUM INVESTMENT?
The Fund does not have any minimum purchase or account requirements with
respect to Service Shares. A Service Organization may, however, impose a
minimum amount for initial and subsequent investments in Service Shares,
and may establish other requirements such as a minimum account balance.
HOW DO I PURCHASE SERVICE SHARES?
Customers of Service Organizations may invest in Service Shares only
through their Service Organizations. Service Shares of the Fund are
purchased by Service Organizations through Goldman Sachs at the current net
asset value without any sales load. See "Purchase of Service Shares."
ADDITIONAL SERVICES. The Trust, on behalf of the Fund, has adopted a
Service Plan with respect to the Service Shares which authorizes the Fund
to compensate Service Organizations for providing account administration
and shareholder liaison services to their customers who are the beneficial
owners of such Shares. The Trust, on behalf of the Fund, will enter into
agreements with each Service Organization which will provide for
compensation to the Service Organization in an amount up to 0.50% (on an
annualized basis) of the average daily net assets of the Service Shares of
the Fund attributable to or held in the name of the Service Organization
for its customers. See "Additional Services."
HOW DO I SELL MY SERVICE SHARES?
You may redeem Service Shares upon request on any Business Day, as
defined under "Additional Information," at the net asset value next
determined after receipt of such request in proper form. See "Redemption of
Service Shares."
HOW DO I RECEIVE DIVIDENDS AND DISTRIBUTIONS?
<TABLE>
<CAPTION>
INVESTMENT INCOME DIVIDENDS CAPITAL GAINS
DECLARED AND PAID DISTRIBUTIONS
----------------- -------------
<S> <C>
Quarterly Annually
</TABLE>
Recordholders of Service Shares may receive dividends in additional
Service Shares of the Fund or you may elect to receive cash. For further
information concerning dividends, see "Dividends."
4
<PAGE>
FEES AND EXPENSES
(SERVICE SHARES)
<TABLE>
<CAPTION>
FUND
----
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases.............................. None
Maximum Sales Charge Imposed on Reinvested Dividends................... None
Redemption Fees........................................................ None
Exchange Fees.......................................................... None
ANNUAL FUND OPERATING EXPENSES: (as a percentage of average daily net
assets)(/1/)
Management Fees (after applicable limitations)(/2/).................... 1.25%
Service Fees(/5/)...................................................... 0.50%
Other Expenses (after applicable limitations)(/3/)..................... 0.25%
----
TOTAL FUND OPERATING EXPENSES (AFTER FEE AND EXPENSE
LIMITATIONS)(/4/).................................................... 2.00%
====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS
- -------- ------ -------
<S> <C> <C>
You would pay the following expenses on a hypothetical $1,000
investment, assuming (1) a 5% annual return and (2) redemption
at the end of each time period................................ $20 $63
</TABLE>
- ---------------------
/1/ Based on estimated amounts for the current fiscal year.
/2/ The Investment Adviser has voluntarily agreed that a portion of the
management fee would not be imposed on the Fund equal to 0. %. Without such
limitations, management fees would be % of the Fund's average daily net
assets. [CONFIRM]
/3/ The Investment Adviser voluntarily has agreed to reduce or limit certain
other expenses (excluding management fees, service fees, taxes, interest
and brokerage fees and litigation, indemnification and other extraordinary
expenses (and transfer agency fees) to the extent such expenses exceed % of
the Fund's average daily net assets:
/4/ Without the limitations described above, "Other Expenses" and "Total
Operating Expenses" of the Fund for the current fiscal year are estimated
to be % and %, respectively as follows:
/5/ Service Organizations may charge other fees to their customers who are
beneficial owners of Service Shares in connection with their customer
accounts. Due to the service fees, a long-term shareholder may pay more
than the economic equivalent of the maximum front-end sales charges
permitted by the NASD's rules regarding investment companies. See
"Additional Services."
The Investment Adviser has no current intention of modifying or
discontinuing any of the limitations set forth above but may do so in the
future at its discretion. The information set forth in the foregoing table and
hypothetical example relates only to Service Shares of the Fund. The Fund also
offers Institutional Shares, Class A, Class B and Class C Shares, which are
subject to different fees and expenses (which affect performance), have
different minimum investment requirements and are entitled to different
services. Information regarding Institutional, Class A, Class B and Class C
Shares may be obtained from an investor's sales representative or from Goldman
Sachs by calling the number on the back of this Prospectus.
The purpose of the foregoing table is to assist investors in understanding
the various fees and expenses of the Fund that an investor will bear directly
or indirectly. The information on the fees and expenses included in the table
and hypothetical example above is based on the Fund's estimated fees and
expenses and should not be considered as representative of future expenses.
Actual fees and expenses may be greater or less than those indicated.
Moreover, while the example assumes a 5% annual return, the Fund's actual
performance will vary and may result in an actual return greater or less than
5%. See "Management--Investment Adviser" and "Additional Services."
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INVESTMENT OBJECTIVES AND POLICIES
The investment objective and principal investment policies of the Fund are
described below. Other investment practices and management techniques, which
involve certain risks are described under "Description of Securities," "Risk
Factors" and "Investment Techniques." There can be no assurance that the
Fund's investment objectives will be achieved.
The Investment Adviser may purchase for the Fund interests in real estate
investment trusts, common stocks, preferred stocks, convertible debt
obligations, convertible preferred stocks, equity interests in trusts,
partnerships, joint ventures and similar enterprises, warrants and stock
purchase rights ("equity securities"). In choosing the Fund's securities, the
Investment Adviser may utilize first-hand fundamental research, including
visiting company facilities to assess operations and to meet decision-makers.
The Investment Adviser may also use macro analysis of numerous economic and
valuation variables to anticipate changes in company earnings and the overall
investment climate. The Investment Adviser is able to draw on the research and
market expertise of the Goldman Sachs Global Investment Research Department
and other affiliates of the Investment Adviser, as well as information
provided by other securities dealers. Equity securities in the Fund's
portfolio will generally be sold when the Investment Adviser believes that the
market price fully reflects or exceeds the securities' fundamental valuation
or when other more attractive investments are identified.
The Fund's investment strategy is based on the premise that property market
fundamentals are the primary determinant of growth underlying the success of
companies in the real estate industry. The Fund's research and investment
process is designed to identify those companies with strong property
fundamentals and strong management teams. This process is comprised of real
estate market research and securities analysis. The Investment Adviser's
analysis will focus on determining the degree to which a company can achieve
sustainable growth in cash flow and dividend paying capability. The Investment
Adviser will take into account fundamental trends in underlying property
markets as determined by proprietary models, research of local real estate
markets, earnings, cash flow growth and stability, the relationship between
asset values and market prices of the securities and dividend payment history.
The Investment Adviser will attempt to purchase securities of companies whose
underlying portfolios are diversified geographically and by property type.
REAL ESTATE SECURITIES FUND
Objectives. The Fund's investment objective is to provide investors with
total return comprised of long-term growth of capital and dividend income.
Primary Investment Focus. The Fund invests, under normal circumstances,
substantially all, and at least 80% of its total assets in issuers that are
primarily engaged in or related to the real estate industry. The Fund seeks to
achieve its investment objective by investing in a diversified portfolio of
equity securities of REITs and other real estate industry companies. A "real
estate industry company" is a company that derives at least 50% of its gross
revenues or net profits from the ownership, development, construction,
financing, management or sale of commercial, industrial or residential real
estate or interests therein.
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Shares of REITs. The Fund may invest without limitation in shares of REITs.
REITs are pooled investment vehicles which invest primarily in income
producing real estate or real estate related loans or interests. REITs are
generally classified as equity REITs, mortgage REITs or a combination of
equity and mortgage REITs. Equity REITs invest the majority of their assets
directly in real property and derive income primarily from the collection of
rents. Equity REITs can also realize capital gains by selling properties that
have appreciated in value. Mortgage REITs invest the majority of their assets
in real estate mortgages and derive income from the collection of interest
payments. Similar to investment companies such as the Fund, REITs are not
taxed on income distributed to shareholders provided they comply with several
requirements of the Internal Revenue Code of 1986, as amended (the "Code").
The Fund will indirectly bear its proportionate share of expenses incurred by
REITs in which the Fund invests in addition to the expenses incurred directly
by the Fund.
Other. The Fund may invest up to 20% of its total assets in fixed income
securities that, in the opinion of the Investment Adviser, offer the potential
to further the Fund's investment objectives. In addition, although the Fund
will invest primarily in publicly traded U.S. securities, it may invest up to
5% of its net assets in foreign securities.
DESCRIPTION OF SECURITIES
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities, including debt obligations
and preferred stock of the issuer convertible at a stated exchange rate into
common stock of the issuer. Convertible securities generally offer lower
interest or dividend yields than non-convertible securities of similar
quality. As with all fixed income securities, the market value of convertible
securities tends to decline as interest rates increase and, conversely, to
increase as interest rates decline. However, when the market price of the
common stock underlying a convertible security exceeds the conversion price,
the convertible security tends to reflect the market price 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 decline in price to the same extent as the underlying common stock.
Convertible securities rank senior to common stocks in an issuer's capital
structure and consequently entail less risk than the issuer's common stock. In
evaluating a convertible security, the Investment Adviser will give primary
emphasis to the attractiveness of the underlying common stock. The convertible
debt securities in which the Fund may invest are not subject to any minimum
rating criteria. Convertible debt securities are equity investments for
purposes of the Fund's investment policies.
FIXED INCOME SECURITIES
U.S. GOVERNMENT SECURITIES. The Fund may invest in U.S. Government
securities. Generally, these securities include U.S. Treasury obligations and
obligations issued or guaranteed by U.S. Government agencies,
instrumentalities or sponsored enterprises. U.S. Government securities also
include Treasury receipts and other stripped U.S. Government securities, where
the interest and principal components of stripped U.S. Government securities
are traded independently. The Fund may also invest in zero coupon U.S.
Treasury securities and in zero coupon securities issued by financial
institutions, which represent a proportionate interest in underlying U.S.
Treasury securities. A zero coupon security pays no interest to its holder
during its life and its value consists of the difference between its face
value at maturity and its cost. The market prices of zero coupon securities
generally are more volatile than the market prices of securities that pay
interest periodically. See "Taxation" in the Additional Statement.
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MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. The Fund may invest in
mortgage-backed securities ("Mortgage-Backed Securities"), which represent
direct or indirect participations in, or are collateralized by and payable
from, mortgage loans secured by real property. The Fund may also invest in
asset-backed securities ("Asset-Backed Securities"). The principal and
interest payments on Asset-Backed Securities are collateralized by pools of
assets such as auto loans, credit card receivables, leases, installment
contracts and personal property. Such asset pools are securitized through the
use of special purpose trusts or corporations. Principal and interest payments
may be credit enhanced by a letter of credit, a pool insurance policy or a
senior/subordinated structure.
The Fund may also invest in stripped Mortgage-Backed Securities ("SMBS")
(including interest only and principal only securities), which are derivative
multiple class Mortgage-Backed Securities. SMBS are usually structured with
two different classes: one that receives 100% of the interest payments and the
other that receives 100% of the principal payments from a pool of mortgage
loans. If the underlying mortgage loans experience different than anticipated
prepayments of principal, the Fund may fail to fully recoup its initial
investment in these securities. 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 loans 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.
CORPORATE DEBT OBLIGATIONS. The Fund may invest in corporate debt
obligations. Corporate debt obligations are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations.
BANK OBLIGATIONS. The Fund may invest in obligations issued or guaranteed by
U.S. or 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 limited to the issuing branch by the
terms of the specific obligations or by government regulation. Banks are
subject to extensive but different governmental regulations which may limit
both the amount and types of loans which may be made and interest rates which
may be charged. In addition, the profitability of the banking industry is
largely dependent upon the availability and cost of funds for the purpose of
financing lending operations under prevailing money market conditions. General
economic conditions as well as exposure to credit losses arising from possible
financial difficulties of borrowers play an important part in the operation of
this industry.
STRUCTURED SECURITIES. The Fund may invest in structured securities. The
value of the principal of and/or interest on such securities is determined by
reference to changes in the value of specific currencies, interest rates,
commodities, indices or other financial indicators (the "Reference") or the
relative change in two or more References. The interest rate or the principal
amount payable upon maturity or redemption may be increased or decreased
depending upon changes in the applicable Reference. The terms of the
structured securities may provide that in certain circumstances no principal
is due at maturity and, therefore, result in the loss of the Fund's
investment. Structured securities may be positively or negatively indexed, so
that appreciation of the Reference may produce an increase or decrease in the
interest rate or value of the security at maturity. In addition, changes in
the interest rates or the value of the security at maturity may be a multiple
of changes in the value of the Reference. Consequently, structured securities
may entail a greater degree of market risk than other types of fixed-income
securities. Structured securities may also be more volatile, less liquid and
more difficult to accurately price than less complex securities.
RATING CRITERIA. The Fund may invest up to 20% of its total assets in debt
securities, including securities which are unrated or rated in the lowest
rating categories by Standard & Poor's Ratings Group ("Standard & Poor's") or
Moody's Investors Service, Inc. ("Moody's") (i.e., BB or lower by Standard &
Poor's or Ba or lower by Moody's), including securities rated D by Moody's or
Standard & Poor's. Fixed income securities rated
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<PAGE>
BBB or Baa are considered medium-grade obligations with speculative
characteristics, and adverse economic conditions or changing circumstances may
weaken their issuers' capacity to pay interest and repay principal. Fixed
income securities rated BB or Ba or below (or comparable unrated securities)
are commonly referred to as "junk bonds," and are considered predominately
speculative and may be questionable as to principal and interest payments. In
some cases, such bonds may be highly speculative, have poor prospects for
reaching investment grade standing and be in default. As a result, investment
in such bonds will entail greater speculative risks than those associated with
investment in investment grade bonds. Also, to the extent that the rating
assigned to a security in the Fund's portfolio is downgraded by a rating
organization, the market price and liquidity of such security may be adversely
affected. See Appendix A to the Additional Statement for a description of the
corporate bond ratings assigned by Standard & Poor's and Moody's.
INVESTMENT TECHNIQUES
OPTIONS ON SECURITIES AND SECURITIES INDICES
The Fund may write (sell) covered call and put options and purchase call and
put options on any securities in which it may invest or on any securities
index composed of securities in which it may invest. 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 use of options to seek to increase total return
involves the risk of loss if the Investment Adviser is incorrect in its
expectation of fluctuations in securities prices or interest rates. The
successful use of options for hedging purposes also depends in part on the
ability of the Investment Adviser to manage future price fluctuations and the
degree of correlation between the options and securities markets. If the
Investment Adviser is incorrect in its expectation of changes in securities
prices or determination of the correlation between the securities indices on
which options are written and purchased and the securities in the Fund's
investment portfolio, the investment performance of the Fund will be less
favorable than it would have been in the absence of such options transactions.
The writing of options could significantly increase the Fund's portfolio
turnover rate and, therefore, associated brokerage commissions or spreads.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
To seek to increase total return or to hedge against changes in interest
rates or securities prices, the Fund may purchase and sell various kinds of
futures contracts, and purchase and write call and put options on any of such
futures contracts. The Fund may also enter into closing purchase and sale
transactions with respect to any such contracts and options. The futures
contracts may be based on various securities (such as U.S. Government
securities), securities indices and other financial instruments and indices.
The Fund will engage in futures and related options transactions for bona fide
hedging purposes as defined in regulations of the Commodity Futures Trading
Commission or to seek to increase total return to the extent permitted by such
regulations. The Fund may not purchase or sell futures contracts or purchase
or sell related options to seek to increase total return, except for closing
purchase or sale transactions, if immediately thereafter the sum of the amount
of initial margin deposits and premiums paid on the Fund's outstanding
positions in futures and related options entered into for the purpose of
seeking to increase total return would exceed 5% of the market value of the
Fund's net assets. These transactions involve brokerage costs, require margin
deposits and, in the case of contracts and options obligating the Fund to
purchase securities, require the Fund to segregate and maintain cash or liquid
assets with a value equal to the amount of the Fund's obligations.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. See
"Investment Objectives and Policies--Futures Contracts and Options
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<PAGE>
on Futures Contracts" in the Additional Statement. Thus, while the Fund may
benefit from the use of futures and options on futures, unanticipated changes
in interest rates or securities prices may result in poorer overall
performance than if the Fund had not entered into any futures contracts or
options transactions. Because perfect correlation between a futures position
and portfolio position that is intended to be protected is impossible to
achieve, the desired protection may not be obtained and the Fund may be
exposed to risk of loss. The loss incurred by the Fund in entering into
futures contracts and in writing call options on futures is potentially
unlimited and may exceed the amount of the premium received. Futures markets
are highly volatile and the use of futures may increase the volatility of the
Fund's net asset value. The profitability of the Fund's trading in futures to
seek to increase total return depends upon the ability of the Investment
Adviser to correctly analyze the futures markets. In addition, because of the
low margin deposits normally required in futures trading, a relatively small
price movement in a futures contract may result in substantial losses to the
Fund. Further, futures contracts and options on futures may be illiquid, and
exchanges may limit fluctuations in futures contract prices during a single
day.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
The Fund may purchase when-issued securities. When-issued transactions arise
when securities are purchased by a Fund with payment and delivery taking place
in the future in order to secure what is considered to be an advantageous
price and yield to the Fund at the time of entering into the transaction. The
Fund may also purchase securities on a forward commitment basis; that is, make
contracts to purchase securities for a fixed price at a future date beyond the
customary three-day settlement period. The Fund is required to hold and
maintain in a segregated account with the Fund's custodian until three days
prior to the settlement date, cash or liquid assets in an amount sufficient to
meet the purchase price. Alternatively, the Fund may enter into offsetting
contracts for the forward sale of other securities that it owns. The purchase
of securities on a when-issued or forward commitment basis involves a risk of
loss if the value of the security to be purchased declines prior to the
settlement date. Although the Fund would generally purchase securities on a
when-issued or forward commitment basis with the intention of acquiring
securities for its portfolio, the Fund may dispose of when-issued securities
or forward commitments prior to settlement if the Investment Adviser deems it
appropriate to do so.
ILLIQUID AND RESTRICTED SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
investments, which include securities (both foreign and domestic) that are not
readily marketable, swap transactions, certain SMBS, repurchase agreements
maturing in more than seven days, time deposits with a notice or demand period
of more than seven days, and certain over-the-counter options, and certain
restricted securities, unless it is determined, based upon the continuing
review of the trading markets for a specific restricted security, that such
restricted security is eligible for resale under Rule 144A under the
Securities Act of 1933 and, therefore, is liquid. The Trustees have adopted
guidelines and delegated to the Investment Adviser the daily function of
determining and monitoring the liquidity of portfolio securities. The
Trustees, however, retain oversight focusing on factors such as valuation,
liquidity and availability of information and are ultimately responsible for
each determination. Investing in restricted securities eligible for resale
pursuant to Rule 144A may decrease the liquidity of the Fund's portfolio 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 and illiquid securities normally reflect a discount,
which may be significant, from the market price of comparable securities for
which a liquid market exists.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with dealers in U.S.
Government securities and member banks of the Federal Reserve System which
furnish collateral at least equal in value or market price to the amount
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of their repurchase obligation. If the other party or "seller" defaults, the
Fund might suffer a loss to the extent that the proceeds from the sale of the
underlying securities and other collateral held by the Fund in connection with
the related repurchase agreement are less than the repurchase price. In
addition, in the event of bankruptcy of the seller or failure of the seller to
repurchase the securities as agreed, the Fund could suffer losses, including
loss of interest on or principal of the security and costs associated with
delay and enforcement of the repurchase agreement. The Trustees have reviewed
and approved certain counterparties whom they believe to be creditworthy and
have authorized the Fund to enter into repurchase agreements with such
counterparties. In addition, the Fund, together with other registered
investment companies having management agreements with the Investment Adviser
or its affiliates, may transfer uninvested cash balances into a single joint
account, the daily aggregate balance of which will be invested in one or more
repurchase agreements.
LENDING OF PORTFOLIO SECURITIES
The Fund may also seek to increase its income by lending portfolio
securities. Under present regulatory policies, such loans may be made to
institutions, such as certain broker-dealers, and are required to be secured
continuously by collateral in cash, cash equivalents, 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. If the Investment Adviser determines to make securities loans,
the value of the securities loaned may not exceed 33 1/3% of the value of the
total assets of the Fund. The Fund may experience a loss or delay in the
recovery of its securities if the institution with which it has engaged in a
portfolio loan transaction breaches its agreement with the Fund.
SHORT SALES AGAINST-THE-BOX
The Fund may make short sales of securities or maintain a short position,
provided that 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 an equal
amount of the securities of the same issuer as the securities sold short (a
short sale against-the-box). Not more than 25% of the Fund's net assets
(determined at the time of the short sale) may be subject to such short sales.
Short sales will be made primarily to defer realization of gain or loss for
federal tax purposes; a gain or loss in the Fund's long position will be
offset by a gain or loss in its short position.
TEMPORARY INVESTMENTS
The Fund may, for temporary defensive purposes, invest 100% of its total
assets in U.S. Government securities, repurchase agreements collateralized by
U.S. Government securities, commercial paper rated at least A-2 by Standard &
Poor's or P-2 by Moody's, certificates of deposit, bankers' acceptances,
repurchase agreements, non-convertible preferred stocks and non-convertible
corporate bonds with a remaining maturity of less than one year. When the
Fund's assets are invested in such instruments, the Fund may not be achieving
its investment objectives.
MISCELLANEOUS TECHNIQUES
In addition to the techniques and investments described above, the Fund may,
with respect to no more than 5% of its net assets, engage in the following
techniques and investments (i) warrants and stock purchase rights,
(ii) foreign securities (including options and futures transactions), (iii)
foreign currency transactions, (iv) mortgage swaps, index swaps and interest
rate swaps, caps, floors and collars, (v) yield curve options and inverse
floating rate securities, (vi) other investment companies, (vii) mortgage
dollar rolls and (viii) unseasoned companies. For more information see the
Additional Statement.
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RISK FACTORS
RISK FACTORS ASSOCIATED WITH THE REAL ESTATE INDUSTRY. Although the Fund
does not invest directly in real estate, it does invest primarily in
securities of issuers that are primarily engaged in or related to the real
estate industry, and does have a policy of concentrating its investments in
the real estate industry. Therefore, an investment in the Fund is subject to
certain risks associated with the direct ownership of real estate and with the
real estate industry in general. These risks include, among others: possible
declines in the value of real estate; risks related to general and local
economic conditions; possible lack of availability of mortgage funds;
overbuilding; extended vacancies of properties; increases in competition,
property taxes and operating expenses; changes in zoning laws; costs resulting
from the clean-up of, and liability to third parties for damages resulting
from, environmental problems; casualty or condemnation losses; uninsured
damages from floods, earthquakes or other natural disasters; limitations on
and variations in rents; and changes in interest rates. To the extent that
assets underlying the Fund's investments are concentrated geographically, by
property type or in certain other respects, the Fund may be subject to certain
of the foregoing risks to a greater extent.
In addition, if the Fund receives rental income or income from the
disposition of real property acquired as a result of a default on securities
the Fund owns, the receipt of such income or the ownership of such property
may adversely affect the Fund's ability to retain its tax status as a
regulated investment company. Investments by the Fund in securities of
companies providing mortgage servicing will be subject to the risks associated
with refinancings and their impact on servicing rights.
RISKS OF INVESTING IN REITS. Investing in REITs involves certain unique
risks in addition to those risks associated with investing in the real estate
industry in general. Equity REITs may be affected by changes in the value of
the underlying property owned by the REITs. Mortgage REITs may be affected by
the quality of any credit extended. REITs are dependent upon management
skills, are not diversified, are subject to heavy cash flow dependency,
default by borrowers and self-liquidation. REITs are also subject to the
possibilities of failing to qualify for tax free pass-through of income under
the Code and failing to maintain their exemptions from registration under the
Investment Company Act of 1940, as amended (the "1940 Act"). REITs whose
underlying properties are concentrated in a particular industry or geographic
region are also subject to risks affecting such industries and regions.
REITs (especially mortgage REITs) are also subject to interest rate risks.
When interest rates decline, the value of a REIT's investment in fixed rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a REIT's investment in fixed rate obligations can be expected to
decline. In contrast, as interest rates on adjustable rate mortgage loans are
reset periodically, yields on a REIT's investments in such loans will
gradually align themselves to reflect changes in market interest rates,
causing the value of such investments to fluctuate less dramatically in
response to interest rate fluctuations than would investments in fixed rate
obligations.
Investing in REITs involves risks similar to those associated with investing
in small capitalization companies. REITs may have limited financial resources,
may trade less frequently and in a limited volume and may be subject to more
abrupt or erratic price movements than larger company securities.
Historically, small capitalization stocks, such as REITs have been more
volatile in price than the larger capitalization stocks included in the
Standard & Poor's Index of 500 Common Stocks.
RISK OF INVESTING IN FIXED INCOME SECURITIES. When interest rates decline,
the market value of fixed income securities tends to increase. Conversely,
when interest rates increase, the market value of fixed income
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<PAGE>
securities tends to decline. Volatility of a security's market value will
differ depending upon the security's duration, the issuer and the type of
instrument. Investments in fixed income securities are subject to the risk
that the issuer could default on its obligations and the Fund could sustain
losses on such investments. A default could impact both interest and principal
payments.
RISKS OF DERIVATIVE TRANSACTIONS. The Fund's transactions, if any, in
options, futures, options on futures, swap transactions and structured
securities involve certain risks, including a possible lack of correlation
between changes in the value of hedging instruments and the portfolio assets
being hedged, the potential illiquidity of the markets for derivative
instruments, the risks arising from the margin requirements and related
leverage factors associated with such transactions. The use of these
management techniques to seek to increase total return may be regarded as a
speculative practice and involves the risk of loss if the Investment Adviser
is incorrect in its expectation of fluctuations in securities prices or
interest rates. The Fund's use of certain derivative transactions may be
limited by the requirements of the Code, for qualification as a regulated
investment company.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions that are described in
detail under "Investment Restrictions" in the Additional Statement.
Fundamental investment restrictions of the Fund can not be changed without
approval of a majority of the outstanding shares of the Fund. The Fund's
investment objectives and all policies not specifically designated as
fundamental are non-fundamental and may be changed without shareholder
approval. If there is a change in the Fund's investment objectives,
shareholders should consider whether the Fund remains an appropriate
investment in light of their then current financial positions and needs.
PORTFOLIO TURNOVER
A high rate of portfolio turnover (100% or more) involves correspondingly
greater expenses which must be borne by the Fund and its shareholders and may
under certain circumstances make it more difficult for the Fund to qualify as
a regulated investment company under the Code. It is anticipated that the
annual portfolio turnover rate of the Fund will generally not exceed 100%. The
portfolio turnover rate is calculated by dividing the lesser of the dollar
amount of sales or purchases of portfolio securities by the average monthly
value of the Fund's portfolio securities, excluding securities having a
maturity at the date of purchase of one year or less. Notwithstanding the
foregoing, the Investment Adviser may, from time to time, make short-term
investments when it believes such investments are in the best interests of the
Fund.
MANAGEMENT
TRUSTEES AND OFFICERS
The Trustees are responsible for deciding matters of general policy and
reviewing the actions of the Investment Adviser, distributor and transfer
agent. The officers of the Trust conduct and supervise the Fund's daily
business operations. The Additional Statement contains information as to the
identity of, and other information about, the Trustees and officers of the
Trust.
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INVESTMENT ADVISER
INVESTMENT ADVISER. Goldman Sachs Asset Management, One New York Plaza, New
York, New York 10004, a separate operating division of Goldman Sachs, serves
as the investment adviser to the Fund. Goldman Sachs registered as an
investment adviser in 1981. As of June 30, 1997, GSAM, together with its
affiliates, acted as investment adviser, administrator or distributor for
assets in excess of $ billion.
Under a Management Agreement with the Fund, the Investment Adviser, subject
to the general supervision of the Trustees, provides day-to-day advice as to
the Fund's portfolio transactions. Goldman Sachs has agreed to permit the
Trust to use the name "Goldman Sachs" or a derivative thereof as part of the
Fund's name for as long as the Fund's Management Agreement is in effect.
In performing its investment advisory services, the Investment Adviser,
while remaining ultimately responsible for the management of the Fund, may
rely upon its asset management affiliates for portfolio decisions and
management with respect to certain portfolio securities and is able to draw
upon the research and expertise of its other affiliate offices. In addition,
the Investment Adviser will have access to the research of, and proprietary
technical models developed by, Goldman Sachs and may apply quantitative and
qualitative analysis in determining the appropriate allocations among the
categories of issuers and types of securities.
Under the Management Agreement, the Investment Adviser also: (i) supervises
all non-advisory operations of the Fund that it advises; (ii) provides
personnel to perform such executive, administrative and clerical services as
are reasonably necessary to provide effective administration of the Fund;
(iii) arranges for at the Fund's expense (a) the preparation of all required
tax returns, (b) the preparation and submission of reports to existing
shareholders, (c) the periodic updating of prospectuses and statements of
additional information and (d) the preparation of reports to be filed with the
SEC and other regulatory authorities; (iv) maintains the Fund's records; and
(v) provides office space and all necessary office equipment and services.
FUND MANAGERS
<TABLE>
<CAPTION>
YEARS
PRIMARILY
NAME AND TITLE RESPONSIBLE FIVE YEAR EMPLOYMENT HISTORY
-------------- ----------- ----------------------------
<C> <C> <S>
</TABLE>
[TO COME]
14
<PAGE>
It is the responsibility of the Investment Adviser to make investment
decisions for the Fund and to place the purchase and sale orders for the
Fund's portfolio transactions. Such orders may be directed to any broker
including, to the extent and in the manner permitted by applicable law,
Goldman Sachs or its affiliates. In effecting purchases and sales of portfolio
securities for the Fund, the Investment Adviser will seek the best price and
execution of the Fund's orders. In doing so, where two or more brokers or
dealers offer comparable prices and execution for a particular trade,
consideration may be given to whether the broker or dealer provides investment
research or brokerage services or sells shares of any Goldman Sachs Fund. See
the Additional Statement for a further description of the Investment Adviser's
brokerage allocation practices.
As compensation for its services rendered and assumption of certain expenses
pursuant to the Management Agreement, GSAM is entitled to a fee, computed
daily and payable monthly at a rate equal to % of the Fund's average daily
net assets.
The Investment Adviser has voluntarily agreed to reduce or limit certain
"Other Expenses" of the Fund (excluding management fees, service fees, taxes,
interest and brokerage fees and litigation, indemnification and other
extraordinary expenses [and transfer agency fees] to the extent such expenses
exceed % per annum of the Fund's average daily net assets. Such reductions or
limits, if any, are calculated monthly on a cumulative basis and may be
discontinued or modified by the Investment Adviser in its discretion at any
time.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
GOLDMAN SACHS. The involvement of the Investment Adviser, 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 Fund or limit the Fund's investment activities. Goldman Sachs
and its affiliates engage in proprietary trading and advise accounts and funds
which have investment objectives similar to those of the Fund and/or which
engage in and compete for transactions in the same type of securities,
currencies and instruments as the Fund. Goldman Sachs and its affiliates will
not 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 Fund
and in general it is not anticipated that the Investment Adviser will have
access to proprietary information for the purpose of managing the Fund. The
results of the Fund's investment activities, therefore, may differ from those
of Goldman Sachs and its affiliates and it is possible that the Fund could
sustain losses during periods in which Goldman Sachs and its affiliates and
other accounts achieve significant profits on their trading for proprietary or
other accounts. From time to time, the Fund's activities may be limited
because of regulatory restrictions applicable to Goldman Sachs and its
affiliates, and/or their internal policies designed to comply with such
restrictions. See "Management--Activities of Goldman Sachs and its Affiliates
and Other Accounts Managed by Goldman Sachs" in the Additional Statement for
further information.
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York, serves as the exclusive
distributor (the "Distributor") of the Fund's shares. Goldman Sachs, 4900
Sears Tower, Chicago, Illinois, also serves as each Fund's transfer agent (the
"Transfer Agent") and as such performs various shareholder servicing
functions. As compensation for the services rendered to the Fund by Goldman
Sachs (as Transfer Agent) and the assumption by Goldman Sachs of the expenses
related thereto, Goldman Sachs is entitled to receive a fee from the Fund,
with respect to Class A shares, Class B and Class C shares of [$12,000] per
year plus [$7.50] per account, together with out-of-pocket and transaction-
related expenses (including those out-of-pocket expenses payable to servicing
and/or sub-transfer agents). Shareholders with inquiries regarding the Fund
should contact Goldman Sachs (as Transfer Agent) at the address or the
telephone number set forth on the back cover page of this Prospectus.
15
<PAGE>
NET ASSET VALUE
The net asset value per share of the class of the Fund is calculated by the
Fund's custodian as of the close of regular trading on the New York Stock
Exchange (normally 3:00 p.m. Chicago time, 4:00 p.m. New York time), on each
Business Day (as such term is defined under "Additional Information"). Net
asset value per share of each class is calculated by determining the net
assets attributable to each class and dividing by the number of outstanding
shares of that class. Portfolio securities are valued based on market
quotations or, if accurate quotations are not readily available, at fair value
as determined in good faith under procedures established by the Trustees.
PERFORMANCE INFORMATION
From time to time the Fund may publish average annual total return, yield
and distribution rates in advertisements and communications to shareholders or
prospective investors. Average annual total return is determined by computing
the average annual percentage change in value of $1,000 invested at the
maximum public offering price for specified periods ending with the most
recent calendar quarter, assuming reinvestment of all dividends and
distributions at net asset value. The total return calculation assumes a
complete redemption of the investment at the end of the relevant period. The
Fund may also from time to time advertise total return on a cumulative,
average, year-by-year or other basis for various specified periods by means of
quotations, charts, graphs or schedules. In addition, the Fund may furnish
total return calculations based on investments at various sales charge levels
or at net asset value. Any performance data which is based on the Fund's net
asset value per share would be reduced if any applicable sales charge were
taken into account. In addition to the above, the Fund may from time to time
advertise its performance relative to certain averages, performance rankings,
indices, other information prepared by recognized mutual fund statistical
services and investments for which reliable performance data is available.
The Fund computes its yield by dividing net investment income earned during
a recent thirty-day period by the product of the average daily number of
shares outstanding and entitled to receive dividends during the period and the
maximum offering price per share on the last day of the relevant period. The
results are compounded on a bond equivalent (semi-annual) basis and then
annualized. 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. The Fund's
quotations of distribution rate are calculated by annualizing the most recent
distribution of net investment income for a monthly, quarterly or other
relevant period and dividing this amount by the net asset value per share on
the last day of the period for which the distribution rates are being
calculated.
The Fund's yield, total return and distribution rate will be calculated
separately for each class of shares in existence. Because each class of shares
may be subject to different expenses, yield, the total return and distribution
rate calculations with respect to each class of shares for the same period
will differ. See "Shares of the Trust."
The investment results of the Fund will fluctuate over time and any
presentation of investment results for any prior period should not be
considered a representation of what an investment may earn or what the Fund's
performance may be in any future period. In addition to information provided
in shareholder reports, the Fund may, in its discretion, from time to time
make a list of its holdings available to investors upon request.
16
<PAGE>
SHARES OF THE TRUST
The Fund is a series of Goldman Sachs Trust, which was formed under the laws
of the State of Delaware on January 28, 1997. The Trust was formerly a
Maryland corporation, and reorganized into the Trust as of April 30, 1997. The
Trustees have authority under the Trust's Declaration of Trust to create and
classify shares of beneficial interests in separate series, without further
action by shareholders. Additional series may be added in the future. The
Trustees also have authority to classify and reclassify any series or
portfolio of shares into one or more classes.
When issued, shares are fully paid and non-assessable. In the event of
liquidation, shareholders are entitled to share pro rata in the net assets of
the Fund available for distribution to such shareholders. All shares are
freely transferable and have no preemptive, subscription or conversion rights.
Shareholders are entitled to one vote per share, provided that, at the option
of the Trustees, shareholders will be entitled to a number of votes based upon
the net asset values represented by their shares.
The Trust does not intend to hold annual meetings of shareholders. However,
pursuant to the Trust's By-Laws, the recordholders of at least 10% of the
shares outstanding and entitled to vote at a special meeting may require the
Trust to hold such special meeting of shareholders for any purpose and
recordholders may, under certain circumstances, as permitted by the Act,
communicate with other shareholders in connection with requiring a special
meeting of shareholders. The Trustees will call a special meeting of
shareholders for the purpose of electing Trustees if, at any time, less than a
majority of Trustees holding office at the time were elected by shareholders.
In the interest of economy and convenience, the Trust does not issue
certificates representing the Fund's shares. Instead, the Transfer Agent
maintains a record of each shareholder's ownership. Each shareholder receives
confirmation of purchase and redemption orders from the Transfer Agent. Fund
shares and any dividends and distributions paid by the Fund are reflected in
account statements from the Transfer Agent.
TAXATION
FEDERAL TAXES
The Fund is treated as a separate entity for tax purposes. The Fund intends
to elect to be treated as a regulated investment company and intends to
qualify for such treatment for each taxable year under Subchapter M of the
Code. To qualify as such, the Fund must satisfy certain requirements relating
to the sources of its income, diversification of its assets and distribution
of its income to shareholders. As a regulated investment company, the Fund
will not be subject to federal income or excise tax on any net investment
income and net realized capital gains that are distributed to its shareholders
in accordance with certain timing requirements of the Code.
17
<PAGE>
Dividends paid by the Fund from net investment income, certain net realized
foreign exchange gains, the excess of net short-term capital gain over net
long-term capital loss and original issue discount or market discount income
will be taxable to its shareholders as ordinary income. Dividends paid by the
Fund from the excess of net long-term capital gain over net short-term capital
loss will be taxable as long-term capital gains regardless of how long the
shareholders have held their shares. These tax consequences will apply
regardless of whether distributions are received in cash or reinvested in
shares. The Fund's dividends that are paid to its corporate shareholders and
are attributable to qualifying dividends the Fund receives from U.S. domestic
corporations may be eligible, in the hands of such corporate shareholders, for
the corporate dividends-received deduction, subject to certain holding period
requirements and debt financing limitations under the Code. Since dividends
the Fund receives from REITs are not qualifying dividends for this purpose, it
is not likely that a substantial portion of the Fund's dividends will
generally qualify for the corporate dividends-received deduction. Certain
distributions paid by the Fund in January of a given year may be taxable to
shareholders as if received the prior December 31. Shareholders will be
informed annually about the amount and character of distributions received
from the Fund for federal income tax purposes.
Investors should consider the tax implications of buying shares immediately
prior to a distribution. Investors who purchase shares shortly before the
record date for a distribution will pay a per share price that includes the
value of the anticipated distribution and will be taxed on the distribution
even though the distribution represents a return of a portion of the purchase
price.
Redemptions and exchanges of shares are taxable events.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on distributions, redemptions and
exchanges if they fail to furnish their correct taxpayer identification number
and certain certifications required by the Internal Revenue Service or if they
are otherwise subject to backup withholding. Individuals, corporations and
other shareholders that are not U.S. persons under the Code are subject to
different tax rules and may be subject to nonresident alien withholding at the
rate of 30% (or a lower rate provided by an applicable tax treaty) on amounts
treated as ordinary dividends from the Fund.
The Fund may be subject to foreign withholding or other foreign taxes on
income or gain from certain foreign securities. The Fund will not be eligible
to elect to pass such foreign taxes through to shareholders, who therefore
will generally not take such taxes into account on their own tax returns. The
Fund will generally deduct such taxes in determining the amounts available for
distribution to shareholders.
OTHER TAXES
In addition to federal taxes, a shareholder may be subject to state, local
or foreign taxes on payments received from the Fund. A state income (and
possibly local income and/or intangible property) tax exemption is generally
available to the extent (if any) the Fund's distributions are derived from
interest on (or, in the case of intangible property taxes, the value of its
assets is attributable to) certain U.S. Government obligations, provided in
some states that certain thresholds for holdings of such obligations and/or
reporting requirements are satisfied. For a further discussion of certain tax
consequences of investing in shares of the Fund, see "Taxation" in the
Additional Statement. Shareholders are urged to consult their own tax advisers
regarding specific questions as to federal, state and local taxes as well as
to any foreign taxes.
18
<PAGE>
ADDITIONAL INFORMATION
The term "a vote of the majority of the outstanding shares" of the Fund
means the vote of the lesser of (i) 67% or more of the shares 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 (ii) more than 50% of the outstanding
shares of the Fund.
As used in this Prospectus, the term "Business Day" means any day the New
York Stock Exchange is open for trading, which is Monday through Friday except
for holidays. The New York Stock Exchange is closed on the following holidays:
New Year's Day, Presidents' Day (observed), Good Friday, Memorial Day
(observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
19
<PAGE>
ADDITIONAL SERVICES
The Trust, on behalf of the Fund, has adopted a Service Plan with respect to
the Service Shares which authorizes the Fund to compensate certain institutions
("Service Organizations") for providing account administration and personal and
account maintenance services to their customers who are beneficial owners of
such Shares. The Trust, on behalf of the Fund, enters into agreements with
Service Organizations which purchase Service Shares on behalf of their custom-
ers ("Service Agreements"). The Service Agreements provide for compensation to
the Service Organizations in an amount up to 0.50% (on an annualized basis) of
the average daily net assets of the Service Shares of the Fund attributable to
or held in the name of the Service Organization for its customers; provided,
however, that the fee paid for personal and account maintenance services shall
not exceed 0.25% of such average daily net assets. The services provided by the
Service Organizations may include acting, directly or through an agent, as the
sole shareholder of record, maintaining account records for customers, process-
ing orders to purchase, redeem or exchange Service Shares for customers, re-
sponding to inquiries from prospective and existing shareholders and assisting
customers with investment procedures.
Holders of Service Shares of the Fund bear all expenses and fees paid to
Service Organizations for their services with respect to such Shares as well as
any other expenses which are directly attributable to such Shares.
Service Organizations may charge other fees to their customers who are the
beneficial owners of Service Shares in connection with their customer accounts.
These fees would be in addition to any amounts received by the Service Organi-
zation under a Service Agreement and may affect the return earned on an invest-
ment in the Fund. The Trust, on behalf of the Fund, accrues payments made pur-
suant to a Service Agreement daily. All inquiries of beneficial owners of Serv-
ice Shares should be directed to such owners' Service Organization.
REPORTS TO SHAREHOLDERS
Recordholders of Service Shares of the Fund will receive an annual report
containing audited financial statements and a semi-annual report. The
recordholder of Service Shares will also be provided with a printed confirma-
tion for each transaction in its account and a quarterly account statement. A
year-to-date statement for any account will be provided to a Service Organiza-
tion upon request made to Goldman Sachs.
Service Organizations will be responsible for providing services similar to
those described above to their customers who are the beneficial owners of such
Shares. For example, Service Organizations are responsible for providing each
customer exercising investment discretion with monthly statements with respect
to such customer's account in lieu of an immediate confirmation of each trans-
action.
DIVIDENDS
Each dividend from net investment income and capital gain distributions, if
any, declared by the Fund on its outstanding Service Shares will, at the elec-
tion of each shareholder, be paid (i) in cash or (ii) in additional Service
Shares of the Fund. This election should initially be made on a shareholder's
Account Information Form and may be changed upon written notice to Goldman
Sachs at any time prior to the record date for a particular
20
<PAGE>
dividend or distribution. If no election is made, all dividends from net in-
vestment income and capital gain distributions will be reinvested in Service
Shares of the Fund.
The election to reinvest dividends and distributions paid by the Fund in ad-
ditional Service Shares of the Fund will not affect the tax treatment of such
dividends and distributions, which will be treated as received by the share-
holder and then used to purchase Service Shares of the Fund.
The Fund intends that all or substantially all its net investment income and
net realized long-term and short-term capital gains, after reduction by
available capital losses, including any capital losses carried forward from
prior years, will be declared as dividends for each taxable year. The Fund will
pay dividends from net investment income quarterly. The Fund will pay dividends
from net realized long-term and short-term capital gains, reduced by available
capital losses, at least annually. From time to time, a portion of the Fund's
dividends may constitute a return of capital.
At the time of an investor's purchase of shares of the Fund a portion of the
net asset value per share may be represented by undistributed income of the
Fund or realized or unrealized appreciation of the Fund's portfolio securities.
Therefore, subsequent distributions on such shares from such income or realized
appreciation may be taxable to the investor even if the net asset value of the
investor's shares is, as a result of the distributions, reduced below the cost
of such shares and the distributions (or portions thereof) represent a return
of a portion of the purchase price.
PURCHASE OF SERVICE SHARES
Customers of Service Organizations may invest in Service Shares only through
Service Organizations. Service Shares may be purchased on any Business Day by a
Service Organization through Goldman Sachs at the net asset value per share
next determined after receipt of an order. No sales load will be charged. If,
by the close of regular trading on the New York Stock Exchange (normally 3:00
p.m. Chicago time, 4:00 p.m. New York time), an order is received from a Serv-
ice Organization by Goldman Sachs, the price per share will be the net asset
value per share computed on the day the purchase order is received. See "Net
Asset Value." Purchases of Service Shares of the Fund must be settled within
three (3) Business Days of the receipt of a complete purchase order. Payment of
the proceeds of redemption of shares purchased by check may be delayed for a
period of time as described under "Redemption of Service Shares."
The Service Organizations are responsible for the timely transmittal of
purchase orders to Goldman Sachs and payments to State Street. In order to
facilitate timely transmittal, the Service Organizations have established times
by which purchase orders and payments must be received by them.
PURCHASE PROCEDURES
Purchases of Service Shares may be made by a Service Organization placing an
order with Goldman Sachs at 800-621-2550 and either wiring federal funds to
State Street Bank and Trust Company ("State Street") or initiating an ACH
transfer. Purchases may also be made by a Service Organization by check (except
that the
21
<PAGE>
Trust will not accept a check drawn on a foreign bank or a third party check)
or Federal Reserve draft made payable to "Goldman Sachs Real Estate Securities
Fund--Name of Class of shares" and should be directed to "Goldman Sachs Real
Estate Securities Fund--Name of Class of shares," c/o National Financial Data
Services, Inc. ("NFDS"), P.O. Box 419711, Kansas City, MO 64141-6711.
OTHER PURCHASE INFORMATION
The Fund does not have any minimum purchase or account requirements with
respect to Service Shares. A Service Organization may, however, impose a
minimum amount for initial and subsequent investments in Service Shares, and
may establish other requirements such as a minimum account balance. A Service
Organization may effect redemptions of noncomplying accounts, and may impose a
charge for any special services rendered to its customers. Customers should
contact their Service Organization for further information concerning such
requirements and charges.
The Fund reserves the right to redeem Service Shares of any Service Organiza-
tion whose account balance is less than $50 as a result of earlier redemptions.
Such redemptions will not be implemented if the value of such shareholder's ac-
count falls below the minimum account balance solely as a result of market con-
ditions. The Trust will give sixty (60) days' prior written notice to Service
Organizations whose Service Shares are being redeemed to allow them to purchase
sufficient additional Service Shares to avoid such redemption.
The Fund and Goldman Sachs each reserves the right to reject any specific
purchase order (including exchanges) or to restrict purchases or exchanges by a
particular purchaser (or group of related purchasers). This may occur, for ex-
ample, when a purchaser or group of purchaser's pattern of frequent purchases,
sales or exchanges of Service Shares of the Fund is evident, or if purchases,
sales, or exchanges are, or a subsequent abrupt redemption might be, of a size
that would disrupt management of the Fund.
In the sole discretion of Goldman Sachs, the Fund may accept securities
instead of cash for the purchase of shares of the Fund. Such purchases will be
permitted only if the Investment Adviser determines that any securities
acquired in this manner are consistent with the Fund's investment objectives,
restrictions and policies and are desirable investments for the Fund.
EXCHANGE PRIVILEGE
Service Shares of the Fund may be exchanged by a Service Organization for (i)
Service Shares of any other mutual fund sponsored by Goldman Sachs and desig-
nated as an eligible fund for this purpose and (ii) the corresponding class of
any Goldman Sachs Money Market Fund at the net asset value next determined ei-
ther by writing to Goldman Sachs, Attention: Goldman Sachs Real Estate Securi-
ties Fund--Name of Class of shares, c/o GSAM Shareholder Services, 4900 Sears
Tower, Chicago, Illinois 60606 or, if previously elected in the Fund's Account
Information Form, by telephone at 800-621-2550 (7:00 a.m. to 5:30 p.m. Chicago
time). A shareholder should obtain and read the prospectus relating to any
other fund and its shares and consider its investment objective, policies and
applicable fees before making an exchange. Service Shares acquired by telephone
exchange must be registered in the same name(s) and have the same address as
Service Shares of the Fund for which the exchange is being made.
22
<PAGE>
In an effort to prevent unauthorized or fraudulent exchanges by telephone,
Goldman Sachs employs reasonable procedures as set forth under "Redemption of
Service Shares" to confirm that such instructions are genuine. In times of
drastic economic or market changes the telephone exchange privilege may be dif-
ficult to implement. For federal income tax purposes, an exchange is treated as
a sale of the Service Shares surrendered in the exchange, on which an investor
may realize a gain or loss, followed by a purchase of Service Shares or the
corresponding class of any Goldman Sachs Money Market Fund received in the ex-
change. Shareholders should consult their own tax advisers concerning the tax
consequences of an exchange. Exchanges are available only in states where ex-
changes may legally be made. The exchange privilege may be modified or with-
drawn at any time on sixty (60) days' written notice to recordholders of Serv-
ice Shares and is subject to certain limitations. See "Purchase of Service
Shares."
REDEMPTION OF SERVICE SHARES
The Fund will redeem its Service Shares upon request of the recordholder of
such Shares on any Business Day at the net asset value next determined after
the receipt by the Transfer Agent of such request in proper form. See "Net As-
set Value." If Service Shares to be redeemed were recently purchased by check,
the Fund may delay transmittal of redemption proceeds until such time as it has
assured itself that good funds have been collected for the purchase of such
Service Shares. This may take up to fifteen (15) days. Redemption requests may
be made by writing to or calling the Transfer Agent at the address or telephone
number set forth on the back cover of this Prospectus. A Service Organization
may request redemptions by telephone if the optional telephone redemption priv-
ilege is elected on the Account Information Form. It may be difficult to imple-
ment redemptions by telephone in times of drastic economic or market changes.
In an effort to prevent unauthorized or fraudulent redemption or exchange
requests by telephone, Goldman Sachs employs reasonable procedures specified by
the Trust to confirm that such instructions are genuine. Among other things,
any redemption request that requires money to go to an account or address other
than that designated on the Account Information Form must be in writing and
signed by an authorized person designated on the Account Information Form. Any
such written request is also confirmed by telephone with both the requesting
party and the designated bank account to verify instructions. Exchanges among
accounts with different names, addresses and social security or other taxpayer
identification numbers must be in writing and signed by an authorized person
designated on the Account Information Form. Other procedures may be implemented
from time to time. If reasonable procedures are not implemented, the Trust may
be liable for any loss due to unauthorized or fraudulent transactions. In all
other cases, neither the Fund, the Trust nor Goldman Sachs will be responsible
for the authenticity of redemption or exchange instructions received by
telephone.
The Fund will arrange for the proceeds of redemptions effected by any means
to be wired to the recordholder of Service Shares, or if the recordholder
elects in writing, by check. Redemption proceeds paid by wire transfer will
normally be wired on the next Business Day in federal funds (for a total one-
day delay), but may be paid up to three (3) days after receipt of a properly
executed redemption request. Wiring of redemption proceeds may be delayed one
additional Business Day if the Federal Reserve Bank is closed on the day
redemption proceeds would ordinarily be wired. Redemption proceeds paid by
check will normally be mailed to the address of record within three (3)
Business Days of receipt of a properly executed redemption request. Once
23
<PAGE>
wire transfer instructions have been given by Goldman Sachs, neither the Fund,
the Trust nor Goldman Sachs assumes any further responsibility for the
performance of intermediaries or the customer's Service Organization in the
transfer process. If a problem with such performance arises, the customer
should deal directly with such intermediaries or Service Organizations.
Additional documentation regarding a redemption by any means may be required
to effect a redemption when deemed appropriate by the Transfer Agent. The
request for such redemption will not be considered to have been received in
proper form until such additional documentation has been submitted to the
Transfer Agent by the recordholder of Service Shares.
Service Organizations are responsible for the timely transmittal of
redemption requests by their customers to the Transfer Agent. In order to
facilitate timely transmittal of redemption requests, Service Organizations
have established times by which redemption requests must be received by them.
Additional documentation may be required when deemed appropriate by a Service
Organization.
--------------------
24
<PAGE>
APPENDIX
GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON ACCOUNT
INFORMATION FORM
You are required by law to provide the Fund with your correct Taxpayer
Identification Number (TIN), regardless of whether you file tax returns.
Failure to do so may subject you to penalties. Failure to provide your correct
TIN and to sign your name in the Certification section of the Account
Information Form could result in withholding of 31% by the Fund for the
federal backup withholding tax on distributions, redemptions, exchanges and
other payments relating to your account.
Any tax withheld may be credited against taxes owed on your federal income
tax return.
If you do not have a TIN, you should apply for one immediately by contacting
your local office of the Social Security Administration or the Internal
Revenue Service (IRS). Backup withholding could also apply to payments
relating to your account prior to the Fund's receipt of your TIN.
Special rules apply for certain entities. For example, for an account
established under a Uniform Gifts or Transfers to Minors Act, the TIN of the
minor should be furnished.
If you have been notified by the IRS that you are subject to backup
withholding because you failed to report all your interest and/or dividend
income on your tax return and you have not been notified by the IRS that such
withholding should cease, you must cross out item (2) in the Certification
section of the Account Information Form.
If you are an exempt recipient, you should furnish your TIN and certify your
exemption by signing the Certification section and writing "exempt" after your
signature. Exempt recipients include: corporations, tax-exempt pension plans
and IRA's, governmental agencies, financial institutions, registered
securities and commodities dealers and others.
If you are a nonresident alien or foreign entity, you must provide a
completed Form W-8 to the Fund in order to avoid backup withholding on certain
payments. Other payments to you may be subject to nonresident alien
withholding of up to 30%.
For further information regarding backup and nonresident alien withholding,
see Sections 3406, 1441 and 1442 of the Internal Revenue Code and consult your
tax adviser.
A-1
<PAGE>
- --------------------------------------------------------------------------------
GOLDMAN SACHS ASSET
MANAGEMENT
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
DISTRIBUTOR
85 BROAD STREET
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
TRANSFER AGENT
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN
1776 HERITAGE DRIVE
NORTH QUINCY, MASSACHUSETTS 02110
TOLL FREE (IN U.S.) . . . . . . . . 800-621-2550
REPROSVC
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GOLDMAN SACHS
REAL ESTATE
SECURITIES FUND
- --------------------------------------------------------------------------------
PROSPECTUS
SERVICE SHARES
LOGO GOLDMAN
SACHS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- -----------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED JUNE 13, 1997
PROSPECTUS GOLDMAN SACHS FIXED INCOME FUNDS
INSTITUTIONAL SHARES
, 1997
GOLDMAN SACHS ADJUSTABLE RATE
GOVERNMENT FUND GOLDMAN SACHS MUNICIPAL INCOME FUND
Seeks a high level of current income
Seeks a high level of current that is exempt from regular federal in-
income, consistent with low come tax, consistent with preservation
volatility of principal. The of capital. The Fund invests primarily
Fund invests primarily in ad- in municipal securities.
justable rate mortgage pass-
through securities and other
mortgage securities with peri-
odic interest rate resets,
which are issued or guaranteed
by the U.S. government, its
agencies, instrumentalities or
sponsored enterprises.
GOLDMAN SACHS CORE FIXED INCOME FUND
Seeks a total return consisting of
capital appreciation and income that
exceeds the total return of the Lehman
Brothers Aggregate Bond Index. The Fund
invests primarily in fixed-income
securities, including securities issued
or guaranteed by the U.S. government,
GOLDMAN SACHS SHORT DURATION its agencies, instrumentalities or
GOVERNMENT FUND sponsored enterprises, corporate
securities, mortgage-backed securities
Seeks a high level of current and asset-backed securities.
income and secondarily, in
seeking current income, may
also consider the potential
for capital appreciation. The
Fund invests primarily in se-
curities issued or guaranteed
by the U.S. government, its
agencies, instrumentalities or
sponsored enterprises.
GOLDMAN SACHS GLOBAL INCOME FUND
Seeks a high total return, emphasizing
current income and, to a lesser extent,
providing opportunities for capital
appreciation. The Fund invests primarily
in a portfolio of high quality fixed-
income securities of U.S. and foreign
issuers and foreign currencies.
GOLDMAN SACHS SHORT
DURATIONTAX-FREE FUND
GOLDMAN SACHS HIGH YIELD FUND
Seeks a high level of current Seeks a high level of current income
income, consistent with rela- and, secondarily, capital appreciation.
tively low volatility of prin- The Fund invests primarily in fixed-
cipal, that is exempt from income securities rated below investment
regular federal income tax. grade.
The Fund invests primarily in
municipal securities.
GOLDMAN SACHS GOVERNMENT IN-
COME FUND
Seeks a high level of current
income, consistent with safety
of principal. The Fund invests
primarily in securities, in-
cluding mortgage-backed secu-
rities, issued or guaranteed
by the U.S. government, its
agencies, instrumentalities or
sponsored enterprises.
Goldman Sachs Funds Management, L.P. ("GSFM"), New York, New York, an
affiliate of Goldman, Sachs & Co. ("Goldman Sachs"), serves as investment
adviser to the Adjustable Rate Government and Short Duration Government Funds.
Goldman Sachs Asset Management ("GSAM"), New York, New York, a separate
operating division of Goldman Sachs, serves as investment adviser to the Short
Duration Tax-Free, Government Income, Municipal Income, Core Fixed Income and
High Yield Funds. Goldman Sachs Asset Management International ("GSAMI"),
London, England, an affiliate of Goldman Sachs, serves as investment adviser to
the Global Income Fund. GSAM, GSFM and GSAMI are each referred to in this
Prospectus as the "Investment Adviser." Goldman Sachs serves as each Fund's
distributor and transfer agent.
INSTITUTIONAL SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION,
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN A FUND INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
(continued on next page)
<PAGE>
(cover continued)
THE ADJUSTABLE RATE GOVERNMENT, SHORT DURATION GOVERNMENT AND GOVERNMENT
INCOME FUNDS' NET ASSET VALUES AND YIELDS ARE NOT GUARANTEED BY THE U.S.
GOVERNMENT OR BY ITS AGENCIES, INSTRUMENTALITIES OR SPONSORED ENTERPRISES.
THE CORE FIXED INCOME, GLOBAL INCOME AND HIGH YIELD FUNDS MAY INVEST IN
SECURITIES OF FOREIGN ISSUERS AND FOREIGN CURRENCIES THAT ENTAIL CERTAIN RISKS
NOT CUSTOMARILY ASSOCIATED WITH INVESTING IN U.S. DOLLAR-DENOMINATED FIXED-
INCOME SECURITIES. IN PARTICULAR, THE SECURITIES MARKETS OF EMERGING MARKET
COUNTRIES ARE LESS LIQUID, ARE SUBJECT TO GREATER PRICE VOLATILITY, HAVE
SMALLER MARKET CAPITALIZATIONS, HAVE LESS GOVERNMENT REGULATION AND ARE NOT
SUBJECT TO AS EXTENSIVE AND FREQUENT ACCOUNTING, FINANCIAL AND OTHER REPORTING
REQUIREMENTS AS THE SECURITIES MARKETS OF MORE DEVELOPED COUNTRIES.
THE HIGH YIELD FUND INVESTS PRIMARILY IN HIGH YIELD, FIXED-INCOME SECURITIES
RATED BELOW INVESTMENT GRADE THAT ARE CONSIDERED SPECULATIVE AND GENERALLY
INVOLVE GREATER PRICE VOLATILITY AND GREATER RISK OF LOSS OF PRINCIPAL AND
INTEREST THAN INVESTMENTS IN HIGHER RATED FIXED-INCOME SECURITIES.
INVESTORS SHOULD CONSIDER THE RISKS ASSOCIATED WITH INVESTMENT IN A FUND
INVESTING IN FOREIGN AND OR HIGH YIELD SECURITIES. THE FUNDS MAY NOT BE
SUITABLE FOR ALL INVESTORS. SEE "DESCRIPTION OF SECURITIES" AND "RISK
FACTORS."
This Prospectus provides information about Goldman Sachs Trust (the "Trust")
and the Funds that a prospective investor should understand before investing.
This Prospectus should be retained for future reference. A Statement of
Additional Information (the "Additional Statement"), dated May 1, 1997,
containing further information about the Trust and the Funds which may be of
interest to investors, has been filed with the Securities and Exchange
Commission ("SEC"), is incorporated herein by reference in its entirety, and
may be obtained without charge from Goldman Sachs by calling the telephone
number, or writing to one of the addresses, listed on the back cover of this
Prospectus. The SEC maintains a Web site (http://www.sec.gov) that contains
the Additional Statement and other information regarding the Trust.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Highlights..................... 1
Fees and Expenses................... 7
Financial Highlights................ 9
Investment Objectives and Policies.. 13
Description of Securities........... 20
Risk Factors........................ 27
Investment Techniques............... 30
Investment Restrictions............. 34
Portfolio Turnover.................. 34
Management.......................... 35
Dividends........................... 38
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Net Asset Value................... 39
Performance Information........... 40
Shares of the Trust............... 41
Taxation.......................... 41
Additional Information............ 43
Reports to Shareholders........... 44
Purchase of Institutional Shares.. 44
Exchange Privilege................ 46
Redemption of Institutional
Shares........................... 47
Appendix.......................... A-1
Account Information Form
</TABLE>
<PAGE>
FUND HIGHLIGHTS
The following is intended to highlight certain information contained in
this Prospectus and is qualified in its entirety by the more detailed
information contained herein.
WHAT IS THE GOLDMAN SACHS TRUST?
The Goldman Sachs Trust is an open-end management investment company that
offers its shares in several investment funds (mutual funds). Each Fund
pools the monies of investors by selling its shares to the public and
investing these monies in a portfolio of securities designed to achieve that
Fund's stated investment objectives.
WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS?
Each Fund has distinct investment objectives and policies. There can be no
assurance that a Fund's objectives will be achieved. For a complete
description of each Fund's investment objectives and policies, see
"Investment Objectives and Policies," "Description of Securities" and
"Investment Techniques."
1
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
INTEREST
INVESTMENT RATE
FUND NAME OBJECTIVES DURATION SENSITIVITY INVESTMENT SECTOR CREDIT QUALITY OTHER INVESTMENTS
- -------------- ------------------- ------------------- ------------ --------------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
ADJUSTABLE A high level of Target = 6-month 9-month note At least 65% of U.S. Government Fixed-rate
RATE current income, to 1-year total assets in Securities mortgage
GOVERNMENT consistent with U.S. Treasury securities issued or pass-through
FUND low volatility Security guaranteed by the securities and
of principal. Maximum = 2 years U.S. government, repurchase
its agencies, agreements
instrumentalities collateralized by
or sponsored U.S. Government
enterprises Securities.
("U.S. Government
Securities'')
that are adjustable
rate mortgage
pass-through
securities and
other mortgage
securities with
periodic interest
rate resets.
--------------------------------------------------------------------------------------------
SHORT DURATION A high level of Target = 2-year 2-year bond At least 65% of U.S. Government Mortgage pass-
GOVERNMENT current income, U.S. Treasury total assets in Securities through
FUND and secondarily, Security plus U.S. Government securities and
in seeking current or minus .5 years Securities other securities
income, may also Maximum = 3 years and repurchase representing an
consider the poten- agreements interest in or
tial for capital collateralized collateralized
appreciation. by such securities. by mortgage loans.
--------------------------------------------------------------------------------------------
SHORT DURATION A high level of Target = Lehman 3-year bond At least 80% of Minimum = BBB/Baa U.S. Government
TAX-FREE current income, Brothers net assets in Securities
FUND consistent with 3-year Municipal municipal securities. and repurchase
low volatility Bond Index agreements
of principal, plus or minus collateralized
that is exempt .5 years by such securities.
from regular Maximum = 4 years
federal
income tax.
--------------------------------------------------------------------------------------------
GOVERNMENT A high level of Target = Lehman 5-year bond At least 65% of U.S. Government Non-government
INCOME current income, Brothers Mutual assets in U.S. Securities and mortgage pass-
FUND consistent with Fund Government/ Government non-U.S. through securities,
safety of Mortgage Index Securities, including Government asset-backed
principal. plus or minus mortgage-backed Securities rated securities,
1 year U.S. Government AAA/Aaa corporate
Maximum = Securities. fixed-income
6 years securities and
repurchase
agreements
collateralized by
U.S. Government
Securities.
<CAPTION>
FUND NAME BENCHMARK
- --------------- -----------------
<S> <C>
ADJUSTABLE 6-month and
RATE 1-Year U.S.
GOVERNMENT Treasury Security
FUND
--------------------------------------------------------------------------------------------
SHORT DURATION 2-Year U.S.
GOVERNMENT Treasury Security
FUND
--------------------------------------------------------------------------------------------
SHORT DURATION Lehman Brothers
TAX-FREE 3-Year Municipal
FUND Bond Index
--------------------------------------------------------------------------------------------
GOVERNMENT Lehman Brothers
INCOME Mutual Fund
FUND Government/
Mortgage Index
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
INTEREST
INVESTMENT RATE
FUND NAME OBJECTIVES DURATION SENSITIVITY INVESTMENT SECTOR CREDIT QUALITY
- ----------- --------------------- -------------------- ------------ ---------------------- -------------------
<S> <C> <C> <C> <C> <C>
CORE FIXED Total return Target = Lehman 5-year bond At least 65% of Minimum = BBB/Baa
INCOME FUND consisting Brothers assets in fixed-income Minimum for non-
of capital Aggregate Bond securities, including dollar securities =
appreciation Index plus or U.S. Government AA/Aa
and income that minus 1 year Securities, corporate,
exceeds the total Maximum = 6 years mortgage-backed
return of the and asset-backed
Lehman Brothers securities.
Aggregate Bond
Index.
--------------------------------------------------------------------------------------------
MUNICIPAL A high level of Target = Lehman 15-year bond At least 80% of Minimum =
INCOME current income Brothers 15-year net assets in BBB/Baa
FUND that is exempt Municipal Bond municipal securities. Average = AA/Aa
from regular Index plus
federal income or minus 1 year
tax, consistent Maximum = 12 years
with preservation
of capital.
--------------------------------------------------------------------------------------------
GLOBAL A high total return, Target = J.P. Morgan 6-year bond Securities of U.S. Minimum = AA/Aa
INCOME emphasizing current Global Government and foreign or A if sovereign
FUND income, and, to a Bond Index governments and issuer
lesser extent, (hedged) corporations. At least 50% =
providing plus or minus AAA/Aaa
opportunities 2.5 years
for capital Maximum = 7.5 years
appreciation.
--------------------------------------------------------------------------------------------
HIGH YIELD A high level of Target = Lehman 6-year bond At least 65% of At least 65% =
FUND current income Brothers High assets in fixed- BB/Ba or below
and, secondarily, Yield Bond Index income securities
capital appreciation. plus or minus rated below
2.5 years investment grade,
Maximum =7.5 years including U.S. and
non-U.S. dollar
corporate debt,
foreign government
securities,
convertible
securities
and preferred stock.
<CAPTION>
FUND NAME OTHER INVESTMENTS BENCHMARK
- ------------ ---------------------- ---------------
<S> <C> <C>
CORE FIXED Foreign fixed- Lehman Brothers
INCOME FUND income, Aggregate Bond
municipal and Index
convertible
securities,
foreign currencies
and repurchase
agreements
collateralized
by U.S.
Government
Securities.
--------------------------------------------------------------------------------------------
MUNICIPAL U.S. Government Lehman Brothers
INCOME Securities and 15-year
FUND repurchase Municipal
agreements Bond Index
collateralized by
such securities.
--------------------------------------------------------------------------------------------
GLOBAL Mortgage and asset- J.P. Morgan
INCOME backed securities, Global
FUND foreign currencies Government Bond
and repurchase Index (hedged)
agreements
collateralized by
U.S. Government
Securities or
certain foreign
government securities.
--------------------------------------------------------------------------------------------
HIGH YIELD Mortgage-backed Lehman Brothers
FUND and asset-backed High Yield
securities, U.S. Bond Index
Government
Securities,
investment grade
corporate fixed-
income securities,
structured
securities,
foreign currencies
and repurchase
agreements
collateralized by
U.S. Government
Securities.
</TABLE>
3
<PAGE>
WHAT ARE THE RISK FACTORS AND SPECIAL CHARACTERISTICS THAT I SHOULD CONSIDER
BEFORE INVESTING?
Each Fund's share price will fluctuate with market, economic and, with
respect to the Core Fixed Income, Global Income and High Yield Funds,
foreign exchange conditions, so that an investment in any of the Funds may
be worth more or less when redeemed than when purchased. None of the Funds
should be relied upon as a complete investment program. There can be no
assurance that a Fund's investment objectives will be achieved. See "Risk
Factors."
Interest Rate Risk. When interest rates decline, the market value of
fixed-income securities tends to increase. Conversely, when interest rates
increase, the market value of fixed-income securities tends to decline.
Volatility of a security's market value will differ depending upon the
security's duration, the issuer and the type of instrument.
Default Risk/Credit Risk. Investments in fixed-income securities are
subject to the risk that the issuer could default on its obligations and a
Fund could sustain losses on such investments. A default could impact both
interest and principal payments.
Call Risk and Extension Risk. Fixed-income securities may be subject to
both call risk and extension risk. Call risk (i.e., where the issuer
exercises its right to pay principal on an obligation earlier than
scheduled) causes cash flow to be returned earlier than expected. This
typically results when interest rates have declined and a Fund will suffer
from having to reinvest in lower yielding securities. Extension risk (i.e.,
where the issuer exercises its right to pay principal on an obligation later
than scheduled) causes cash flows to be returned later than expected. This
typically results when interest rates have increased and a Fund will suffer
from the inability to invest in higher yielding securities. The investment
characteristics of Mortgage-Backed Securities (including adjustable rate
mortgage securities) and Asset-Backed Securities differ from those of
traditional fixed-income securities because they generally have both call
risk (also known as prepayment risk) and extension risk.
Tax Risk of Municipal Securities. Due to Municipal Securities' tax-exempt
status, their yields and market values may be more adversely impacted by
changes in tax rates and policies than taxable fixed-income securities.
Risks of investing in non-investment grade fixed-income securities. Non-
investment grade fixed-income securities (commonly referred to as "junk
bonds") are subject to greater volatility and risk of loss and are less
liquid than securities which are perceived to be of higher credit quality.
Such securities, also referred to as high yield securities, are considered
to be speculative by traditional investment standards. High yield securities
are subject to increased risk of an issuer's inability to meet principal and
interest payments. The High Yield Fund may invest in securities which are in
default at the time of investment. The market for non-investment grade
securities tends to be concentrated in a limited number of market makers,
which may affect liquidity. In addition, the market price of such securities
tends to reflect individual corporate developments to a greater extent than
that of higher rated securities which react primarily to the general level
of interest rates.
Foreign Risks. Investments in securities of foreign issuers and currencies
involve risks that are different from those associated with investments in
domestic securities. The risks associated with foreign investments and
currencies include changes in relative currency exchange rates, political
and economic developments, the imposition of exchange controls, confiscation
and other governmental restrictions. In addition, the securities
4
<PAGE>
markets of foreign countries are generally less liquid and subject to
greater price volatility. To the extent that the Core Fixed Income, Global
Income and High Yield Funds invest in emerging markets and countries, these
risks may be heightened.
Other. A Fund's use of certain investment techniques, including
derivatives, forward contracts, options, futures and swap transactions, will
subject the Fund to greater risk than funds that do not employ such
techniques.
Non-Diversification. Global Income Fund is a "non-diversified" fund as
defined under the Investment Company Act of 1940, as amended (the "Act"),
and is, therefore, subject only to certain federal tax diversification
requirements (to which the other Funds are also subject), in addition to the
policies adopted by the Investment Adviser. To the extent that the Fund is
not diversified under the Act, it will be more susceptible to adverse
developments affecting any single issuer of portfolio securities. See
"Investment Restrictions."
WHO MANAGES THE FUNDS?
Goldman Sachs Funds Management, L.P. serves as the Investment Adviser to
the Adjustable Rate Government and Short Duration Government Funds. Goldman
Sachs Asset Management serves as Investment Adviser to the Short Duration
Tax-Free, Government Income, Municipal Income, Core Fixed Income and High
Yield Funds. Goldman Sachs Asset Management International serves as
Investment Adviser to the Global Income Fund. As of , 1997, the
Investment Advisers, together with their affiliates, acted as investment
adviser, administrator or distributor for assets in excess of $ billion.
WHO DISTRIBUTES THE FUNDS' SHARES?
Goldman Sachs acts as distributor of each Fund's shares.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $50,000 ($1,000,000 for the Government
Income, Municipal Income, Global Income and High Yield Funds) in
Institutional Shares of the Fund alone or in combination with Institutional
Shares (or the corresponding class) of any other mutual fund sponsored by
Goldman Sachs and designated as an eligible fund for this purpose.
HOW DO I PURCHASE INSTITUTIONAL SHARES?
You may purchase Institutional Shares of the Funds through Goldman Sachs.
Institutional Shares are purchased at the current net asset value without
any sales load. See "Purchase of Institutional Shares."
HOW DO I SELL MY INSTITUTIONAL SHARES?
You may redeem Institutional Shares upon request on any Business Day, as
defined under "Additional Information," at the net asset value next
determined after receipt of such request in proper form. See "Redemption of
Institutional Shares."
5
<PAGE>
HOW DO I RECEIVE DIVIDENDS AND DISTRIBUTIONS?
<TABLE>
<CAPTION>
INVESTMENT INCOME
DIVIDENDS
------------------ CAPITAL GAINS
FUND DECLARED PAID DISTRIBUTIONS
---- ------------------ -------------
<S> <C> <C> <C>
Adjustable Rate Government.................. Daily Monthly Annually
Short Duration Government................... Daily Monthly Annually
Short Duration Tax-Free..................... Daily Monthly Annually
Government Income........................... Daily Monthly Annually
Municipal Income............................ Daily Monthly Annually
Core Fixed Income........................... Daily Monthly Annually
Global Income............................... Monthly Monthly Annually
High Yield.................................. Daily Monthly Annually
</TABLE>
Recordholders of Institutional Shares may receive dividends in additional
Institutional Shares of the Fund in which you have invested or you may elect
to receive cash. For further information concerning dividends, see
"Dividends."
6
<PAGE>
FEES AND EXPENSES (INSTITUTIONAL SHARES)
<TABLE>
<CAPTION>
ADJUSTABLE SHORT SHORT CORE
RATE DURATION DURATION GOVERNMENT MUNICIPAL FIXED GLOBAL HIGH
GOVERNMENT GOVERNMENT TAX-FREE INCOME INCOME INCOME INCOME YIELD
FUND/1/ FUND FUND FUND/1/ FUND/1/ FUND FUND FUND/1/
---------- ---------- -------- ---------- --------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shareholder Transaction
Expenses:
Maximum Sales Charge
Imposed on Pur-
chases............... none none none none none none none none
Maximum Sales Charge
Imposed on Reinvested
Dividends............ none none none none none none none none
Redemption Fees....... none none none none none none none none
Exchange Fees......... none none none none none none none none
ANNUAL FUND OPERATING EXPENSES:
(as a
percentage of average daily net
assets)
Management Fees (after
applicable limita-
tions)/2/............ 0.40% 0.40% 0.40% 0.25% 0.55% 0.40% 0.59% 0.65%
Distribution (Rule
12b-1) Fees.......... none none none none none none none none
Other Expenses (after
applicable
limitations)/3/...... 0.11% 0.05% 0.05% 0.00% 0.05% 0.05% 0.06% 0.05%
---- ---- ---- ---- ---- ---- ---- ----
TOTAL FUND OPERATING
EXPENSES (after fee
and
expense limita-
tions)/4/........... 0.51% 0.45% 0.45% 0.25% 0.60% 0.45% 0.65% 0.70%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
EXAMPLE
You would pay the following expenses on a hypothetical $1,000 investment
assuming (i) a 5% annual return and (ii) redemption at the end of each time
period.
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Adjustable Rate Government...................... $ 5 $16 $29 $64
Short Duration Government....................... $ 5 $14 $25 $57
Short Duration Tax-Free......................... $ 5 $14 $25 $57
Government Income............................... $ 3 $ 8 $14 $32
Municipal Income................................ $ 6 $19 $33 $75
Core Fixed Income............................... $ 5 $14 $25 $57
Global Income................................... $ 7 $21 $36 $81
High Yield...................................... $ 7 $22 N/A N/A
</TABLE>
- --------
/1/Based on estimated amounts for the current fiscal year for the Adjustable
Rate Government, Government Income, Municipal Income and High Yield Funds.
/2/The Investment Advisers have voluntarily agreed that a portion of the
management fee would not be imposed on the Short Duration Government,
Government Income, Global Income and High Yield Funds equal to .10%, .40%,
.31% and .05%, respectively. Without such limitations, management fees would
be .50%, .65%, .90% and .70% of each Fund's average daily net assets,
respectively.
/3/The Investment Advisers voluntarily have agreed to reduce or limit certain
other expenses (excluding management fees, taxes, interest and brokerage
fees and litigation, indemnification and other extraordinary expenses (and
transfer agency fees in the case of the Global Income and High Yield Funds))
to the extent such expenses exceed .05%, .05%, .00%, .05%, .05%, .06% and
.01% of the average daily net assets of the Short Duration Government, Short
Duration Tax-Free, Government Income, Municipal Income, Core Fixed Income,
Global Income and High Yield Funds, respectively.
7
<PAGE>
/4/Without the limitations described above, "Other Expenses" and "Total
Operating Expenses" of each Fund (other than the Adjustable Rate Government,
Government Income, Municipal Income and High Yield Funds) for the fiscal
year ended October 31, 1996 would have been as follows:
<TABLE>
<CAPTION>
TOTAL
OTHER OPERATING
EXPENSES EXPENSES
-------- ---------
<S> <C> <C>
Short Duration Government................................. .21% .71%
Short Duration Tax-Free................................... .61% 1.01%
Core Fixed Income......................................... .43% .83%
Global Income............................................. .21% 1.11%
</TABLE>
In addition, without the limitations described above, "Other Expenses" and
"Total Operating Expenses" for the Government Income, Municipal Income and
High Yield Funds, for the current fiscal year are estimated to be:
<TABLE>
<CAPTION>
TOTAL
OTHER OPERATING
EXPENSES EXPENSES
-------- ---------
<S> <C> <C>
Government Income......................................... .74% 1.39%
Municipal Income.......................................... .50% 1.05%
High Yield................................................ .60% 1.30%
</TABLE>
The Investment Advisers have no current intention of modifying or
discontinuing any of the limitations set forth above but may do so in the
future at their discretion. The information set forth in the foregoing table
and hypothetical example relates only to Institutional Shares of the Funds.
The Short Duration Government, Short Duration Tax-Free and Core Fixed Income
Funds also offer Administration Shares, Service Shares, Class A Shares, Class
B Shares and Class C Shares; Adjustable Rate Government Fund also offers
Administration Shares, Service Shares and Class A Shares; Government Income,
Municipal Income, Global Income and High Yield Funds also offer Service
Shares, Class A Shares, Class B Shares and Class C Shares. The other classes
of the Funds are subject to different fees and expenses (which affect
performance), have different minimum investment requirements and are entitled
to different services. Information regarding any other class of the Funds may
be obtained from your sales representative or from Goldman Sachs by calling
the number on the back cover page of this Prospectus.
The purpose of the foregoing table is to assist investors in understanding
the various fees and expenses of a Fund that an investor will bear directly or
indirectly. The information on the fees and expenses included in the table and
the hypothetical example above are based on each Fund's fees and expenses
(actual or estimated) and should not be considered as representative of past
or future expenses. Actual fees and expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, a Fund's
actual performance will vary and may result in an actual return greater or
less than 5%. See "Management --Investment Advisers."
8
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
The following data with respect to a share (of the Class specified) of the
Funds outstanding during the period(s) indicated has been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report
incorporated by reference into the Additional Statement from the Annual Report
to shareholders for the Funds for the year ended October 31, 1996 (the "Annual
Report"). This information should be read in conjunction with the financial
statements and related notes incorporated by reference and attached to the
Additional Statement. The Annual Report also contains performance information
and is available upon request and without charge by calling the telephone
number or writing to one of the addresses on the back cover of this
Prospectus. During the periods shown, the Trust did not offer Institutional or
Service shares of the High Yield Fund. Accordingly, there are no financial
highlights for these classes.
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS
--------------------------------------------------
NET REALIZED NET
AND REALIZED
UNREALIZED AND
GAIN (LOSS) UNREALIZED TOTAL
ON GAIN (LOSS) INCOME
NET ASSET INVESTMENT, ON FOREIGN (LOSS)
VALUE AT NET OPTION AND CURRENCY FROM
BEGINNING INVESTMENT FUTURES RELATED INVESTMENT
OF PERIOD INCOME TRANSACTIONS TRANSACTIONS OPERATIONS
--------- ---------- ------------ ------------ ----------
ADJUSTABLE RATE GOVERNMENT FUND
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional
Shares..........
Administration
Shares..........
Class A Shares..
FOR THE YEAR ENDED OCTOBER 31,
1996-Institu-
tional Shares... 9.77 0.5759(a) 0.0772 (a) -- 0.6531
1996-Administra-
tion Shares..... 9.77 0.5489(a) 0.0797 (a) -- 0.6286
1996-Class A
Shares.......... 9.77 0.5481(a) 0.0806 (a) -- 0.6287
1995-Institu-
tional Shares... 9.74 0.5630(a) 0.0717 (a) -- 0.6347
1995-Administra-
tion Shares..... 9.74 0.5366(a) 0.0737 (a) -- 0.6103
1995-Class A
Shares(c)....... 9.79 0.2721(a) (0.0090)(a) -- 0.2631
1994-Institu-
tional Shares... 10.00 0.4341(a) (0.2455)(a) -- 0.1886
1994-Administra-
tion Shares..... 10.00 0.4211(a) (0.2572)(a) -- 0.1639
1993-Institu-
tional Shares... 10.04 0.4397 (0.0376)(d) -- 0.4021
1993-Administra-
tion Shares(e).. 10.02 0.2146 (0.0173)(d) -- 0.1973
1992-Institu-
tional Shares... 10.03 0.5599 (0.0029)(d) -- 0.5570
FOR THE PERIOD JULY 17, 1991(G) THROUGH OCTOBER 31,
1991-Institu-
tional Shares... 10.00 0.1531 0.0322 (d) -- 0.1853
<CAPTION>
DISTRIBUTIONS TO SHAREHOLDERS
---------------------------------------------------------------------
IN EXCESS
FROM NET OF NET
REALIZED REALIZED NET NET
GAIN ON GAIN ON INCREASE ASSET
INVESTMENT, IN EXCESS INVESTMENT, FROM TOTAL (DECREASE) VALUE
FROM NET OPTION AND OF NET OPTION AND PAID DISTRIBUTIONS IN NET AT END
INVESTMENT FUTURES INVESTMENT FUTURES IN TO ASSET OF TOTAL
INCOME TRANSACTIONS INCOME TRANSACTIONS CAPITAL SHAREHOLDERS VALUE PERIOD RETURN(K)
---------- ------------ ---------- ------------ ------- ------------- ---------- ------ ---------
ADJUSTABLE RATE GOVERNMENT FUND
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional
Shares..........
Administration
Shares..........
Class A Shares..
FOR THE YEAR ENDED OCTOBER 31,
1996-Institu-
tional Shares... (0.5725) -- (0.0206) -- -- (0.5931) 0.0600 9.83 6.86
1996-Administra-
tion Shares..... (0.5489) -- (0.0198) -- -- (0.5687) 0.0600 9.83 6.60
1996-Class A
Shares.......... (0.5489) -- (0.0198) -- -- (0.5687) 0.0600 9.83 6.60
1995-Institu-
tional Shares... (0.5759) -- (0.0287) -- -- (0.6046) 0.0301 9.77 6.75
1995-Administra-
tion Shares..... (0.5528) -- (0.0275) -- -- (0.5803) 0.0300 9.77 6.48
1995-Class A
Shares(c)....... (0.2697) -- (0.0134) -- -- (0.2831) (0.0200) 9.77 2.74(f)
1994-Institu-
tional Shares... (0.4486) -- -- -- -- (0.4486) (0.2600) 9.74 1.88
1994-Administra-
tion Shares..... (0.4239) -- -- -- -- (0.4239) (0.2600) 9.74 1.63
1993-Institu-
tional Shares... (0.4397) -- (0.0024) -- -- (0.4421) (0.0400) 10.00 4.13
1993-Administra-
tion Shares(e).. (0.2146) -- (0.0027) -- -- (0.2173) (0.0200) 10.00 2.01(f)
1992-Institu-
tional Shares... (0.5470) -- -- -- -- (0.5470) 0.0100 10.04 6.12
FOR THE PERIOD JULY 17, 1991(G) THROUGH OCTOBER 31,
1991-Institu-
tional Shares... (0.1553) -- -- -- -- (0.1553) 0.0300 10.03 2.14(f)
<CAPTION>
RATIOS ASSUMING NO
VOLUNTARY WAIVER OF
FEES OR EXPENSE
LIMITATIONS
----------------------
RATIO OF RATIO OF RATIO OF
NET NET RATIO OF NET
EXPENSES INVESTMENT EXPENSES INVESTMENT
TO INCOME PORT NET ASSETS TO INCOME
AVERAGE (LOSS) TO FOLIO AT END OF AVERAGE (LOSS) TO
NET AVERAGE TURNOVER PERIOD NET AVERAGE
ASSETS NET ASSETS RATE(D) (IN 000S) ASSETS NET ASSETS
-------- ---------- -------- ---------- -------- ----------
ADJUSTABLE RATE GOVERNMENT FUND
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional Shares....
Administration Shares...
Class A Shares..........
FOR THE YEAR ENDED OCTOBER 31,
1996-Institutional
Shares.................. 0.45 5.85 52.36 613,149 0.51 5.79
1996-Administration
Shares.................. 0.70 5.59 52.36 3,792 0.76 5.53
1996-Class A Shares..... 0.70 5.59 52.36 10,728 1.01 5.28
1995-Institutional
Shares.................. 0.46 5.77 24.12 657,358 0.53 5.70
1995-Administration
Shares.................. 0.71 5.50 24.12 3,572 0.78 5.43
1995-Class A Shares(c).. 0.69(b) 5.87(b) 24.12 15,203 1.01(b) 5.55(b)
1994-Institutional
Shares.................. 0.46 4.38 37.81 942,523 0.49 4.35
1994-Administration
Shares.................. 0.71 4.27 37.81 6,960 0.74 4.24
1993-Institutional
Shares.................. 0.45 4.36 103.74 2,760,871 0.48 4.33
1993-Administration
Shares(e)............... 0.70(b) 3.81(b) 103.74 5,326 0.73(b) 3.78(b)
1992-Institutional
Shares.................. 0.42 5.61 286.40 2,145,064 0.55 5.48
FOR THE PERIOD JULY 17, 1991(G) THROUGH OCTOBER 31,
1991-Institutional
Shares.................. 0.20(b) 7.31(b) 145.67(b) 239,642 1.02(b) 6.49(b)
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
RATIOS ASSUMING NO
VOLUNTARY WAIVER OF
FEES OR EXPENSE
LIMITATIONS
----------------------
RATIO OF RATIO OF RATIO OF
NET NET RATIO OF NET
EXPENSES INVESTMENT EXPENSES INVESTMENT
TO INCOME PORT NET ASSETS TO INCOME
AVERAGE (LOSS) TO FOLIO AT END OF AVERAGE (LOSS) TO
NET AVERAGE TURNOVER PERIOD NET AVERAGE
ASSETS NET ASSETS RATE(D) (IN 000S) ASSETS NET ASSETS
-------- ---------- -------- ---------- -------- ----------
ADJUSTABLE RATE GOVERNMENT FUND
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional Shares....
Administration Shares...
Class A Shares..........
FOR THE YEAR ENDED OCTOBER 31,
1996-Institutional
Shares.................. 0.45 5.85 52.36 613,149 0.51 5.79
1996-Administration
Shares.................. 0.70 5.59 52.36 3,792 0.76 5.53
1996-Class A Shares..... 0.70 5.59 52.36 10,728 1.01 5.28
1995-Institutional
Shares.................. 0.46 5.77 24.12 657,358 0.53 5.70
1995-Administration
Shares.................. 0.71 5.50 24.12 3,572 0.78 5.43
1995-Class A Shares(c).. 0.69(b) 5.87(b) 24.12 15,203 1.01(b) 5.55(b)
1994-Institutional
Shares.................. 0.46 4.38 37.81 942,523 0.49 4.35
1994-Administration
Shares.................. 0.71 4.27 37.81 6,960 0.74 4.24
1993-Institutional
Shares.................. 0.45 4.36 103.74 2,760,871 0.48 4.33
1993-Administration
Shares(e)............... 0.70(b) 3.81(b) 103.74 5,326 0.73(b) 3.78(b)
1992-Institutional
Shares.................. 0.42 5.61 286.40 2,145,064 0.55 5.48
FOR THE PERIOD JULY 17, 1991(G) THROUGH OCTOBER 31,
1991-Institutional
Shares.................. 0.20(b) 7.31(b) 145.67(b) 239,642 1.02(b) 6.49(b)
</TABLE>
9--1
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS
--------------------------------------------------
NET REALIZED NET
AND REALIZED
UNREALIZED AND
GAIN (LOSS) UNREALIZED TOTAL
ON GAIN (LOSS) INCOME
NET ASSET INVESTMENT, ON FOREIGN (LOSS)
VALUE AT NET OPTION AND CURRENCY FROM
BEGINNING INVESTMENT FUTURES RELATED INVESTMENT
OF PERIOD INCOME TRANSACTIONS TRANSACTIONS OPERATIONS
--------- ---------- ------------ ------------ ----------
SHORT DURATION GOVERNMENT FUND
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional
Shares.........
Administration
Shares.........
Service Shares
FOR THE YEAR ENDED OCTOBER 31,
1996-Institu-
tional Shares
................ 9.82 0.6290(a) 0.0136 (a) -- 0.6426
1996-Administra-
tion
Shares(h)...... 9.86 0.3837(a) 0.0003 (a) -- 0.3840
1996-Service
Shares(i)...... 9.72 0.3134(a) 0.1018 (a) -- 0.4152
1995-Institu-
tional Shares.. 9.64 0.6652(a) 0.1666 (a) -- 0.8318
1995-Administra-
tion Shares.... 9.64 0.2384(a) (0.0433)(a) -- 0.1951
1994-Institu-
tional Shares.. 10.14 0.5628(a) (0.4592)(a) -- 0.1036
1994-Administra-
tion Shares.... 10.14 0.5329(a) (0.4539)(a) -- 0.0790
1993-Institu-
tional Shares.. 10.16 0.5627 (0.0135)(d) -- 0.5492
1993-Administra-
tion
Shares(e)...... 10.23 0.2725 (0.0900)(d) -- 0.1825
1992-Institu-
tional Shares.. 10.22 0.6703 (0.0600)(d) -- 0.6103
1991-Institu-
tional Shares.. 10.00 0.8020 0.2200 (d) -- 1.0220
1990-Institu-
tional Shares.. 10.07 0.8300 (0.0700)(d) -- 0.7600
1989-Institu-
tional Shares.. 10.10 0.8800 -- -- 0.8800
FOR THE PERIOD AUGUST 15, 1988(G) THROUGH OCTOBER 31,
1988-Institu-
tional Shares.. 10.00 0.1800 0.1000 (d) -- 0.2800
<CAPTION>
DISTRIBUTIONS TO SHAREHOLDERS
-----------------------------------------------------------------------
IN EXCESS
FROM NET OF NET
REALIZED REALIZED NET NET
GAIN ON GAIN ON INCREASE ASSET
INVESTMENT, IN EXCESS INVESTMENT, FROM TOTAL (DECREASE) VALUE
FROM NET OPTION AND OF NET OPTION AND PAID DISTRIBUTIONS IN NET AT END
INVESTMENT FUTURES INVESTMENT FUTURES IN TO ASSET OF TOTAL
INCOME TRANSACTIONS INCOME TRANSACTIONS CAPITAL SHAREHOLDERS VALUE PERIOD RETURN(K)
---------- ------------ ---------- ------------ -------- ------------- ---------- ------ ---------
SHORT DURATION GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional
Shares.........
Administration
Shares.........
Service Shares
FOR THE YEAR ENDED OCTOBER 31,
1996-Institu-
tional Shares
................ (0.6326) -- -- -- -- (0.6326) 0.0100 9.83 6.75
1996-Administra-
tion
Shares(h)...... (0.3940) -- -- -- -- (0.3940) (0.0100) 9.85 4.00(f)
1996-Service
Shares(i)...... (0.3152) -- -- -- -- (0.3152) 0.1000 9.82 4.35(f)
1995-Institu-
tional Shares.. (0.6518) -- -- -- -- (0.6518) 0.1800 9.82 8.97
1995-Administra-
tion Shares.... (0.2051) -- -- -- -- (0.2051) (0.0100) 9.63(h) 2.10
1994-Institu-
tional Shares.. (0.5598) (0.0438) -- -- -- (0.6036) (0.5000) 9.64 0.99
1994-Administra-
tion Shares.... (0.5352) (0.0438) -- -- -- (0.5790) (0.5000) 9.64 0.73
1993-Institu-
tional Shares.. (0.5627) -- (0.0065) -- -- (0.5692) (0.0200) 10.14 5.55
1993-Administra-
tion
Shares(e)...... (0.2725) -- -- -- -- (0.2725) (0.0900) 10.14 1.74
1992-Institu-
tional Shares.. (0.6703) -- -- -- -- (0.6703) (0.0600) 10.16 6.24
1991-Institu-
tional Shares.. (0.8020) -- -- -- -- (0.8020) 0.2200 10.22 10.93
1990-Institu-
tional Shares.. (0.8300) -- -- -- -- (0.8300) (0.0700) 10.00 8.23
1989-Institu-
tional Shares.. (0.8800) -- -- -- (0.0300) (0.9100) (0.0300) 10.07 9.08
FOR THE PERIOD AUGUST 15, 1988(G) THROUGH OCTOBER 31,
1988-Institu-
tional Shares.. (0.1800) -- -- -- -- (0.1800) 0.1000 10.10 3.30(f)
<CAPTION>
RATIOS ASSUMING NO
VOLUNTARY WAIVER OF
FEES OR EXPENSE
LIMITATIONS
--------------------
RATIO OF RATIO OF NET RATIO OF
NET NET ASSETS RATIO OF NET
EXPENSES INVESTMENT AT END EXPENSES INVESTMENT
TO INCOME OF TO INCOME
AVERAGE (LOSS) TO PORTFOLIO PERIOD AVERAGE (LOSS) TO
NET AVERAGE TURNOVER (IN NET AVERAGE
ASSETS NET ASSETS RATE(D) 000S) ASSETS NET ASSETS
-------- ---------- --------- ------- -------- ----------
SHORT DURATION GOVERNMENT FUND
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional Shares....
Administration Shares...
Service Shares
FOR THE YEAR ENDED OCTOBER 31,
1996-Institutional
Shares ................ 0.45 6.44 115.45 99,944 0.71 6.18
1996-Administration
Shares(h).............. 0.70(b) 5.97(b) 115.45 252 0.96(b) 5.71(b)
1996-Service Shares(i).. 0.95(b) 6.05(b) 115.45 1,822 1.21(b) 5.79(b)
1995-Institutional
Shares................. 0.45 6.87 292.56 103,760 0.72 6.60
1995-Administration
Shares................. 0.70(b) 7.91(b) 292.56 -- 0.90(b) 7.71(b)
1994-Institutional
Shares................. 0.45 5.69 289.79 193,095 0.59 5.55
1994-Administration
Shares................. 0.70 5.38 289.79 730 0.84 5.24
1993-Institutional
Shares................. 0.45 5.46 411.66 359,708 0.64 5.31
1993-Administration
Shares(e).............. 0.70(b) 4.84(b) 411.66 16,490 0.80(b) 4.74(b)
1992-Institutional
Shares................. 0.45 6.60 216.07 277,927 0.69 6.36
1991-Institutional
Shares................. 0.45 8.25 155.44 158,848 0.79 7.91
1990-Institutional
Shares................. 0.45 8.62 173.21 68,995 0.95 8.12
1989-Institutional
Shares................. 0.46 8.71 137.37 31,015 1.39 7.78
FOR THE PERIOD AUGUST 15, 1988(G) THROUGH OCTOBER 31,
1988-Institutional
Shares................. 0.55(b) 8.55(b) 167.00(b) 39,052 1.42(b) 7.68(b)
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
RATIOS ASSUMING NO
VOLUNTARY WAIVER OF
FEES OR EXPENSE
LIMITATIONS
--------------------
RATIO OF RATIO OF NET RATIO OF
NET NET ASSETS RATIO OF NET
EXPENSES INVESTMENT AT END EXPENSES INVESTMENT
TO INCOME OF TO INCOME
AVERAGE (LOSS) TO PORTFOLIO PERIOD AVERAGE (LOSS) TO
NET AVERAGE TURNOVER (IN NET AVERAGE
ASSETS NET ASSETS RATE(D) 000S) ASSETS NET ASSETS
-------- ---------- --------- ------- -------- ----------
SHORT DURATION GOVERNMENT FUND
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional Shares....
Administration Shares...
Service Shares
FOR THE YEAR ENDED OCTOBER 31,
1996-Institutional
Shares ................ 0.45 6.44 115.45 99,944 0.71 6.18
1996-Administration
Shares(h).............. 0.70(b) 5.97(b) 115.45 252 0.96(b) 5.71(b)
1996-Service Shares(i).. 0.95(b) 6.05(b) 115.45 1,822 1.21(b) 5.79(b)
1995-Institutional
Shares................. 0.45 6.87 292.56 103,760 0.72 6.60
1995-Administration
Shares................. 0.70(b) 7.91(b) 292.56 -- 0.90(b) 7.71(b)
1994-Institutional
Shares................. 0.45 5.69 289.79 193,095 0.59 5.55
1994-Administration
Shares................. 0.70 5.38 289.79 730 0.84 5.24
1993-Institutional
Shares................. 0.45 5.46 411.66 359,708 0.64 5.31
1993-Administration
Shares(e).............. 0.70(b) 4.84(b) 411.66 16,490 0.80(b) 4.74(b)
1992-Institutional
Shares................. 0.45 6.60 216.07 277,927 0.69 6.36
1991-Institutional
Shares................. 0.45 8.25 155.44 158,848 0.79 7.91
1990-Institutional
Shares................. 0.45 8.62 173.21 68,995 0.95 8.12
1989-Institutional
Shares................. 0.46 8.71 137.37 31,015 1.39 7.78
FOR THE PERIOD AUGUST 15, 1988(G) THROUGH OCTOBER 31,
1988-Institutional
Shares................. 0.55(b) 8.55(b) 167.00(b) 39,052 1.42(b) 7.68(b)
</TABLE>
10--1
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS
--------------------------------------------------
NET REALIZED NET
AND REALIZED
UNREALIZED AND
GAIN (LOSS) UNREALIZED TOTAL
ON GAIN (LOSS) INCOME
NET ASSET INVESTMENT, ON FOREIGN (LOSS)
VALUE AT NET OPTION AND CURRENCY FROM
BEGINNING INVESTMENT FUTURES RELATED INVESTMENT
OF PERIOD INCOME TRANSACTIONS TRANSACTIONS OPERATIONS
--------- ---------- ------------ ------------ ----------
SHORT DURATION TAX-FREE FUND
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional
Shares.........
Administration
Shares.........
Service Shares
FOR THE YEAR ENDED OCTOBER 31,
1996-Institu-
tional Shares.. 9.94 0.4192(a) 0.0200 (a) -- 0.4392
1996-Administra-
tion Shares.... 9.94 0.3944(a) 0.0200 (a) -- 0.4144
1996-Service
Shares......... 9.95 0.3697(a) 0.0200 (a) -- 0.3897
1995-Institu-
tional Shares.. 9.79 0.4235(a) 0.1500 (a) -- 0.5735
1995-Administra-
tion Shares.... 9.79 0.3989(a) 0.1500 (a) -- 0.5489
1995-Service
Shares......... 9.79 0.3744(a) 0.1600 (a) -- 0.5344
1994-Institu-
tional Shares.. 10.23 0.3787(a) (0.3575)(a) -- 0.0212
1994-Administra-
tion Shares.... 10.23 0.3537(a) (0.3575)(a) -- (0.0038)
1994-Service
Shares(j)...... 9.86 0.0475(a) (0.0700)(a) (0.0225)
1993-Institu-
tional Shares.. 9.93 0.3834 0.3000(d) -- 0.6834
1993-Administra-
tion
Shares(j)...... 10.16 0.1555 0.0720(d) -- 0.2275
FOR THE PERIOD OCTOBER 1, 1992(G) THROUGH OCTOBER 31,
1992-Institu-
tional Shares.. 10.00 0.0341 (0.0700)(d) -- (0.0359)
GOVERNMENT INCOME FUND
- -------------------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31,
1996-Class A
shares.......... $14.47 $ 0.92 $ (0.11) -- $ 0.81
1996-Class B
shares(m)....... 14.11 0.41 0.26 -- 0.67
1995-Class A
shares.......... 13.47 0.94 1.00 -- 1.94
1994-Class A
shares.......... 14.90 0.85 (1.28) -- (0.43)
FOR THE PERIOD FEBRUARY 10, 1993(G) THROUGH OCTOBER 31,
1993-Class A
shares.......... 14.32 0.56 0.58 -- 1.14
MUNICIPAL INCOME FUND
- -------------------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31,
1996-Class A
shares.......... $14.17 $ 0.65 $0.20 -- $ 0.85
1996-Class B
shares(m)....... 14.03 0.27 0.34 -- 0.61
1995-Class A
shares.......... 13.08 0.67 1.09 -- 1.76
1994-Class A
shares.......... 14.64 0.73 (1.51) -- (0.78)
FOR THE PERIOD JULY 20, 1993(G) THROUGH OCTOBER 31,
1993-Class A
shares.......... 14.32 0.22 0.32 -- 0.54
<CAPTION>
DISTRIBUTIONS TO SHAREHOLDERS
---------------------------------------------------------------------
IN EXCESS
FROM NET OF NET
REALIZED REALIZED NET NET
GAIN ON GAIN ON INCREASE ASSET
INVESTMENT, IN EXCESS INVESTMENT, FROM TOTAL (DECREASE) VALUE
FROM NET OPTION AND OF NET OPTION AND PAID DISTRIBUTIONS IN NET AT END
INVESTMENT FUTURES INVESTMENT FUTURES IN TO ASSET OF TOTAL
INCOME TRANSACTIONS INCOME TRANSACTIONS CAPITAL SHAREHOLDERS VALUE PERIOD RETURN(K)
---------- ------------ ---------- ------------ ------- ------------- ---------- ------ ---------
SHORT DURATION TAX-FREE FUND
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional
Shares.........
Administration
Shares.........
Service Shares
FOR THE YEAR ENDED OCTOBER 31,
1996-Institu-
tional Shares.. (0.4192) -- -- -- -- (0.4192) 0.0300 9.96 4.50
1996-Administra-
tion Shares.... (0.3944) -- -- -- -- (0.3944) 0.0300 9.96 4.24
1996-Service
Shares......... (0.3697) -- -- -- -- (0.3697) 0.0200 9.97 3.98
1995-Institu-
tional Shares.. (0.4235) -- -- -- -- (0.4235) 0.1500 9.94 5.98
1995-Administra-
tion Shares.... (0.3989) -- -- -- -- (0.3989) 0.1500 9.94 5.76
1995-Service
Shares......... (0.3744) -- -- -- -- (0.3744) 0.1600 9.95 5.59
1994-Institu-
tional Shares.. (0.3787) (0.0825) -- -- -- (0.4612) (0.4400) 9.79 0.17
1994-Administra-
tion Shares.... (0.3537) (0.0825) -- -- -- (0.4362) (0.4400) 9.79 (0.11)
1994-Service
Shares(j)...... (0.0475) -- (0.0475) (0.0700) 9.79 (0.32)(f)
1993-Institu-
tional Shares.. (0.3834) -- -- -- -- (0.3834) 0.3000 10.23 7.03
1993-Administra-
tion
Shares(j)...... (0.1555) -- -- -- -- (0.1555) 0.0720 10.23 2.28(f)
FOR THE PERIOD OCTOBER 1, 1992(G) THROUGH OCTOBER 31,
1992-Institu-
tional Shares.. (0.0341) -- -- -- -- (0.0341) (0.0700) 9.93 (0.34)(f)
GOVERNMENT INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31,
1996-Class A
shares.......... $(0.92) -- -- -- -- $ (0.92) $ (0.11) $14.36 5.80%
1996-Class B
shares(m)....... (0.41) -- -- -- -- (0.41) 0.26 14.37 4.85(f)
1995-Class A
shares.......... (0.94) -- -- -- -- (0.94) 1.00 14.47 14.90
1994-Class A
shares.......... (0.85) (0.12) (0.02) (0.01) -- (1.00) (1.43) 13.47 (2.98)
FOR THE PERIOD FEBRUARY 10, 1993(G) THROUGH OCTOBER 31,
1993-Class A
shares.......... (0.56) -- -- -- -- (0.56) 0.58 14.90 8.03(f)
MUNICIPAL INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31,
1996-Class A
shares.......... $ (0.65) -- -- -- -- $ (0.65) $ 0.20 $14.37 6.13%
1996-Class B
shares(m)....... (0.27) -- -- -- -- (0.27) 0.34 14.37 4.40(f)
1995-Class A
shares.......... (0.67) -- -- -- -- (0.67) 1.09 14.17 13.79
1994-Class A
shares.......... (0.73) (0.05) -- -- -- (0.78) (1.56) 13.08 (5.51)
FOR THE PERIOD JULY 20, 1993(G) THROUGH OCTOBER 31,
1993-Class A
shares.......... (0.22) -- -- -- -- (0.22) 0.32 14.64 3.73(f)
<CAPTION>
RATIOS ASSUMING NO
VOLUNTARY WAIVER OF
FEES OR EXPENSE
LIMITATIONS
--------------------
RATIO OF RATIO OF NET RATIO OF
NET NET ASSETS RATIO OF NET
EXPENSES INVESTMENT AT END EXPENSES INVESTMENT
TO INCOME OF TO INCOME
AVERAGE (LOSS) TO PORTFOLIO PERIOD AVERAGE (LOSS) TO
NET AVERAGE TURNOVER (IN NET AVERAGE
ASSETS NET ASSETS RATE(D) 000S) ASSETS NET ASSETS
-------- ---------- --------- ------- -------- ----------
SHORT DURATION TAX-FREE FUND
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional Shares....
Administration Shares...
Service Shares
FOR THE YEAR ENDED OCTOBER 31,
1996-Institutional
Shares................. 0.45 4.21 231.65 34,814 1.01 3.65
1996-Administration
Shares................. 0.70 3.96 231.65 48 1.26 3.40
1996-Service Shares..... 0.95 3.74 231.65 695 1.51 3.18
1995-Institutional
Shares................. 0.45 4.31 259.52 58,389 0.77 3.99
1995-Administration
Shares................. 0.70 4.14 259.52 46 1.02 3.82
1995-Service Shares..... 0.95 3.87 259.52 454 1.27 3.55
1994-Institutional
Shares................. 0.45 3.74 354.00 83,704 0.61 3.58
1994-Administration
Shares................. 0.70 3.51 354.00 3,866 0.86 3.35
1994-Service Shares(j).. 0.95(b) 4.30(b) 354.00 440 1.11(b) 4.14(b)
1993-Institutional
Shares................. 0.41 3.70 404.60 115,803 1.06 3.05
1993-Administration
Shares(j).............. 0.70(b) 3.32(b) 404.60 911 1.07(b) 2.95(b)
FOR THE PERIOD OCTOBER 1, 1992(G) THROUGH OCTOBER 31,
1992-Institutional
Shares................. 0.05(b) 4.58(b) 31.19(f) 14,601 2.68(b) 1.95(b)
GOVERNMENT INCOME FUND
- ---------------------------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31,
1996-Class A shares..... 0.50% 6.42% 485.09% $30,603 1.89% 5.03%
1996-Class B shares(m).. 1.25(b) 5.65(b) 485.09 234 2.39(b) 4.51(b)
1995-Class A shares..... 0.47 6.67 449.53 29,503 2.34 4.80
1994-Class A shares..... 0.11 6.06 654.90 14,452 2.86 3.31
FOR THE PERIOD FEBRUARY 10, 1993(G) THROUGH OCTOBER 31,
1993-Class A shares..... 0.00(b) 4.87(b) 725.41(f) 12,860 4.00(b) 0.87(b)
MUNICIPAL INCOME FUND
- ---------------------------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31,
1996-Class A shares..... 0.85% 4.58% 344.13% $52,267 1.55% 3.88%
1996-Class B shares(m).. 1.60(b) 3.55(b) 344.13 255 2.05(b) 3.10(b)
1995-Class A shares..... 0.76 4.93 335.55 53,797 1.49 4.20
1994-Class A shares..... 0.45 5.28 357.54 47,373 1.55 4.18
FOR THE PERIOD JULY 20, 1993(G) THROUGH OCTOBER 31,
1993-Class A shares..... 0.00(b) 5.15(b) 99.99(f) 30,166 2.42(b) 2.73(b)
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
RATIOS ASSUMING NO
VOLUNTARY WAIVER OF
FEES OR EXPENSE
LIMITATIONS
--------------------
RATIO OF RATIO OF NET RATIO OF
NET NET ASSETS RATIO OF NET
EXPENSES INVESTMENT AT END EXPENSES INVESTMENT
TO INCOME OF TO INCOME
AVERAGE (LOSS) TO PORTFOLIO PERIOD AVERAGE (LOSS) TO
NET AVERAGE TURNOVER (IN NET AVERAGE
ASSETS NET ASSETS RATE(D) 000S) ASSETS NET ASSETS
-------- ---------- --------- ------- -------- ----------
SHORT DURATION TAX-FREE FUND
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional Shares....
Administration Shares...
Service Shares
FOR THE YEAR ENDED OCTOBER 31,
1996-Institutional
Shares................. 0.45 4.21 231.65 34,814 1.01 3.65
1996-Administration
Shares................. 0.70 3.96 231.65 48 1.26 3.40
1996-Service Shares..... 0.95 3.74 231.65 695 1.51 3.18
1995-Institutional
Shares................. 0.45 4.31 259.52 58,389 0.77 3.99
1995-Administration
Shares................. 0.70 4.14 259.52 46 1.02 3.82
1995-Service Shares..... 0.95 3.87 259.52 454 1.27 3.55
1994-Institutional
Shares................. 0.45 3.74 354.00 83,704 0.61 3.58
1994-Administration
Shares................. 0.70 3.51 354.00 3,866 0.86 3.35
1994-Service Shares(j).. 0.95(b) 4.30(b) 354.00 440 1.11(b) 4.14(b)
1993-Institutional
Shares................. 0.41 3.70 404.60 115,803 1.06 3.05
1993-Administration
Shares(j).............. 0.70(b) 3.32(b) 404.60 911 1.07(b) 2.95(b)
FOR THE PERIOD OCTOBER 1, 1992(G) THROUGH OCTOBER 31,
1992-Institutional
Shares................. 0.05(b) 4.58(b) 31.19(f) 14,601 2.68(b) 1.95(b)
GOVERNMENT INCOME FUND
- ---------------------------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31,
1996-Class A shares..... 0.50% 6.42% 485.09% $30,603 1.89% 5.03%
1996-Class B shares(m).. 1.25(b) 5.65(b) 485.09 234 2.39(b) 4.51(b)
1995-Class A shares..... 0.47 6.67 449.53 29,503 2.34 4.80
1994-Class A shares..... 0.11 6.06 654.90 14,452 2.86 3.31
FOR THE PERIOD FEBRUARY 10, 1993(G) THROUGH OCTOBER 31,
1993-Class A shares..... 0.00(b) 4.87(b) 725.41(f) 12,860 4.00(b) 0.87(b)
MUNICIPAL INCOME FUND
- ---------------------------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31,
1996-Class A shares..... 0.85% 4.58% 344.13% $52,267 1.55% 3.88%
1996-Class B shares(m).. 1.60(b) 3.55(b) 344.13 255 2.05(b) 3.10(b)
1995-Class A shares..... 0.76 4.93 335.55 53,797 1.49 4.20
1994-Class A shares..... 0.45 5.28 357.54 47,373 1.55 4.18
FOR THE PERIOD JULY 20, 1993(G) THROUGH OCTOBER 31,
1993-Class A shares..... 0.00(b) 5.15(b) 99.99(f) 30,166 2.42(b) 2.73(b)
</TABLE>
11--1
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS(N)
-----------------------------------------------
NET REALIZED NET
AND REALIZED
UNREALIZED AND
GAIN (LOSS) UNREALIZED TOTAL
ON GAIN (LOSS) INCOME
NET ASSET INVESTMENT, ON FOREIGN (LOSS)
VALUE AT NET OPTION AND CURRENCY FROM
BEGINNING INVESTMENT FUTURES RELATED INVESTMENT
OF PERIOD INCOME TRANSACTIONS TRANSACTIONS OPERATIONS
--------- ---------- ------------ ------------ ----------
CORE FIXED INCOME FUND
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional
Shares..........
Administration
Shares..........
Service Shares
FOR THE YEAR ENDED OCTOBER 31,
1996-Institu-
tional Shares... 10.00 0.6448 (0.0704) -- 0.5744
1996-Administra-
tion Shares(1).. 9.91 0.4083 (0.0703) -- 0.3380
1996-Service
Shares(1)....... 9.77 0.3756 0.0898 -- 0.4654
1995-Institu-
tional Shares... 9.24 0.6423 0.7610 -- 1.4033
FOR THE PERIOD JANUARY 5, 1994(G) THROUGH OCTOBER 31,
1994-Institu-
tional Shares... 10.00 0.4648 (0.7617) -- (0.2969)
GLOBAL INCOME FUND
- ---------------- ----------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Class A Shares..
Class B Shares..
Institutional
Shares..........
FOR THE YEARS ENDED OCTOBER 31,
1996-Class A
shares.......... 14.45 0.71 0.62 0.18 1.51
1996-Class B
shares(m)....... 14.03 0.34 0.41 0.11 0.86
1996-
Institutional
shares.......... 14.45 1.15 0.32 0.10 1.57
1995-Class A
shares.......... 13.43 0.89 0.92 0.15 1.96
1995-
Institutional
shares(m)....... 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(G) THROUGH OCTOBER 31,
1991-Class A
shares.......... 14.55 0.25 0.23 (0.19) 0.29
- -------------------------------------------------------------------------------
<CAPTION>
DISTRIBUTIONS TO SHAREHOLDERS
-----------------------------------------------------------------------
IN EXCESS
FROM NET OF NET
REALIZED REALIZED NET NET
GAIN ON GAIN ON INCREASE ASSET
INVESTMENT, IN EXCESS INVESTMENT, FROM TOTAL (DECREASE) VALUE
FROM NET OPTION AND OF NET OPTION AND PAID DISTRIBUTIONS IN NET AT END
INVESTMENT FUTURES INVESTMENT FUTURES IN TO ASSET OF TOTAL
INCOME TRANSACTIONS INCOME TRANSACTIONS CAPITAL SHAREHOLDERS VALUE PERIOD RETURN(K)
---------- ------------ ---------- ------------ -------- ------------- ---------- ------ ---------
CORE FIXED INCOME FUND
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional
Shares..........
Administration
Shares..........
Service Shares
FOR THE YEAR ENDED OCTOBER 31,
1996-Institu-
tional Shares... (0.6438) (0.0806) -- -- -- (0.7244) (0.1500) 9.85 5.98
1996-Administra-
tion Shares(1).. (0.4080) -- -- -- -- (0.4080) (0.0700) 9.84 3.56(f)
1996-Service
Shares(1)....... (0.3754) -- -- -- -- (0.3754) 0.0900 9.86 4.90(f)
1995-Institu-
tional Shares... (0.6433) -- -- -- -- (0.6433) 0.7600 10.00 15.72
FOR THE PERIOD JANUARY 5, 1994(G) THROUGH OCTOBER 31,
1994-Institu-
tional Shares... (0.4648) -- -- -- -- (0.4648) (0.7617) 9.24 (3.00)
GLOBAL INCOME FUND
- ---------------- ----------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Class A Shares..
Class B Shares..
Institutional
Shares..........
FOR THE YEARS ENDED OCTOBER 31,
1996-Class A
shares.......... (1.43) -- -- -- -- (1.43) 0.08 14.53 11.0%
1996-Class B
shares(m)....... (0.36) -- -- -- -- (0.36) 0.50 14.53 6.24(f)
1996-
Institutional
shares.......... (1.50) -- -- -- -- (1.50) 0.07 14.52 11.55
1995-Class A
shares.......... (0.94) -- -- -- -- (0.94) 1.02 14.45 15.08
1995-
Institutional
shares(m)....... (0.26) -- -- -- -- (0.26) 0.36 14.45 4.42(f)
1994-Class A
shares.......... (0.22) (0.16) -- -- (0.61) (0.99) (1.64) 13.43 (4.49)
1993-Class A
shares.......... (0.85) (0.27) -- -- -- (1.12) 0.38 15.07 10.75
1992-Class A
shares.......... (1.14) -- -- -- -- (1.14) 0.09 14.69 8.77
FOR THE PERIOD AUGUST 2, 1991(G) THROUGH OCTOBER 31,
1991-Class A
shares.......... (0.24) -- -- -- -- (0.24) 0.05 14.60 2.00
<CAPTION>
RATIOS ASSUMING NO
VOLUNTARY WAIVER OF
FEES OR EXPENSE
LIMITATIONS
--------------------
RATIO OF NET RATIO OF
NET RATIO OF ASSETS RATIO OF NET
EXPENSES NET AT END EXPENSES INVESTMENT
TO INVESTMENT OF TO INCOME
AVERAGE INCOME TO PORTFOLIO PERIOD AVERAGE (LOSS) TO
NET AVERAGE TURNOVER (IN NET AVERAGE
ASSETS NET ASSETS RATE(D) 000S) ASSETS NET ASSETS
-------- ---------- --------- ------- -------- ----------
CORE FIXED INCOME FUND
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional Shares....
Administration Shares...
Service Shares
FOR THE YEAR ENDED OCTOBER 31,
1996-Institutional
Shares.................. 0.45 6.51 414.20 72,061 0.83 6.13
1996-Administration
Shares(1)............... 0.70(b) 6.41(b) 414.20 702 1.08(b) 6.03(b)
1996-Service Shares(1).. 0.95(b) 6.37(b) 414.20 381 1.33(b) 5.99(b)
1995-Institutional
Shares.................. 0.45 6.56 383.26 55,502 0.96 6.05
FOR THE PERIOD JANUARY 5, 1994(G) THROUGH OCTOBER 31,
1994-Institutional
Shares.................. 0.45(b) 6.48(b) 288.25 24,508 1.46(b) 5.47(b)
GLOBAL INCOME FUND
- ------------------------ -------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Class A Shares..........
Class B Shares..........
Institutional Shares....
FOR THE YEARS ENDED OCTOBER 31,
1996-Class A shares..... 1.16 5.81 232.15 198,665 1.64 5.33
1996-Class B shares(m).. 1.70(b) 5.16(b) 232.15 256 2.14(b) 4.72(b)
1996-Institutional
shares.................. 0.65 6.35 232.15 54,254 1.11 5.89
1995-Class A shares..... 1.29 6.23 265.86 245,835 1.58 5.94
1995-Institutional
shares(m)............... 0.65(b) 6.01(b) 265.86 31,619 1.08(b) 5.58(b)
1994-Class A shares..... 1.28 5.73 343.74 396,584 1.53 5.48
1993-Class A shares..... 1.30 5.78 313.88 675,662 1.55 5.53
1992-Class A shares..... 1.37 7.85 270.75 588,893 1.62 7.60
FOR THE PERIOD AUGUST 2, 1991(G) THROUGH OCTOBER 31,
1991-Class A shares..... 0.38(f) 1.72(f) 34.22(f) 388,744 0.44(f) 1.66(f)
- ---------------------------------------------------------------------------------------
</TABLE>
(a) Calculated based on the average shares outstanding methodology.
(b) Annualized.
(c) Class A share activity commenced on May 15, 1995.
(d) Includes the effect of mortgage dollar roll transactions.
(e) Administration share activity commenced on April 15, 1993.
(f) Not annualized.
(g) Commencement of operations.
(h) GS Short Duration Government Fund Administration shares were redeemed in
full on February 23, 1995 and re-commenced on February 28, 1996 at $9.86.
(i) Service share activity commenced on April 10, 1996.
(j) Administration and service share activity commenced on May 20, 1993 and
September 20, 1994 respectively.
(k) 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 not
sales charges. For Class A shares only, total return would be reduced if a
sales charge were taken into account.
(l) Administration and Service share activity commenced operations on February
28, 1996 and March 13, 1996 respectively.
(m) Institutional and Class B shares commenced operations on June 1, 1995 and
May 1, 1996, respectively.
(n) Includes the balancing effect of calculating per share amounts.
12
<PAGE>
<TABLE>
<CAPTION>
RATIOS ASSUMING NO
VOLUNTARY WAIVER OF
FEES OR EXPENSE
LIMITATIONS
--------------------
RATIO OF NET RATIO OF
NET RATIO OF ASSETS RATIO OF NET
EXPENSES NET AT END EXPENSES INVESTMENT
TO INVESTMENT OF TO INCOME
AVERAGE INCOME TO PORTFOLIO PERIOD AVERAGE (LOSS) TO
NET AVERAGE TURNOVER (IN NET AVERAGE
ASSETS NET ASSETS RATE(D) 000S) ASSETS NET ASSETS
-------- ---------- --------- ------- -------- ----------
CORE FIXED INCOME FUND
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional Shares....
Administration Shares...
Service Shares
FOR THE YEAR ENDED OCTOBER 31,
1996-Institutional
Shares.................. 0.45 6.51 414.20 72,061 0.83 6.13
1996-Administration
Shares(1)............... 0.70(b) 6.41(b) 414.20 702 1.08(b) 6.03(b)
1996-Service Shares(1).. 0.95(b) 6.37(b) 414.20 381 1.33(b) 5.99(b)
1995-Institutional
Shares.................. 0.45 6.56 383.26 55,502 0.96 6.05
FOR THE PERIOD JANUARY 5, 1994(G) THROUGH OCTOBER 31,
1994-Institutional
Shares.................. 0.45(b) 6.48(b) 288.25 24,508 1.46(b) 5.47(b)
GLOBAL INCOME FUND
- ------------------------ -------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Class A Shares..........
Class B Shares..........
Institutional Shares....
FOR THE YEARS ENDED OCTOBER 31,
1996-Class A shares..... 1.16 5.81 232.15 198,665 1.64 5.33
1996-Class B shares(m).. 1.70(b) 5.16(b) 232.15 256 2.14(b) 4.72(b)
1996-Institutional
shares.................. 0.65 6.35 232.15 54,254 1.11 5.89
1995-Class A shares..... 1.29 6.23 265.86 245,835 1.58 5.94
1995-Institutional
shares(m)............... 0.65(b) 6.01(b) 265.86 31,619 1.08(b) 5.58(b)
1994-Class A shares..... 1.28 5.73 343.74 396,584 1.53 5.48
1993-Class A shares..... 1.30 5.78 313.88 675,662 1.55 5.53
1992-Class A shares..... 1.37 7.85 270.75 588,893 1.62 7.60
FOR THE PERIOD AUGUST 2, 1991(G) THROUGH OCTOBER 31,
1991-Class A shares..... 0.38(f) 1.72(f) 34.22(f) 388,744 0.44(f) 1.66(f)
- ---------------------------------------------------------------------------------------
</TABLE>
12--1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and principal investment policies of each Fund are
described below. Other investment practices and management techniques, which
involve certain risks are described under "Description of Securities," "Risk
Factors" and "Investment Techniques." There can be no assurance that a Fund's
investment objectives will be achieved.
A Fund's duration approximates its price sensitivity to changes in interest
rates. Maturity measures the time until final payment is due; it takes no
account of the pattern of a security's cash flows over time. In computing
portfolio duration, a Fund will estimate the duration of obligations that are
subject to prepayment or redemption by the issuer taking into account the
influence of interest rates on prepayments and coupon flows. This method of
computing duration is known as "option-adjusted" duration. A Fund will not be
limited as to its maximum weighted average portfolio maturity or the maximum
stated maturity with respect to individual securities unless otherwise noted.
A Fund will deem a security to have met its minimum credit rating
requirement if the security receives the minimum required long-term rating (or
the equivalent short-term credit rating) at the time of purchase from at least
one rating organization (including, but not limited to, Standard & Poor's
Ratings Group ("S&P") and Moody's Investors Service, Inc. ("Moody's")) even
though it has been rated below the minimum rating by one or more other rating
organizations, or, if unrated by a rating organization, is determined by the
Investment Adviser to be of comparable quality. If a security satisfies a
Fund's minimum rating criteria at the time of purchase and is subsequently
downgraded below such rating, the Fund will not be required to dispose of such
security. If a downgrade occurs, the Investment Adviser will consider what
action, including the sale of such security, is in the best interest of a Fund
and its shareholders.
The Investment 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.
ADJUSTABLE RATE GOVERNMENT FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income, consistent with low volatility of principal.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be in a range approximately equal to that of a six-month to one-
year U.S. Treasury security. In addition, under normal interest rate
conditions, the Fund's maximum duration will not exceed two years. The
approximate interest rate sensitivity of the Fund is comparable to a nine-
month note.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
65% of its total assets in U.S. Government Securities that are adjustable rate
mortgage pass-through securities and other U.S. Government Securities. The
remainder of the Fund's assets (up to 35%) may be invested in other U.S.
Government Securities, including mortgage pass-through securities, other
securities representing an interest in or collateralized by adjustable rate
and fixed rate mortgage loans ("Mortgage-Backed Securities") and repurchase
agreements collateralized by U.S. Government Securities. Substantially all of
the Fund's assets will be invested in U.S. Government Securities. 100% of the
Fund's portfolio will be invested in U.S. dollar-denominated securities.
13
<PAGE>
CREDIT QUALITY. The Fund invests in U.S. Government Securities and
repurchase agreements collateralized by such securities.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), mortgage and
interest rate swaps and interest rate floors, caps and collars. The Fund may
also employ other investment techniques to seek to enhance returns, such as
lending portfolio securities and entering into mortgage dollar rolls,
repurchase agreements and other investment practices described under
"Investment Techniques."
SHORT DURATION GOVERNMENT FUND
OBJECTIVE. The Fund's investment objective is to provide a high level of
current income. Secondarily, the Fund may, in seeking current income, also
consider the potential for capital appreciation.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the two-year U.S.
Treasury security, plus or minus .5 years. In addition, under normal interest
rate conditions, the Fund's maximum duration will not exceed three years. The
approximate interest rate sensitivity of the Fund is comparable to a two-year
bond.
INVESTMENT SECTOR. The Fund invests, under normal market conditions, at
least 65% of its total assets in U.S. Government Securities and in repurchase
agreements collateralized by such securities. Substantially all of the Fund's
assets will be invested in U.S. Government Securities. 100% of the Fund's
portfolio will be invested in U.S. dollar-denominated securities.
CREDIT QUALITY. The Fund invests in U.S. Government Securities and
repurchase agreements collateralized by such securities.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), mortgage and
interest rate swaps and interest rate floors, caps and collars. The Fund may
also employ other investment techniques to seek to enhance returns, such as
lending portfolio securities and entering into mortgage dollar rolls,
repurchase agreements and other investment practices described under
"Investment Techniques."
SHORT DURATION TAX-FREE FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income, consistent with relatively low volatility of
principal, that is exempt from regular federal income tax.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers
three-year Municipal Bond Index, plus or minus .5 years. In addition, under
normal interest rate conditions, the Fund's maximum duration will not exceed
four years. The approximate interest rate sensitivity of the Fund is
comparable to a three-year bond.
INVESTMENT SECTOR. The Fund invests, under normal conditions, at least 80%
of its net assets in fixed-income securities issued by or on behalf of states,
territories and possessions of the United States (including the District of
Columbia) and the political subdivisions, agencies and instrumentalities
thereof ("Municipal
14
<PAGE>
Securities"), the interest on which is exempt from regular federal income tax
(i.e., excluded from gross income for federal income tax purposes), and is not
a tax preference item under the federal alternative minimum tax. Under normal
circumstances, the Fund's investments in private activity bonds and taxable
investments will not exceed, in the aggregate, 20% of the Fund's net assets.
The interest from certain private activity bonds (including the Fund's
distributions of such interest) may be a preference item for purposes of the
federal alternative minimum tax. 100% of the Fund's portfolio will be invested
in U.S. dollar-denominated securities.
CREDIT QUALITY. The Municipal Securities in which the Fund invests will be
rated, at the time of investment, at least BBB by S&P or Baa by Moody's.
Municipal Securities rated BBB or Baa are considered medium-grade obligations
with speculative characteristics, and adverse economic conditions or changing
circumstances may weaken their issuers' capability to pay interest and repay
principal. The credit rating assigned to Municipal Securities by these rating
organizations or by the Investment Adviser may reflect the existence of
guarantees, letters of credit or other credit enhancement features available
to the issuers or holders of such Municipal Securities.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), interest rate
swaps, floors, caps and collars. The Fund may also employ other investment
techniques to seek to enhance returns, such as lending portfolio securities
and entering into repurchase agreements and other investment practices
described under "Investment Techniques."
While the Fund, under normal market conditions, invests substantially all of
its assets in Municipal Securities, the recognition of certain accrued market
discount income (if the Fund acquires Municipal Securities or other
obligations at a market discount), income from investments other than
Municipal Securities and any capital gains generated from the disposition of
investments, will result in taxable income. In addition to federal income tax,
shareholders may be subject to state, local or foreign taxes on distributions
of such income received from the Fund. See "Description of Securities."
GOVERNMENT INCOME FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income, consistent with safety of principal.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers
Mutual Fund Government/Mortgage Index, plus or minus one year. In addition,
under normal interest rate conditions, the Fund's maximum duration will not
exceed six years. The approximate interest rate sensitivity of the Fund is
comparable to a five-year bond.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
65% of its total assets in U.S. Government Securities and in repurchase
agreements collateralized by such securities. The remainder of the Fund's
assets may be invested in non-government securities such as privately issued
Mortgage-Backed Securities, Asset-Backed Securities and corporate securities.
100% of the Fund's portfolio will be invested in U.S. dollar-denominated
securities.
CREDIT QUALITY. The Fund's non-U.S. Government Securities will be rated, at
the time of investment, AAA by S&P or Aaa by Moody's.
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OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), mortgage and
interest rate swaps and interest rate floors, caps and collars. The Fund may
also employ other investment techniques to seek to enhance returns, such as
lending portfolio securities and entering into mortgage dollar rolls,
repurchase agreements and other investment practices described under
"Investment Techniques."
MUNICIPAL INCOME FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income that is exempt from regular federal income tax,
consistent with preservation of capital.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers
fifteen-year Municipal Bond Index, plus or minus one year. In addition, under
normal interest rate conditions, the Fund's maximum duration will not exceed
twelve years. The approximate interest rate sensitivity of the Fund is
comparable to a fifteen-year bond.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
80% of its net assets in Municipal Securities, the interest on which is exempt
from regular federal income tax (i.e., excluded from gross income for federal
income tax purposes). The Fund may invest up to 100% of its net assets in
private activity bonds, the interest from certain of which (including the
Fund's distributions of such interest) may be a preference item for purposes
of the federal alternative minimum tax. 100% of the Fund's portfolio will be
invested in U.S. dollar-denominated securities.
CREDIT QUALITY. Under normal market conditions, the weighted average credit
quality of the Fund's portfolio will be equivalent to that of securities rated
AA by S&P or Aa by Moody's. All securities purchased by the Fund will be
rated, at the time of investment, at least BBB by S&P or Baa by Moody's.
Fixed-income securities rated BBB or Baa are considered medium-grade
obligations with speculative characteristics, and adverse economic conditions
or changing circumstances may weaken their issuers' capability to pay interest
and repay principal. The credit rating assigned to Municipal Securities by
these rating organizations or by the Investment Adviser may reflect the
existence of guarantees, letters of credit or other credit enhancement
features available to the issuers or holders of such Municipal Securities.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), interest rate
swaps, interest rate floors, caps and collars. The Fund may also employ other
investment techniques to seek to enhance returns, such as lending portfolio
securities and entering into repurchase agreements and other investment
practices described under "Investment Techniques."
While the Fund, under normal market conditions, invests substantially all of
its assets in Municipal Securities, the recognition of certain accrued market
discount income (if the Fund acquires Municipal Securities or other
obligations at a market discount), income from investments other than
Municipal Securities and any capital gains generated from the disposition of
investments, will result in taxable income. In addition to federal income tax,
shareholders may be subject to state, local or foreign taxes on distributions
of such income received from the Fund. See "Description of Securities."
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CORE FIXED INCOME FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
total return consisting of capital appreciation and income that exceeds the
total return of the Lehman Brothers Aggregate Bond Index (the "Index").
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers
Aggregate Bond Index, plus or minus one year. In addition, under normal
interest rate conditions, the Fund's maximum duration will not exceed six
years. The approximate interest rate sensitivity of the Fund is comparable to
a five-year bond.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
65% of its total assets in fixed-income securities, including U.S. Government
Securities, corporate debt securities, Mortgage-Backed Securities, and Asset-
Backed Securities. The Fund may invest up to 25% of its total assets in
obligations of domestic and foreign issuers which are denominated in
currencies other than the U.S. dollar, 10% of which may be invested in issuers
in countries with emerging markets and economies. A number of investment
strategies will be used to achieve the Fund's investment objective, including
market sector selection, determination of yield curve exposure, and issuer
selection. In addition, the Investment Adviser will attempt to take advantage
of pricing inefficiencies in the fixed-income markets.
The Index currently includes U.S. Government Securities and fixed-rate,
publicly issued, U.S. dollar-denominated fixed-income securities rated at
least BBB or Baa or in their equivalent ratings category by S&P or Moody's.
The securities currently included in the Index have at least one year
remaining to maturity; have an outstanding principal amount of at least $100
million; and are issued by the following types of issuers, with each category
receiving a different weighting in the Index: U.S. Treasury; agencies,
authorities or instrumentalities of the U.S. government; issuers of Mortgage-
Backed Securities; utilities; industrial issuers; financial institutions;
foreign issuers; and issuers of Asset-Backed Securities. The Index is a
trademark of Lehman Brothers. Inclusion of a security in the Index does not
imply an opinion by Lehman Brothers as to its attractiveness or
appropriateness for investment. Although Lehman Brothers obtains factual
information used in connection with the Index from sources which it considers
reliable, Lehman Brothers claims no responsibility for the accuracy,
completeness or timeliness of such information and has no liability to any
person for any loss arising from results obtained from the use of the Index
data.
CREDIT QUALITY. All U.S. dollar-denominated fixed-income securities
purchased by the Fund will be rated, at the time of investment, at least BBB
by S&P or Baa by Moody's. The non-U.S. dollar-denominated fixed-income
securities in which the Fund may invest will be rated, at the time of
investment, at least AA by S&P or Aa by Moody's. Fixed-income securities rated
BBB or Baa are considered medium-grade obligations with speculative
characteristics, and adverse economic conditions or changing circumstances may
weaken their issuers' capability to pay interest and repay principal.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund, to seek to hedge its exposure to
foreign currencies and to seek to enhance returns. These techniques include,
but are not limited to, the use of financial futures contracts, option
contracts (including options on futures), forward foreign currency exchange
contracts, currency options and futures, currency, mortgage and interest rate
swaps and interest rate floors, caps and collars. Currency and interest rate
management techniques involve risks different from those associated with
investing solely in U.S. dollar-denominated fixed-income securities of U.S.
issuers. It is expected that the Fund will use certain currency techniques to
seek to
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hedge against currency exchange rate fluctuations or to seek to increase total
return. The Fund may invest in custodial receipts, Municipal Securities and
convertible securities. The Fund may also employ other investment techniques
to seek to enhance returns, such as lending portfolio securities and entering
into mortgage dollar rolls, repurchase agreements and other investment
practices, described under "Investment Techniques."
GLOBAL INCOME FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high total return, emphasizing current income, and, to a lesser extent,
providing opportunities for capital appreciation.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the J.P. Morgan Global
Government Bond Index (hedged), plus or minus 2.5 years. In addition, under
normal interest rate conditions, the Fund's maximum duration will not exceed
7.5 years. The approximate interest rate sensitivity of the Fund is comparable
to a six-year bond.
INVESTMENT SECTOR. The Fund invests primarily in a portfolio of high quality
fixed-income securities of U.S. and foreign issuers and enters into
transactions in foreign currencies. Under normal market conditions, the Fund
will (i) have at least 30% of its total assets, after considering the effect
of currency positions, denominated in U.S. dollars and (ii) invest in
securities of issuers in at least three countries. The Fund may also invest up
to 10% of its total assets in issuers in countries with emerging markets and
economies. The Fund seeks to meet its investment objective by pursuing
investment opportunities in foreign and domestic fixed-income securities
markets and by engaging in currency transactions to seek to enhance returns
and to seek to hedge its portfolio against currency exchange rate
fluctuations.
The fixed-income securities in which the Fund may invest include: (i) U.S.
Government Securities and custodial receipts therefor; (ii) securities issued
or guaranteed by a foreign government or any of its political subdivisions,
authorities, agencies, instrumentalities or by supranational entities (i.e.,
international organizations designated or supported by governmental entities
to promote economic reconstruction or development, such as the World Bank);
(iii) corporate debt securities; (iv) certificates of deposit and bankers'
acceptances issued or guaranteed by, or time deposits maintained at, U.S. or
foreign banks (and their branches wherever located) having total assets of
more than $1 billion; (v) commercial paper and (vi) Mortgage-Backed and Asset-
Backed Securities.
CREDIT QUALITY. All securities purchased by the Fund will be rated, at the
time of investment, at least AA by S&P or Aa by Moody's. However, the Fund may
also invest in obligations of a sovereign issuer, denominated in the issuer's
own currency, rated at least A by S&P or Moody's. The Fund will invest at
least 50% of its total assets in securities rated, at the time of investment,
AAA by S&P or Aaa by Moody's.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund, to seek to hedge its exposure to
foreign currencies and to seek to enhance returns. These techniques include,
but are not limited to, the use of financial futures contracts, option
contracts (including options on futures), forward foreign currency exchange
contracts, currency options and futures, currency, mortgage and interest rate
swaps and interest rate floors, caps and collars. Currency and interest rate
management techniques involve risks different from those associated with
investing solely in U.S. dollar-denominated fixed-income securities of U.S.
issuers. It is expected that the Fund will use certain currency techniques to
seek to hedge against currency exchange rate fluctuations or to seek to
increase total return. While the Fund will have both long and short currency
positions, its net long and short foreign currency exposure will not exceed
the value
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of the Fund's total assets. To the extent that the Fund is fully invested in
foreign securities while also maintaining currency positions, it may be
exposed to greater combined risk. The Fund's net currency positions may expose
it to risks independent of its securities positions. The Fund may also employ
other investment techniques to seek to enhance returns, such as lending
portfolio securities and entering into mortgage dollar rolls, repurchase
agreements and other investment practices described under "Investment
Techniques."
The Fund may invest more than 25% of its total assets in the securities of
corporate and governmental issuers located in each of Canada, Germany, Japan,
and the United Kingdom as well as in the securities of U.S. issuers.
Concentration of the Fund's investments in such issuers will subject the Fund,
to a greater extent than if investment was more limited, to the risks of
adverse securities markets, exchange rates and social, political or economic
events which may occur in those countries. With respect to other countries,
not more than 25% of the Fund's total assets will be invested in securities of
issuers in any other foreign country.
HIGH YIELD FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income. Secondarily, the Fund may, in seeking current
income, also consider the potential for capital appreciation.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers High
Yield Bond Index, plus or minus 2.5 years. In addition, under normal interest
rate conditions, the Fund's maximum duration will not exceed 7.5 years. The
approximate interest rate sensitivity of the Fund is comparable to a 6-year
bond.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
65% of its total assets in high yield, fixed-income securities rated, at the
time of investment, below investment grade. Non-investment grade securities
are securities rated BB or below by S&P, Ba or below by Moody's, an equivalent
rating by another rating organization, or if unrated by a rating organization,
determined by the Investment Adviser to be of comparable quality. The Fund may
invest in all types of fixed-income securities, including senior and
subordinated corporate debt obligations (such as bonds, debentures, notes and
commercial paper), convertible and non-convertible corporate debt obligations,
and preferred stock. The Fund may invest up to 25% of its total assets in
obligations of domestic and foreign issuers (including securities of issuers
located in countries with emerging markets and economies) which are
denominated in currencies other than the U.S. dollar. Under normal market
conditions, the Fund may invest up to 35% of its total assets in investment
grade fixed-income securities, including U.S. Government Securities, Asset-
Backed and Mortgage-Backed Securities and corporate securities. The Fund may
also invest in common stocks, warrants, rights and other equity securities,
but will generally hold such equity investments only when debt or preferred
stock of the issuer of such equity securities is held by the Fund. A number of
investment strategies are used to seek to achieve the Fund's investment
objective, including market sector selection, determination of yield curve
exposure, and issuer selection. In addition, the Investment Adviser will
attempt to take advantage of pricing inefficiencies in the fixed-income
markets.
CREDIT QUALITY. The Fund invests primarily in high yield, fixed income
securities rated below investment grade. Non-investment grade securities
(commonly known as "junk bonds") tend to offer higher yields than higher rated
securities with similar maturities. Non-investment grade securities are,
however, considered speculative and generally involve greater price volatility
and greater risk of loss of principal and interest than higher rated
securities. See "Description of Securities." A description of the corporate
bond and preferred stock ratings is contained in Appendix B to the Additional
Statement.
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OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund, to seek to hedge its exposure to
foreign securities and to seek to enhance returns. These techniques include,
but are not limited to, the use of financial futures contracts, option
contracts (including options on futures), forward foreign currency exchange
contracts, currency options and futures, currency, mortgage and interest rate
swaps, and interest rate floors, caps and collars. Currency and interest rate
management techniques involve risks different from those associated with
investing solely in U.S. dollar-denominated fixed-income securities of U.S.
issuers. It is expected that the Fund will use currency techniques to seek to
hedge against currency exchange rate fluctuations or to seek to increase total
return. The Fund may also employ other investment techniques to seek to
enhance returns, such as lending portfolio securities and entering into
repurchase agreements and other investment practices described under
"Investment Techniques."
DESCRIPTION OF SECURITIES
U.S. GOVERNMENT SECURITIES
Each Fund may invest in U.S. Government Securities. Generally, these
securities include U.S. Treasury obligations and obligations issued or
guaranteed by U.S. government agencies, instrumentalities or sponsored
enterprises which are supported by (a) the full faith and credit of the U.S.
Treasury (such as the Government National Mortgage Association ("Ginnie
Mae")), (b) the right of the issuer to borrow from the U.S. Treasury (such as
securities of the Student Loan Marketing Association), (c) the discretionary
authority of the U.S. government to purchase certain obligations of the issuer
(such as the Federal National Mortgage Association ("Fannie Mae") and Federal
Home Loan Mortgage Corporation ("Freddie Mac")), or (d) only the credit of the
issuer. No assurance can be given that the U.S. government will provide
financial support to U.S. government agencies, instrumentalities or sponsored
enterprises in the future.
U.S. Government Securities also include Treasury receipts, zero coupon bonds
and other stripped U.S. Government Securities, where the interest and
principal components of stripped U.S. Government Securities are traded
independently. The most widely recognized program is the Separate Trading of
Registered Interest and Principal of Securities Program.
MORTGAGE-BACKED SECURITIES
CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES. Mortgage-Backed Securities
represent direct or indirect participations in, or are collateralized by and
payable from, mortgage loans secured by real property. Mortgagors can
generally prepay interest or principal on their mortgage whenever they choose.
Therefore, Mortgage-Backed Securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of
principal prepayments on the underlying loans. This can result in
significantly greater price and yield volatility than is the case with
traditional fixed-income securities. During periods of declining interest
rates, prepayments can be expected to accelerate, and thus impair a Fund's
ability to reinvest the returns of principal at comparable yields. Conversely,
in a rising interest rate environment, a declining prepayment rate will extend
the average life of many Mortgage-Backed Securities and prevent a Fund from
taking advantage of such higher yields.
FIXED RATE MORTGAGE LOANS. Generally, fixed-rate mortgage loans pay interest
at fixed annual rates and have original terms to maturity ranging from 5 to 40
years. Fixed-rate mortgage loans typically 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.
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ADJUSTABLE RATE MORTGAGE LOANS ("ARMS"). The Adjustable Rate Government Fund
will primarily, and the Short Duration Government, Government Income, Core
Fixed Income, Global Income and High Yield Funds may, invest in ARMs, which
are pass-through mortgage securities collateralized by mortgages with
adjustable rather than fixed coupon rates. ARMs generally provide for a fixed
initial mortgage interest rate for a set period. Thereafter, the interest
rates are subject to periodic adjustments based on changes to a designated
benchmark index.
ARMs allow a Fund to participate in increases in interest rates through
periodic increases in the securities' coupon rates. During periods of
declining interest rates, coupon rates may readjust downward resulting in
lower yields to a Fund. Therefore, the value of an ARM is unlikely to rise
during periods of declining interest rates to the same extent as fixed-rate
securities. Interest rate declines may result in accelerated prepayment of
mortgages with the result that proceeds from prepayments will be reinvested at
lower interest rates. During periods of rising interest rates, changes in the
coupon rate will lag behind changes in the market rate. ARMs are also
typically subject to maximum increases and decreases in the interest rate
adjustment which can be made on any one adjustment date, in any one year, or
during the life of the security. In the event of dramatic increases or
decreases in prevailing market interest rates, the value of a Fund's
investments in ARMs may fluctuate more substantially since these limits may
prevent the security from fully adjusting its interest rate to the prevailing
market rates.
U.S. GOVERNMENT GUARANTEED MORTGAGE-BACKED SECURITIES. Certain Mortgage-
Backed Securities are issued or guaranteed by the U.S. government, its
agencies, instrumentalities or sponsored enterprises. Such issuers include,
but are not limited to, Ginnie Mae, Fannie Mae and Freddie Mac. See "U.S.
Government Securities."
PRIVATELY ISSUED MORTGAGE-BACKED SECURITIES. The Government Income, Core
Fixed Income, Global Income and High Yield Funds may invest in Mortgage-Backed
Securities issued or sponsored by non-governmental entities. Privately issued
Mortgage-Backed Securities are generally backed by pools of conventional
(i.e., non-government guaranteed or insured) mortgage loans. Since such
Mortgage-Backed Securities normally are not guaranteed by an entity having the
credit standing of Ginnie Mae, Fannie Mae or Freddie Mac, in order to receive
a high quality rating from the rating organizations (i.e., S&P or Moody's),
they normally are structured with one or more types of "credit enhancement."
MULTIPLE CLASS MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE
OBLIGATIONS. The Adjustable Rate Government, Short Duration Government,
Government Income, Core Fixed Income, Global Income and High Yield Funds may
also invest in multiple class securities, including collateralized mortgage
obligations ("CMOs") and Real Estate Mortgage Investment Conduit ("REMIC")
pass-through or participation certificates. CMOs provide an investor with a
specified interest in the cash flow from a pool of underlying mortgages or of
other Mortgage-Backed Securities. CMOs are issued in multiple classes, each
with a specified fixed or floating interest rate and a final scheduled
distribution date. In most cases, payments of principal are applied to the CMO
classes in the order of their respective stated maturities, so that no
principal payments will be made on a CMO class until all other classes having
an earlier stated maturity date are paid in full. A REMIC is a CMO that
qualifies for special tax treatment under the Internal Revenue Code of 1986,
as amended (the "Code"), and invests in certain mortgages principally secured
by interests in real property and other permitted investments. The Funds do
not intend to purchase residual interests in REMICs.
STRIPPED MORTGAGE-BACKED SECURITIES. The Adjustable Rate Government, Short
Duration Government, Government Income, Core Fixed Income, Global Income and
High Yield Funds may invest in Stripped Mortgage-Backed Securities ("SMBS"),
which are derivative multiple class Mortgage-Backed Securities.
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SMBS are usually structured with two different classes; one that receives 100%
of the interest payments and the other that receives 100% of the principal
payments from a pool of mortgage loans. If the underlying mortgage loans
experience different than anticipated prepayments of principal, a Fund may
fail to fully recoup its initial investment in these securities. 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 loans
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.
ASSET-BACKED SECURITIES
The Government Income, Core Fixed Income, Global Income and High Yield Funds
may invest in Asset-Backed Securities. The principal and interest payments on
Asset-Backed Securities are collateralized by pools of assets such as auto
loans, credit card receivables, leases, installment contracts and personal
property. Such asset pools are securitized through the use of special purpose
trusts or corporations. Principal and interest payments may be credit enhanced
by a letter of credit, a pool insurance policy or a senior/subordinated
structure.
MUNICIPAL SECURITIES
GENERAL. Municipal Securities in which the Short Duration Tax-Free and
Municipal Income Funds and, to a limited extent, the Core Fixed Income and
High Yield Funds, invest consist of bonds, notes, commercial paper and other
instruments (including participation interests in such securities) issued by
or on behalf of states, territories and possessions of the United States
(including the District of Columbia) and their political subdivisions,
agencies or instrumentalities, the interest on which, in the opinion of bond
counsel for the issuers or counsel selected by the Investment Adviser, is
exempt from regular federal income tax (i.e., excluded from gross income for
federal income tax purposes but not necessarily exempt from federal
alternative minimum tax or from state or local taxes). Such securities may pay
fixed, variable or floating rates of interest. Municipal Securities are often
issued to obtain funds for various public purposes, including the construction
of a wide range of public facilities such as bridges, highways, housing,
hospitals, mass transportation, schools, streets and water and sewer works.
Other public purposes for which Municipal Securities may be issued include
refunding outstanding obligations, obtaining funds for general operating
expenses, and obtaining funds to lend to other public institutions and
facilities.
PRIVATE ACTIVITY BONDS. Municipal Securities also include "private activity
bonds" or industrial development bonds, which are issued by or on behalf of
public authorities to obtain funds for such projects as privately-operated
housing facilities, airport, mass transit or port facilities and sewage
disposal. In addition, proceeds of certain industrial development bonds are
used for constructing, equipping, repairing or improving privately operated
industrial or commercial facilities. The Short Duration Tax-Free and Municipal
Income Funds distributions attributable to the interest income from private
activity bonds may subject certain investors to the federal alternative
minimum tax.
MUNICIPAL LEASES AND CERTIFICATES OF PARTICIPATION. 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. Certificates of
participation represent undivided interests in municipal leases, installment
purchase agreements or other instruments. The primary risk associated with
municipal lease obligations and certificates of participation is that the
governmental lessee will fail to appropriate funds to enable it to meet its
payment obligations under the lease. Although the obligations may be secured
by the leased equipment or facilities, the disposition of the
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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 the Fund's original investment. To the extent
that a Fund invests in unrated municipal leases or participates in such
leases, the Trustees will monitor on an ongoing basis the credit quality
rating and risk of cancellation of such unrated leases. Certain municipal
lease obligations and certificates of participation may be deemed illiquid for
the purpose of a Fund's limitation on investments in illiquid securities.
PRE-REFUNDED MUNICIPAL SECURITIES. The interest and principal payments on
pre-refunded Municipal Securities are typically paid from the cash flow
generated from an escrow fund consisting of U.S. Government Securities. These
payments have been "pre-refunded" using the escrow fund.
INSURED SECURITIES. "Insured" Municipal Securities are those for which
scheduled payments of interest and principal are guaranteed by a private (non-
governmental) insurance company. The insurance entitles a Fund to receive only
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 net asset
value of a Fund's shares.
AUCTION RATE SECURITIES. Auction rate Municipal Securities permit the holder
to sell the securities in an auction at par value at specified intervals. The
dividend or interest is typically 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 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 the risk that an auction will fail due to insufficient
demand for the securities. A Fund will take the time remaining until the next
scheduled auction date into account for purposes of determining the
securities' duration.
CORPORATE DEBT OBLIGATIONS
The Government Income, Core Fixed Income, Global Income and High Yield Funds
may invest in corporate debt obligations. In addition to obligations of
corporations, corporate debt obligations include securities issued by banks
and other financial institutions. Corporate debt obligations are subject to
the risk of an issuer's inability to meet principal and interest payments on
the obligations.
CONVERTIBLE SECURITIES
The Core Fixed Income and High Yield Funds may invest in convertible
securities, including debt obligations, and for High Yield Fund preferred
stock, of an issuer convertible at a stated exchange rate into common stock of
the issuer. Convertible securities generally offer lower interest or dividend
yields than non-convertible securities of similar quality. 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. 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 market price 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 a Fund invests are subject to the same rating
criteria as its other investments in fixed-income securities.
PREFERRED STOCK, WARRANTS AND RIGHTS
The High Yield Fund may invest in preferred stock, warrants and rights.
Preferred stocks are securities that represent an ownership interest providing
the holder with claims on the issuer's earnings and assets before
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common stock owners but after bond owners. Unlike debt securities, the
obligations of an issuer of preferred stock, including dividend and other
payment obligations, may not typically be accelerated by the holders of such
preferred stock on the occurrence of an event of default (such as a covenant
default or filing of a bankruptcy petition) or other non-compliance by the
issuer with the terms of the preferred stock. Often, however, on the
occurrence of any such event of default or non-compliance by the issuer,
preferred stockholders will be entitled to gain representation on the issuer's
board of directors or increase their existing board representation. In
addition, preferred stockholders may be granted voting rights with respect to
certain issues on the occurrence of any event of default.
Warrants and other rights are options to buy a stated number of shares of
common stock at a specified price at any time during the life of the warrant.
The holders of warrants and rights have no voting rights, receive no dividends
and have no rights with respect to the assets of the issuer.
FOREIGN INVESTMENTS
FOREIGN SECURITIES. The Global Income Fund will, and the Core Fixed Income
and High Yield Funds may, invest in fixed-income securities of foreign issuers
denominated in any currency. However, the Core Fixed Income and High Yield
Funds will limit their investments in non-U.S. dollar-denominated fixed-income
securities to 25% of their total assets. This may offer potential benefits
that are not available from investing exclusively in U.S. dollar-denominated
domestic issues. Foreign countries may have economic policies or business
cycles different from those of the U.S. and markets for foreign fixed-income
securities do not necessarily move in a manner parallel to U.S. markets.
Investing in the securities of foreign issuers involves risks that are not
typically associated with investing in fixed-income securities of domestic
issuers quoted in U.S. dollars. Such investments may be affected by changes in
currency rates, changes in foreign or U.S. laws or restrictions applicable to
such investments and in exchange control regulations (e.g., currency
blockage). A decline in the exchange rate of the currency (i.e., weakening of
the currency against the U.S. dollar) in which a portfolio security is quoted
or denominated relative to the U.S. dollar would reduce the value of the
portfolio security. In addition, if the currency in which a Fund receives
dividends, interest or other payments declines in value against the U.S.
dollar before such income is distributed as dividends to shareholders or
converted to U.S. dollars, the Fund may have to sell portfolio securities to
obtain sufficient cash to pay such dividends. In addition, clearance and
settlement procedures may be different in foreign countries and, in certain
markets, such procedures have on occasion been unable to keep pace with the
volume of securities transactions, making it more difficult to conduct such
transactions.
The Core Fixed Income, Global Income and High Yield Funds may invest in an
issuer domiciled in one country yet issuing the security in the currency of
another country. The Funds may also invest in debt securities denominated in
the European Currency Unit ("ECU"), which is a "basket" consisting of
specified amounts in the currencies of certain of the twelve member states of
the European Community. The specific amounts of currencies comprising the ECU
may be adjusted by the Council of Ministers of the European Community from
time to time to reflect changes in relative values of the underlying
currencies. In addition, the Funds may invest in securities denominated in
other currency "baskets."
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to U.S.
issuers. There may be less publicly available information about a foreign
issuer than about a U.S. issuer. In addition, there is generally less
government regulation of foreign markets, companies and securities dealers
than in the U.S. Foreign securities markets may have substantially less volume
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than U.S. securities markets and securities of many foreign issuers may be
less liquid and more volatile than securities of comparable domestic issuers.
Furthermore, with respect to certain foreign countries, there is a possibility
of nationalization, expropriation or confiscatory taxation, imposition of
withholding or other taxes on dividend or interest payments (or, in some cases
capital gains), limitations on the removal of funds or other assets of a Fund,
political or social instability or diplomatic developments which could affect
investments in those countries.
FOREIGN GOVERNMENT SECURITIES. The Core Fixed Income, Global Income and High
Yield Funds may invest in debt obligations of foreign governments and
governmental agencies, including those of emerging countries. Investment in
sovereign debt obligations involves special risks not present in debt
obligations of corporate issuers. The issuer of the debt or the governmental
authorities that control the repayment of the debt may be unable or unwilling
to repay principal or interest when due in accordance with the terms of such
debt, and a Fund may have limited recourse in the event of a default. Periods
of economic uncertainty may result in the volatility of market prices of
sovereign debt, and in turn a Fund's net asset value, to a greater extent than
the volatility inherent in debt obligations of U.S. issuers. A sovereign
debtor's willingness or ability to repay principal and pay interest in a
timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's
policy toward international lenders and the political constraints to which a
sovereign debtor may be subject.
EMERGING MARKETS. The Core Fixed Income and Global Income Funds may invest
up to 10% and the High Yield Fund may invest up to 25% of their total assets
in securities of issuers located in countries with emerging economies or
securities markets ("emerging markets"). Political and economic structures in
many emerging markets may be undergoing significant evolution and rapid
development, and emerging markets may lack the social, political and economic
stability characteristic of more developed countries. As a result, the risks
relating to investments in foreign securities described above, including the
possibility of nationalization, expropriation and confiscatory taxation, may
be heightened. In addition, unanticipated political and social developments
may affect the value of the Fund's investments in emerging markets and the
availability to the Fund of additional investments in such countries. The
small size and inexperience of the securities markets in certain emerging
markets and the limited volume of trading in securities in those countries may
make the Fund's investments in such countries less liquid and more volatile
than investments in countries with more developed securities markets (such as
the U.S., Japan and most Western European countries). See the Additional
Statement for further information regarding a Fund's investments in emerging
markets.
FOREIGN CURRENCY TRANSACTIONS. Because investment in foreign issuers by the
Core Fixed Income, Global Income and High Yield Funds will usually involve
currencies of foreign countries, and because the Funds may have currency
exposure independent of their securities positions, the value of the assets of
a Fund as measured in U.S. dollars will be affected by changes in foreign
currency exchange rates. A Fund may, to the extent it invests in foreign
securities, purchase or sell forward foreign currency exchange contracts for
hedging purposes and to seek to protect against anticipated changes in future
foreign currency exchange rates. A Fund also may enter into such contracts to
seek to increase total return when the Investment Adviser anticipates that the
foreign currency will appreciate or depreciate in value, but securities
denominated or quoted in that currency do not present attractive investment
opportunities and are not held in the Fund's portfolio. When entered into to
seek to increase total return, forward foreign currency exchange contracts are
considered speculative. The Funds may also engage in cross-hedging by using
forward contracts in a currency different from that in which the hedged
security is denominated or quoted if the Investment Adviser determines that
there is a pattern of correlation between the two currencies. If a Fund enters
into a forward foreign currency exchange contract to buy foreign
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currency for any purpose or to sell foreign currency to seek to increase total
return, the Fund will be required to place cash or liquid assets in a
segregated account with the Fund's custodian in an amount equal to the value
of the Fund's total assets committed to the consummation of the forward
contract. A Fund will incur costs in connection with conversions between
various currencies. A Fund may hold foreign currency received in connection
with investments in foreign securities when, in the judgment of the Investment
Adviser, it would be beneficial to convert such currency into U.S. dollars at
a later date, based on anticipated changes in the relevant exchange rate.
Currency exchange rates may fluctuate significantly over short periods of
time causing, along with other factors, a Fund's net asset value to fluctuate.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments
in different countries, actual or anticipated changes in interest rates and
other complex factors, as seen from an international perspective. Currency
exchange rates also can be affected unpredictably by the intervention of U.S.
or foreign governments or central banks, or the failure to intervene, or by
currency controls or political developments in the U.S. or abroad. To the
extent that a substantial portion of a Fund's total assets, adjusted to
reflect the Fund's net position after giving effect to currency transactions,
is denominated or quoted in the currencies of foreign countries, the Fund will
be more susceptible to the risk of adverse economic and political developments
within those countries.
The market in forward foreign currency exchange contracts, currency swaps
and other privately negotiated currency instruments offers less protection
against defaults by the other party to such instruments than is available for
currency instruments traded on an exchange. Such contracts are subject to the
risk that the counterparty to the contract will default on its obligations.
Since these contracts are not guaranteed by an exchange or clearinghouse, a
default on a 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 forward foreign currency exchange contracts, currency swaps or
other privately negotiated currency instruments 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 Investment Adviser.
The Core Fixed Income, Global Income and High Yield Fund's use of foreign
currency management techniques in emerging markets may be limited. Due to the
limited market for these instruments in emerging markets, the Investment
Adviser does not currently anticipate that a significant portion of the Fund's
currency exposure in emerging markets, if any, will be covered by such
instruments. For a discussion of such instruments and the risks associated
with their use, see "Investment Objectives and Policies" in the Additional
Statement.
STRUCTURED SECURITIES
The Core Fixed Income, Global Income and High Yield Funds may invest in
structured securities. The value of the principal of and/or interest on such
securities is determined by reference to changes in the value of specific
currencies, interest rates, commodities, indices or other financial indicators
(the "Reference") or the relative change in two or more References. The
interest rate or the principal amount payable upon maturity or redemption may
be increased or decreased depending upon changes in the applicable Reference.
The terms of the structured securities may provide that in certain
circumstances no principal is due at maturity and, therefore, result in the
loss of a Fund's investment. Structured securities may be positively or
negatively indexed, so that appreciation of the Reference may produce an
increase or decrease in the interest rate or value of the security at
maturity. In addition, changes in the interest rates or the value of the
security at maturity may be a multiple of changes in the
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value of the Reference. Consequently, structured securities may entail a
greater degree of market risk than other types of fixed-income securities.
Structured securities may also be more volatile, less liquid and more
difficult to accurately price than less complex securities.
ZERO COUPON, DEFERRED INTEREST, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS
Each Fund may invest in zero coupon, deferred interest, and capital
appreciation bonds. These are securities issued at a discount from their face
value because interest payments are typically postponed until maturity. The
amount of the discount rate varies depending on factors including the time
remaining until maturity, prevailing interest rates, the security's liquidity
and the issuer's credit quality. These securities also may take the form of
debt securities that have been stripped of their interest payments. Each Fund
may also invest in pay-in-kind securities which are securities that have
interest payable by the delivery of additional securities. A portion of the
discount with respect to stripped tax-exempt securities or their coupons may
be taxable. The market prices of zero coupon, deferred interest, pay-in-kind
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. A Fund's investments in zero coupon,
deferred interest, pay-in-kind and capital appreciation bonds or stripped
securities may require the Fund to sell certain of its portfolio securities to
generate sufficient cash to satisfy certain income distribution requirements.
See "Taxation" in the Additional Statement.
RISK FACTORS
INTEREST RATE RISK. When interest rates decline, the market value of fixed-
income securities tends to increase. Conversely, when interest rates increase,
the market value of fixed-income securities tends to decline. Volatility of a
security's market value will differ depending upon the security's duration,
the issuer and the type of instrument.
DEFAULT RISK/CREDIT RISK. Investments in fixed-income securities are subject
to the risk that the issuer could default on its obligations and a Fund could
sustain losses on such investments. A default could impact both interest and
principal payments.
CALL RISK AND EXTENSION RISK. Fixed-income securities may be subject to both
call risk and extension risk. Call risk (i.e., where the issuer exercises its
right to pay principal on an obligation earlier than scheduled) causes cash
flow to be returned earlier than expected. This typically results when
interest rates have declined and a Fund will suffer from having to reinvest in
lower yielding securities. Extension risk (i.e., where the issuer exercises
its right to pay principal on an obligation later than scheduled) causes cash
flows to be returned later than expected. This typically results when interest
rates have increased and a Fund will suffer from the inability to invest in
higher yielding securities. Certain types of U.S. Government, Asset-Backed,
corporate, foreign, Mortgage-Backed and Municipal Securities have this call
and/or extension risk.
The investment characteristics of Mortgage-Backed Securities and Asset-
Backed Securities differ from those of traditional fixed-income securities
because they generally have both call risk (also known as prepayment risk) and
extension risk. Homeowners have the option to prepay their mortgage.
Therefore, the duration of a security backed by home mortgages can either
shorten (call risk) or lengthen (extension risk). Investors are exposed to the
fluctuating principal and interest payments associated with such securities.
In general, if interest
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rates on new mortgage loans fall sufficiently below the interest rates on
existing outstanding mortgage loans, the rate of prepayment would be expected
to increase. Conversely, if mortgage loan interest rates rise above the
interest rates on existing outstanding mortgage loans, the rate of prepayment
would be expected to decrease.
ARMs also have the risk of prepayments, which will have a greater impact on
the Adjustable Rate Government Fund. The rate of principal prepayments with
respect to ARMs has fluctuated in recent years. As with fixed-rate mortgage
loans, ARMs may be subject to a greater rate of principal repayments in a
declining interest rate environment. For example, if prevailing interest rates
fall significantly, ARMs could be subject to higher prepayment rates (than if
prevailing interest rates remain constant or increase) because the
availability of low fixed-rate mortgages may encourage mortgagors to refinance
their ARMs to "lock-in" a fixed-rate mortgage. Conversely, if prevailing
interest rates rise significantly, ARMs may prepay slower. As with fixed-rate
mortgages, ARM prepayment rates vary in both stable and changing interest rate
environments. There are certain ARMs where the homeowner's payments do not
fully cover interest, so the principal balance increases over time. These
"negative amortizing" ARMs may be subject to greater default risk.
DERIVATIVE MORTGAGE-BACKED SECURITIES. Because derivative Mortgage-Backed
Securities (such as principal-only (POs), interest-only (IOs) or inverse
floating rate securities) are more exposed to mortgage prepayments, they
generally involve a greater amount of risk. Small changes in prepayments can
significantly impact the cash flow and the market value of these securities.
The risk of faster than anticipated prepayments generally adversely affects
IOs, super floaters and premium priced Mortgage-Backed Securities. The risk of
slower than anticipated prepayments generally adversely affects POs, floating-
rate securities subject to interest rate caps, support tranches and discount
priced Mortgage-Backed Securities. In addition, particular derivative
securities may be leveraged such that their exposure (i.e., price sensitivity)
to interest rate and/or prepayment risk is magnified.
TAX RISK OF MUNICIPAL SECURITIES. Due to Municipal Securities' tax-exempt
status, their yields and market values may be more adversely impacted by
changes in tax rates and policies than taxable fixed-income securities.
Because interest income from Municipal Securities is not subject to regular
federal income taxation, the attractiveness of Municipal Securities in
relation to other investment alternatives is affected by changes in federal
income tax rates applicable to, or the continuing federal income tax-exempt
status of, such interest income. Any proposed or actual changes in such rates
or exempt status, therefore, can significantly affect the demand for and
supply, liquidity and marketability of Municipal Securities, which could in
turn affect a Fund's ability to acquire and dispose of Municipal Securities at
desirable yield and price levels.
RISKS OF INVESTING IN NON-INVESTMENT GRADE FIXED-INCOME SECURITIES. Non-
investment grade fixed-income securities are considered predominantly
speculative by traditional investment standards. In some cases, these
obligations may be highly speculative and have poor prospects for reaching
investment grade standing. Non-investment grade fixed-income securities and
unrated securities of comparable credit quality (commonly known as "junk
bonds") are subject to the increased risk of an issuer's inability to meet
principal and interest obligations. These securities, also referred to as high
yield securities, may be subject to greater price volatility due to such
factors as specific corporate developments, interest rate sensitivity,
negative perceptions of the junk bond markets generally and less secondary
market liquidity.
Non-investment grade fixed-income securities are often issued in connection
with a corporate reorganization or restructuring or as part of a merger,
acquisition, takeover or similar event. They are also issued by less
established companies seeking to expand. Such issuers are often highly
leveraged and generally less able than
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more established or less leveraged entities to make scheduled payments of
principal and interest in the event of adverse developments or business
conditions.
The market value of non-investment grade fixed-income securities tends to
reflect individual corporate developments to a greater extent than that of
higher rated securities which react primarily to fluctuations in the general
level of interest rates. As a result, a Fund's ability to achieve its
investment objectives may depend to a greater extent on the Investment
Adviser's judgment concerning the creditworthiness of issuers than funds which
invest in higher-rated securities. Issuers of non-investment grade fixed-
income securities may not be able to make use of more traditional methods of
financing and their ability to service debt obligations may be more adversely
affected than issuers of higher-rated securities by economic downturns,
specific corporate developments or the issuer's inability to meet specific
projected business forecasts. Negative publicity about the junk bond market
and investor perceptions regarding lower rated securities, whether or not
based on fundamental analysis, may depress the prices for such securities.
A holder's risk of loss from default is significantly greater for non-
investment grade fixed-income securities than is the case for holders of other
debt securities because such non-investment grade securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities. Investment by a Fund in defaulted securities poses
additional risk of loss should nonpayment of principal and interest continue
in respect of such securities. Even if such securities are held to maturity,
recovery by a Fund of its initial investment and any anticipated income or
appreciation is uncertain.
The secondary market for non-investment grade fixed-income securities is
concentrated in relatively few market makers and is dominated by institutional
investors, including mutual funds, insurance companies and other financial
institutions. Accordingly, the secondary market for such securities is not as
liquid as, and is more volatile than, the secondary market for higher-rated
securities. In addition, market trading volume for high yield fixed-income
securities is generally lower and the secondary market for such securities
could contract under adverse market or economic conditions, independent of any
specific adverse changes in the condition of a particular issuer. These
factors may have an adverse effect on the market price and a Fund's ability to
dispose of particular portfolio investments. A less liquid secondary market
also may make it more difficult for a Fund to obtain precise valuations of the
high yield securities in its portfolio.
Credit ratings issued by credit rating agencies are designed to evaluate the
safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities
and, therefore, may not fully reflect the true risks of an investment. In
addition, credit rating agencies may or may not make timely changes in a
rating to reflect changes in the economy or in the conditions of the issuer
that affect the market value of the security. Consequently, credit ratings are
used only as a preliminary indicator of investment quality. Investments in
non-investment grade and comparable unrated obligations will be more dependent
on the Investment Adviser's credit analysis than would be the case with
investments in investment-grade debt obligations. The Investment Adviser
employs its own credit research and analysis, which includes a study of
existing debt, capital structure, ability to service debt and to pay
dividends, the issuer's sensitivity to economic conditions, its operating
history and the current trend of earnings. The Investment Adviser continually
monitors the investments in a Fund's portfolio and evaluates whether to
dispose of or to retain non-investment grade and comparable unrated securities
whose credit ratings or credit quality may have changed.
OTHER RISKS. Floating-rate derivative debt securities present more complex
types of interest rate risks. For example, range floaters are subject to the
risk that the coupon will be reduced below market rates if a designated
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interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to lower prices in the event of an
unfavorable change in the spread between two designated interest rates.
Asset-Backed Securities present certain credit risks that are not presented
by Mortgage-Backed Securities because Asset-Backed Securities generally do not
have the benefit of a security interest in collateral that is comparable to
mortgage assets. There is the possibility that, in some cases, recoveries on
repossessed collateral may not be available to support payments on these
securities.
FOREIGN RISKS. See "Foreign Securities" for a description of the risks of
investing in foreign securities and currencies.
INVESTMENT TECHNIQUES
MORTGAGE DOLLAR ROLLS. The Adjustable Rate Government, Short Duration
Government, Government Income, Core Fixed Income and Global Income 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 substantially similar (same type, coupon and
maturity) but not identical securities on a specified future date. During the
roll period, the Fund loses the right to receive principal and interest paid
on the securities sold. However, the 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 or fee income plus the interest earned
on the cash proceeds of the securities sold until the settlement date for 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 the Fund. Successful use
of mortgage dollar rolls depends upon the Investment Adviser's ability to
predict correctly interest rates and mortgage prepayments. There is no
assurance that mortgage dollar rolls can be successfully employed. The Fund
will hold and maintain in a segregated account until the settlement date cash
or liquid assets in an amount equal to the forward purchase price. For
financial reporting and tax purposes, each Fund treats 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.
OPTIONS ON SECURITIES AND SECURITIES INDICES. Each Fund may write (sell)
covered call and put options and purchase put and call options on any
securities in which it may invest or on any securities index composed of
securities in which it may invest. 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 use of options to seek to increase total return involves the
risk of loss if the Investment Adviser is incorrect in its expectation of
fluctuations in securities prices or interest rates. The successful use of
options for hedging purposes also depends in part on the ability of the
Investment Adviser to manage future price fluctuations and the degree of
correlation between the options and securities markets. If the Investment
Adviser is incorrect in its expectation of changes in securities prices or
determination of the correlation between the securities indices on which
options are written and purchased and the securities in a Fund's investment
portfolio, the investment performance of the Fund will be less favorable than
it would have been in the absence of such options transactions. The writing of
options could increase a Fund's portfolio turnover rate and, therefore,
associated brokerage commissions or spreads.
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OPTIONS ON FOREIGN CURRENCIES. The Core Fixed Income, Global Income and High
Yield Funds may, to the extent they invest in foreign securities, purchase and
sell (write) put and call options on foreign currencies for the purpose of
protecting against declines in the U.S. dollar value of foreign portfolio
securities and against increases in the U.S. dollar cost of foreign securities
to be acquired. In addition, the Core Fixed Income, Global Income and High
Yield Funds may use options on currency to cross-hedge, which involves writing
or purchasing options on one currency to hedge against changes in exchange
rates for a different currency, if there is a pattern of correlation between
the two currencies. As with other kinds of option transactions, however, the
writing of an option on foreign currency will constitute only a partial hedge,
up to the amount of the premium received. If an option that a Fund has written
is exercised, the Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against exchange rate fluctuations; however, in the event of exchange rate
movements adverse to a Fund's position, the Fund may forfeit the entire amount
of the premium plus related transaction costs. In addition to purchasing put
and call options for hedging purposes, a Fund may purchase call or put options
on currency to seek to increase total return when the Investment Adviser
anticipates that the currency will appreciate or depreciate in value, but the
securities quoted or denominated in that currency do not present attractive
investment opportunities and are not held in the Fund's portfolio. When
purchased or sold to seek to increase total return, options on currencies are
considered speculative. Options on foreign currencies to be written or
purchased by the Funds will be traded on U.S. and foreign exchanges or over-
the-counter.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. To seek to increase
total return, to hedge against changes in interest rates or securities prices,
or in the case of the Core Fixed Income, Global Income and High Yield Funds,
currency exchange rates, a 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 such contracts and options. The futures
contracts may be based on various securities (such as U.S. Government
Securities), foreign currencies, in the case of the Core Fixed Income, Global
Income and High Yield Funds, securities indices and other financial
instruments and indices. A Fund will engage in futures and related options
transactions for bona fide hedging purposes as defined in regulations of the
Commodity Futures Trading Commission or to seek to increase total return to
the extent permitted by such regulations. A Fund may not purchase or sell
futures contracts or purchase or sell related options to seek to increase
total return, except for closing purchase or sale transactions, if immediately
thereafter the sum of the amount of initial margin deposits and premiums paid
on a Fund's outstanding positions in futures and related options entered into
for the purpose of seeking to increase total return would exceed 5% of the
market value of a Fund's net assets. These transactions 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
segregate and maintain cash or liquid assets with a value equal to the amount
of the Fund's obligations.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. See
"Investment Techniques--Futures Contracts and Options on Futures Contracts" in
the Additional Statement. Thus, while a Fund may benefit from the use of
futures and options on futures, unanticipated changes in interest rates,
securities prices or currency exchange rates may result in a poorer overall
performance than if the Fund had not entered into any futures contracts or
options transactions. Because perfect correlation between a futures position
and portfolio position which is intended to be protected is impossible to
achieve, the desired protection may not be obtained and a Fund may be exposed
to risk of loss. The loss incurred by a Fund in entering into futures
contracts and in writing call options on futures is potentially unlimited and
may exceed the amount of the premium received. Futures markets are highly
volatile and the use of futures may increase the volatility of a Fund's net
asset value. The profitability of a Fund's trading in futures
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to seek to increase total return depends upon the ability of the Investment
Adviser to correctly analyze the futures markets. In addition, because of the
low margin deposits normally required in futures trading, a relatively small
price movement in a futures contract may result in substantial losses to a
Fund. Further, futures contracts and options on futures may be illiquid, and
exchanges may limit fluctuations in futures contract prices during a single
day.
CURRENCY SWAPS. The Core Fixed Income, Global Income and High Yield Funds
may enter into currency swaps for hedging purposes or to seek to increase
total return. Currency swaps involve the exchange by a Fund with another party
of their respective rights to make or receive payments in specified
currencies. Currency swaps usually involve the delivery of a gross payment
stream in one designated currency in exchange for the gross payment stream in
another designated currency. Therefore, the entire payment stream under a
currency swap is subject to the risk that the other party to the swap will
default on its contractual delivery obligations. A Fund will not enter into
swap transactions unless the unsecured commercial paper, senior debt or
claims-paying ability of the other party thereto is rated either AA or A-1 or
better by S&P or Aa or P-1 or better by Moody's, or, if unrated by such rating
organizations, determined to be of comparable quality by the Investment
Adviser. The use of currency swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Investment Adviser is
incorrect in its forecasts of 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. The staff of the SEC currently take the
position that swaps are illiquid and thus subject to a Fund's limitation on
investments in illiquid securities.
RISKS OF DERIVATIVE TRANSACTIONS. A Fund's transactions, if any, in options,
futures, options on futures, swap transactions, interest rate caps, floors and
collars, structured securities, inverse floating-rate securities and currency
forward contracts involve certain risks, including a possible lack of
correlation between changes in the value of hedging instruments and the
portfolio assets being hedged, the potential illiquidity of the markets for
derivative instruments, the risks arising from the margin requirements and
related leverage factors associated with such transactions. The use of these
management techniques to seek to increase total return may be regarded as a
speculative practice and involves the risk of loss if the Investment Adviser
is incorrect in its expectation of fluctuations in securities prices, interest
rates or currency prices. A Fund's use of certain derivative transactions may
be limited by the requirements of the Code for qualification as a regulated
investment company.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. Each Fund may purchase when-
issued securities. When-issued transactions arise when securities are
purchased by a Fund with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous price and yield to
the Fund at the time of entering into the transaction. Each Fund may also
purchase securities on a forward commitment basis; that is, make contracts to
purchase securities for a fixed price at a future date beyond the customary
three-day settlement. A 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 assets 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. The purchase of securities on a when-
issued or forward commitment basis involves a risk of loss if the value of the
security to be purchased declines prior to the settlement date. Although a
Fund would generally purchase securities on a when-issued or forward
commitment basis with the intention of acquiring securities for its portfolio,
a Fund may dispose of when-issued securities or forward commitments prior to
settlement if the Investment Adviser deems it appropriate to do so.
ILLIQUID AND RESTRICTED SECURITIES. A Fund may not invest more than 15% of
its net assets in illiquid investments, which includes securities (both
foreign and domestic) that are not readily marketable, swap
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<PAGE>
transactions, certain SMBS, certain municipal leases and participation
interests, repurchase agreements maturing in more than seven days, time
deposits with a notice or demand period of more than seven days and certain
restricted securities, unless it is determined, based upon the continuing
review of the trading markets for a specific restricted security, that such
restricted security is eligible for resale under Rule 144A under the
Securities Act of 1933 and, therefore, is liquid. The Trustees have adopted
guidelines and delegated to the Investment Adviser the daily function of
determining and monitoring the liquidity of portfolio securities. The
Trustees, however, retain oversight focusing on factors such as valuation,
liquidity and availability of information and are ultimately responsible for
each determination. Investing in restricted securities eligible for resale
pursuant to Rule 144A may decrease the liquidity 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 and illiquid securities normally reflect a discount, which may be
significant, from the market price of comparable securities for which a liquid
market exists.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements with
dealers in U.S. Government Securities and member banks of the Federal Reserve
System which furnish collateral at least equal in value or market price to the
amount of their repurchase obligation. The Core Fixed Income, Global Income
and High Yield Funds may also enter into repurchase agreements involving
certain foreign government securities. If the other party or "seller"
defaults, a Fund might suffer a loss to the extent that the proceeds from the
sale of the underlying securities and other collateral held by the Fund in
connection with the related repurchase agreement are less than the repurchase
price. In addition, in the event of bankruptcy of the seller or failure of the
seller to repurchase the securities as agreed, a Fund could suffer losses,
including loss of interest on or principal of the security and costs
associated with delay and enforcement of the repurchase agreement. The
Trustees have reviewed and approved certain counterparties whom they believe
to be creditworthy and have authorized the Funds to enter into repurchase
agreements with such counterparties. In addition, each Fund, together with
other registered investment companies having management agreements with the
Investment Adviser, 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.
TEMPORARY INVESTMENTS. Each Fund may, for temporary defensive purposes,
invest up to 100% of its total assets in (a) U. S. Government Securities or
(b) repurchase agreements collateralized by U.S. Government Securities. The
Short Duration Tax-Free and Municipal Income Funds may for temporary defensive
purposes depart from their stated investment objectives and invest more than
20% of its net assets in taxable investments. The High Yield Fund may for
temporary defensive purposes invest in investment grade securities.
MISCELLANEOUS TECHNIQUES
In addition to the techniques and investments described above, each Fund
may, with respect to no more than 5% of its net assets, engage in the
following techniques and investments: (i) portfolio securities lending, (ii)
mortgage swaps (other than Short Duration Tax-Free and Municipal Income Funds)
and interest rate swaps, caps, floors and collars, (iii) inverse floating-rate
securities, (iv) yield curve options, (v) other investment companies, (vi)
custodial receipts and (vii) with respect to the Short Duration Tax-Free and
Municipal Income Funds, tender option bonds and standby commitments. For more
information, see the Additional Statement.
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INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions that are described
in detail under "Investment Restrictions" in the Additional Statement.
Fundamental investment restrictions of a Fund cannot be changed without
approval of a majority of the outstanding shares of that Fund. Each Fund's
investment objectives and all policies not specifically designated as
fundamental are non-fundamental and may be changed without shareholder
approval. If there is a change in a Fund's investment objectives, shareholders
should consider whether that Fund still remains an appropriate investment in
light of their then current financial positions and needs.
The Short Duration Tax-Free and Municipal Income Funds' policy to invest,
under normal market conditions, at least 80% of its net assets in Municipal
Securities, the interest on which is exempt from regular federal income tax,
is fundamental and may not be changed without shareholder approval. For more
information on a Fund's investment restrictions, an investor should obtain the
Additional Statement.
NON-DIVERSIFICATION STATUS. Since the Global Income Fund is "non-
diversified" under the Act, it is subject only to certain federal tax
diversification requirements. Under federal tax laws, the Global Income Fund
may, with respect to 50% of its total assets, invest up to 25% of its total
assets in the securities of any issuer (except that this limitation does not
apply to U.S. Government Securities). With respect to the remaining 50% of the
Fund's total assets, (1) the Fund may not invest more than 5% of its total
assets in the securities of any one issuer (other than the U.S. government),
and (2) the Fund may not acquire more than 10% of the outstanding voting
securities of any one issuer. These tests apply at the end of each quarter of
its taxable year and are subject to certain conditions and limitations under
the Code. Since the Global Income Fund is not diversified under the Act, it
will be more susceptible to adverse developments affecting any single issuer.
The Adjustable Rate Government, Short Duration Government, Short Duration Tax-
Free, Government Income, Municipal Income, Core Fixed Income and High Yield
Funds are, in addition to these tax diversification requirements, also subject
to the diversification requirements arising out of their diversified status
under the Act.
PORTFOLIO TURNOVER
Each Fund may engage in active short-term trading to benefit from yield
disparities among different issues of securities or among the markets for
fixed-income securities, or for other reasons. It is anticipated that the
portfolio turnover rate of each Fund will vary from year to year. It is
anticipated that the annual portfolio turnover rate for the High Yield Fund
will generally not exceed 150%. The portfolio turnover rate is computed by
dividing the lesser of the dollar amount of securities purchased or securities
sold (excluding all securities whose maturities at acquisition are one year or
less) by the average monthly value of such securities owned during the year. A
100% turnover rate would occur, for example, if all of the securities held by
a Fund were sold and replaced within one year. The Investment Adviser will not
consider the portfolio turnover rate a limiting factor in making investment
decisions for a Fund consistent with the Fund's investment objectives and
portfolio management policies. A high rate of portfolio turnover results in
increased transaction costs to a Fund. The portfolio turnover rate includes
the effect of entering into mortgage dollar rolls. See "Financial Highlights"
for a statement of each Fund's historical portfolio turnover rates.
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MANAGEMENT
TRUSTEES AND OFFICERS
The Trustees are responsible for deciding matters of general policy and
reviewing the actions of the Investment Advisers, distributor and transfer
agent. The officers of the Trust conduct and supervise each Fund's daily
business operations. The Additional Statement contains information as to the
identity of, and other information about, the Trustees and officers of the
Trust.
INVESTMENT ADVISERS
INVESTMENT ADVISERS. Goldman Sachs Funds Management, L.P., One New York
Plaza, New York, New York 10004, a Delaware limited partnership, which is an
affiliate of Goldman Sachs, serves as investment adviser to the Short Duration
Government and Adjustable Rate Government Funds. Goldman Sachs Funds
Management, L.P. registered as an investment adviser in 1990. Goldman Sachs
Asset Management, One New York Plaza, New York, New York 10004, a separate
operating division of Goldman Sachs, serves as the investment adviser to the
Short Duration Tax-Free, Government Income, Municipal Income, Core Fixed
Income and High Yield Funds. Goldman Sachs registered as an investment adviser
in 1981. Goldman Sachs Asset Management International, 133 Peterborough Court,
London EC4A 2BB, England, an affiliate of Goldman Sachs, serves as investment
adviser to the Global Income Fund. Goldman Sachs Asset Management
International became a member of the Investment Management Regulatory
Organization Limited in 1990 and registered as an investment adviser in 1991.
As of , 1997, GSAM, GSFM and GSAMI, together with their affiliates, acted
as investment adviser, administrator or distributor for assets in excess of
$ billion.
Under a Management Agreement with each Fund, the applicable Investment
Adviser, subject to the general supervision of the Trustees, provides day-to-
day advice as to the Fund's portfolio transactions. Goldman Sachs has agreed
to permit the Trust to use the name "Goldman Sachs" or a derivative thereof as
part of each Fund's name for as long as a Fund's Management Agreement is in
effect.
In performing its investment advisory services, each Investment Adviser,
while remaining ultimately responsible for the management of the Funds, is
able to draw upon the research and expertise of its affiliate offices for
portfolio decisions and management with respect to certain portfolio
securities. In addition, the Investment Advisers will have access to the
research of, and proprietary technical models developed by, Goldman Sachs and
may apply quantitative and qualitative analysis in determining the appropriate
allocations among the categories of issuers and types of securities.
Under the Management Agreement, each Investment Adviser also: (i) supervises
all non-advisory operations of each Fund that it advises; (ii) provides
personnel to perform such executive, administrative and clerical services as
are reasonably necessary to provide effective administration of each Fund;
(iii) arranges for at each Fund's expense (a) the preparation of all required
tax returns, (b) the preparation and submission of reports to existing
shareholders, (c) the periodic updating of prospectuses and statements of
additional information and (d) the preparation of reports to be filed with the
SEC and other regulatory authorities; (iv) maintains each Fund's records; and
(v) provides the Fund with office space and all necessary office equipment and
services.
ADJUSTABLE RATE GOVERNMENT AND SHORT DURATION GOVERNMENT FUNDS. The Funds'
portfolio manager is Jonathan A. Beinner. Mr. Beinner is a Vice President of
Goldman Sachs and Co-Head of GSAM's U.S. Fixed
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<PAGE>
Income Department. Mr. Beinner joined the Investment Adviser in 1990 after
working in the trading and arbitrage group of Franklin Savings Association.
GOVERNMENT INCOME AND CORE FIXED INCOME FUNDS. The Funds' portfolio managers
are Jonathan A. Beinner and Richard C. Lucy. See above for information about
Mr. Beinner. Messrs. Beinner and Lucy each specialize in investing in a
particular type of security the Fund may hold. Mr. Lucy is a Vice President of
Goldman Sachs and Co-Head of GSAM's U.S. Fixed Income Department. Mr. Lucy
joined the Investment Adviser in 1992 after spending nine years managing fixed
income assets at Brown Brothers Harriman & Co.
SHORT DURATION TAX-FREE AND MUNICIPAL INCOME FUNDS. The Funds' portfolio
managers are Benjamin S. Thompson and Elisabeth Schupf Lonsdale. Mr. Thompson
and Ms. Lonsdale each specialize in municipal securities. Mr. Thompson's
responsibilities include developing investment strategy and structuring
portfolios. Ms. Lonsdale is also responsible for GSAM's municipal credit
research. Mr. Thompson worked in the institutional sales and marketing group
at GSAM until he joined the fixed-income team in 1993. Prior to joining GSAM
in early 1992, Mr. Thompson worked in the Structured Finance Group of the
Chase Manhattan Bank. Before rejoining Goldman Sachs in 1995, Ms. Lonsdale was
a Director of Fitch Investors Service evaluating the credit ratings of tax-
backed issues. Prior to that, she worked for ten years in the Goldman Sachs
Municipal Finance Department.
GLOBAL INCOME FUND. The Fund's portfolio managers are Stephen Fitzgerald and
Andrew Wilson. Mr. Fitzgerald joined GSAMI in 1992 and is an Executive
Director and Chief Investment Officer for international fixed income. Prior to
1992, he spent two years managing multi-currency fixed-income and balanced
portfolios at Invesco MIM Limited, where he was a senior member of the
derivative products group. Mr. Wilson joined GSAMI in 1995 and is Executive
Director and Portfolio Manager for international fixed income. Prior to
joining GSAMI, he spent three years as an Assistant Director at Rothschild
Asset Management where he was responsible for managing global and
international bond portfolios, with specific focus on the U.S., Canadian,
Australian and Japanese economies. Prior to his employment at Rothschild, Mr.
Wilson spent seven years at the Reserve Bank of New Zealand, his most recent
position as Trading Manager of foreign reserves management. Mr. Wilson's
employment at the Reserve Bank at New Zealand also included a two year
assignment to the foreign investment unit at the Bank of England in London.
It is the responsibility of the Investment Adviser to make investment
decisions for a Fund and to place the purchase and sale orders for a Fund's
portfolio transactions in U.S. and foreign securities and currency markets.
Such orders may be directed to any broker including, to the extent and in the
manner permitted by applicable law, Goldman Sachs or its affiliates. In
effecting purchases and sales of portfolio securities for the Funds, the
Investment Advisers will seek the best price and execution of a Fund's orders.
In doing so, where two or more brokers or dealers offer comparable prices and
execution for a particular trade, consideration may be given to whether the
broker or dealer provides investment research or brokerage services or sells
shares of any Goldman Sachs Fund. See the Additional Statement for a further
description of the Investment Advisers' brokerage allocation practices.
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As compensation for its services rendered and assumption of certain expenses
pursuant to separate Management Agreements, GSAM, GSFM and GSAMI are entitled
to the following fees, computed daily and payable monthly at the annual rates
listed below:
<TABLE>
<CAPTION>
FOR THE FISCAL
CONTRACTUAL YEAR ENDED
RATE* OCTOBER 31, 1996*
----------- ------------------
<S> <C> <C>
GSAM
- ----
Short Duration Tax-Free 0.40% 0.40%
Government Income 0.65% 0.25%
Municipal Income 0.55% 0.55%
Core Fixed Income 0.40% 0.40%
High Yield 0.70% N/A
GSFM
- ----
Short Duration Government 0.50% 0.40%
Adjustable Rate Government 0.40% 0.40%
GSAMI
- -----
Global Income 0.90% 0.59%
</TABLE>
- --------
* With respect to Government Income, Municipal Income and Global Income
Funds, a Management Agreement combining advisory and administration
services (and subadvisory services in the case of Global Income Fund) was
adopted effective April 30, 1997. The Management Agreements for the other
funds previously combined such services. The contractual rate set forth in
the table is the rate payable under the Management Agreements (and, in the
case of Global Income Fund, is identical to the aggregate advisory,
subadvisory and administration fee rate payable by the Fund under the
previously separate investment advisory, subadvisory and administration
agreements). For the fiscal year ended October 31, 1996, the annual rate
expressed is the combined advisory and administration fees paid (after
voluntary fee limitations). The difference, if any, between the stated fees
and the actual fees paid by the Funds reflects that the applicable
Investment Adviser did not charge the full amount of the fees to which it
would have been entitled. The Investment Advisers may discontinue or modify
such limitations in the future at their discretion, although they have no
current intention to do so.
The Investment Advisers to the Short Duration Government, Short Duration
Tax-Free, Core Fixed Income, Government Income, Municipal Income, Global
Income and High Yield Funds have voluntarily agreed to reduce or limit certain
"Other Expenses" of such Funds (excluding management fees, fees under service
and administration plans, taxes, interest and brokerage fees and litigation,
indemnification and other extraordinary expenses (and transfer agency fees in
the case of the Global Income and High Yield Funds) to the extent such
expenses exceed 0.05%, 0.05%, 0.05%, 0.00%, 0.05%, 0.06% and 0.01% per annum
of such Funds' average daily net assets, respectively. Such reductions or
limits, if any, are calculated monthly on a cumulative basis and may be
discontinued or modified by the applicable Investment Adviser in its
discretion at any time.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
GOLDMAN SACHS. The involvement of the Investment Advisers, 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 a Fund or limit a Fund's investment activities. Goldman Sachs and
its affiliates engage in proprietary trading and advise accounts and funds
which have investment objectives similar to those of the Funds and/or which
engage in and compete for transactions in the same types of securities,
currencies and instruments as the Funds. Goldman
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Sachs and its affiliates will not 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 in general it is not anticipated
that the Investment Advisers will have access to proprietary information for
the purpose of managing a Fund. The results of a Fund's investment activities,
therefore, may differ from those of Goldman Sachs and its affiliates and it is
possible that a Fund could sustain losses during periods in which Goldman
Sachs and its affiliates and other accounts achieve significant profits on
their trading for proprietary or other accounts. From time to time, a Fund's
activities may be limited because of regulatory restrictions applicable to
Goldman Sachs and its affiliates, and/or their internal policies designed to
comply with such restrictions. See "Management -- Activities of Goldman Sachs
and its Affiliates and Other Accounts Managed by Goldman Sachs" in the
Additional Statement for further information.
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of each Fund's shares. Goldman
Sachs, 4900 Sears Tower, Chicago, Illinois 60606 also serves as each Fund's
transfer agent (the "Transfer Agent") and as such performs various shareholder
servicing functions. Shareholders with inquiries regarding any Fund should
contact Goldman Sachs (as Transfer Agent) at the address or the telephone
number set forth on the back cover page of this Prospectus. Goldman Sachs is
not entitled to receive a fee from the Global Income Fund for transfer agency
services. Goldman Sachs is entitled to receive a fee from the Adjustable Rate
Government, Short Duration Government, Short Duration Tax-Free Government
Income, Municipal Income and Core Fixed Income Funds equal to each class'
proportionate share of the total transfer agency fees borne by the Fund. Such
fees are equal to the fixed per account charge of $12,000 per year plus $7.50
per account, together with out-of-pocket and transaction related expenses
(including those out-of-pocket expenses payable to servicing and/or sub-
transfer agents) applicable to Class A and B shares where applicable plus
0.04% of the average daily net assets of the other classes of the Funds.
Goldman Sachs is entitled to receive a fee from the High Yield Fund equal to
..04% of the average daily net assets of Institutional and Service shares.
DIVIDENDS
Each Fund (other than the Global Income Fund) will declare a daily dividend.
Such dividend will accrue to shareholders of record as of 3:00 p.m. Chicago
time, and will be paid monthly. The Global Income Fund will declare and pay
dividends monthly. Shares of Global Income Fund will be eligible for dividends
which accrue on or after the date such shares are purchased and will be paid
monthly. Over the course of the fiscal year, dividends accrued and paid will
constitute all or substantially all of the Funds' net investment income. From
time to time a portion of such dividends may constitute a return of capital.
In the case of Core Fixed Income, Global Income and High Yield Funds, net
loss, if any, from certain foreign currency transactions or instruments that
is otherwise taken into account in calculating net investment income or net
realized capital gains for accounting purposes may not be taken into account
in determining the amount of dividends to be declared and paid, with the
result that a portion of the Fund's dividends may be treated as a return of
capital, nontaxable to the extent of a shareholder's tax basis in his shares.
The Funds also intend that all net realized long-term and short-term capital
gains will be declared as a dividend at least annually. In determining amounts
of capital gains to be distributed, capital losses, including any available
capital loss carryovers from prior years will be offset against capital gains.
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<PAGE>
A Fund's net investment income is determined on a daily basis (monthly in
the case of the Global Income Fund). On days on which net asset value is
calculated, such determination is made immediately prior to the calculation of
a Fund's net asset value as of 3:00 p.m. Chicago time. On days on which net
asset value is not calculated, such determination is made as of 3:00 p.m.
Chicago time.
Payment of dividends (other than the Global Income Fund) from net investment
income will be made on the last calendar day of each month in additional
shares of a Fund at the net asset value on such day, unless cash distributions
are elected, in which case, cash payment will be made on the first Business
Day of the succeeding month. In the case of Global Income Fund, reinvestment
of dividends from net investment income in additional shares of the Fund will
be made on the second to last Business Day of each month. Cash dividends will
be paid on or about the last Business Day of the month. Payment of dividends
with respect to capital gains, if any, when declared will be made in
additional shares of the Fund at the net asset value on the payment date,
unless cash distributions are elected. This election to receive dividends in
cash is initially made on the Account Information Form and may be changed upon
written notice to the Transfer Agent at any time prior to the record date for
a particular dividend or distribution. If cash dividends are elected with
respect to the Fund's monthly net investment income dividends, then cash
dividends must also be elected with respect to the non-long-term capital gains
component, if any, of the Fund's annual dividend.
At the time of an investor's purchase of shares of a Fund, a portion of the
net asset value per share may be represented by undistributed income (in the
case of the Global Income Fund) or realized or unrealized appreciation of any
Fund's portfolio securities. Therefore, subsequent distributions on such
shares from such income or realized appreciation may be taxable to the
investor even if the net asset value of the shares is, as a result of the
distributions, reduced below the cost of such shares and the distributions (or
portions thereof) represent a return of a portion of the purchase price.
NET ASSET VALUE
The net asset value per share of each class of a Fund is calculated by the
Fund's custodian as of the close of regular trading on the New York Stock
Exchange (normally 3:00 p.m. Chicago time, 4:00 p.m. New York time) on each
Business Day (as such term is defined under "Additional Information")
immediately after the determination, if any, of the income to be declared as a
dividend (except in the case of the Global Income Fund). Net asset value per
share of each class is calculated by determining the net assets attributable
to each class and dividing by the number of outstanding shares of that class.
Each Fund's portfolio securities for which accurate market quotations 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 and
other portfolio securities are valued at fair value, based on yield
equivalents, a pricing matrix or other sources, under valuation procedures
established by the Trustees. Debt obligations with a remaining maturity of 60
days or less are valued at amortized cost. The Board of Trustees has
determined that the amortized cost of such securities approximates fair market
value.
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PERFORMANCE INFORMATION
From time to time each Fund may publish yield, distribution rate and average
annual total return and the Short Duration Tax-Free and Municipal Income Funds
may publish its tax equivalent yield in advertisements and communications to
shareholders or prospective investors. Average annual total return is
determined by computing the average annual percentage change in value of
$1,000 invested at the maximum public offering price for specified periods
ending with the most recent calendar quarter, assuming reinvestment of all
dividends and distributions at net asset value. The total return calculation
assumes a complete redemption of the investment at the end of the relevant
period. Each Fund may also from time to time advertise total return on a
cumulative, average, year-by-year or other basis for various specified periods
by means of quotations, charts, graphs or schedules. In addition to the above,
each Fund may from time to time advertise its performance relative to certain
averages, performance rankings, indices, other information prepared by
recognized mutual fund statistical services and investments for which reliable
performance data is available.
Yield is computed by dividing net investment income earned during a recent
thirty-day period by the product of the average daily number of shares
outstanding and entitled to receive dividends during the period and the
maximum offering price per share on the last day of the relevant period. The
results are compounded on a bond equivalent (semiannual) basis and then
annualized. 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, the Short Duration Tax-Free and Municipal Income Funds'
tax-free yield. Tax equivalent yield is calculated by dividing the Short
Duration Tax-Free Fund's tax-exempt yield by one minus a stated federal tax
rate.
Quotations of distribution rates are calculated by annualizing the most
recent distribution of net investment income for a monthly, quarterly or other
relevant period and dividing this amount by the net asset value per share or
maximum public offering price on the last day of the period for which the
distribution rates are being calculated.
Each Fund's yield, total return and distribution rate will be calculated
separately for each class of shares in existence. Because each class of shares
may be subject to different expenses, the yield, total return and distribution
rate calculations with respect to each class of shares for the same period
will differ. See "Shares of the Trust."
The investment results of a Fund will fluctuate over time and any
presentation of investment results for any prior period should not be
considered a representation of what an investment may earn or what the Fund's
performance may be in any future period. In addition to information provided
in shareholder reports, the Funds may, in their discretion, from time to time,
make a list of their holdings available to investors upon request.
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<PAGE>
SHARES OF THE TRUST
Each Fund is a series of the Goldman Sachs Trust, which was formed under the
laws of the state of Delaware on January 28, 1997. The Funds were formerly
series of Goldman Sachs Trust, a Massachusetts business trust, and were
reorganized into the Trust as of April 30, 1997. The Trustees have authority
under the Trust's Declaration of Trust to create and classify shares of
beneficial interest in separate series, without further action by
shareholders. Additional series may be added in the future. The Trustees also
have authority to classify or reclassify any series or portfolio of shares
into one or more classes.
When issued, shares are fully paid and non-assessable. In the event of
liquidation, shareholders are entitled to share pro rata in the net assets of
the applicable Fund available for distribution to such shareholders. All
shares are freely transferable and have no preemptive, subscription or
conversion rights. Shareholders are entitled to one vote per share, provided
that at the option of the Trustees, shareholders will be entitled to a number
of votes based upon the net asset values represented by their shares.
The Trust does not intend to hold annual meetings of shareholders. However,
pursuant to the Trust's By-Laws, the recordholders of at least 10% of the
shares outstanding and entitled to vote at a special meeting may require the
Trust to hold such special meeting of shareholders for any purpose and
recordholders may, under certain circumstances, as permitted by the Act,
communicate with other shareholders in connection with requiring a special
meeting of shareholders. The Trustees will call a special meeting of
shareholders for the purpose of electing Trustees, if, at any time, less than
a majority of Trustees holding office at the time were elected by
shareholders.
In the interest of economy and convenience, the Trust does not issue
certificates representing the Funds' shares. Instead, the Transfer Agent
maintains a record of each shareholder's ownership. Each shareholder receives
confirmation of purchase and redemption orders from the Transfer Agent. Fund
shares and any dividends and distributions paid by the Funds are reflected in
account statements from the Transfer Agent.
As of , 1997, the shareholders listed below owned beneficially and of
record 25% or more of the outstanding shares of such Fund: Short Duration
Government Fund--State Street Bank and Trust Company, P.O. Box 1992, Boston,
MA 02105-1992 (34.05%).
TAXATION
FEDERAL TAXES
Each Fund is treated as a separate entity for tax purposes, has elected or
intends to elect to be treated as a regulated investment company and intends
to qualify for such treatment for each taxable year under Subchapter M of the
Code. To qualify as such, a Fund must satisfy certain requirements relating to
the sources of its income, diversification of its assets and distribution of
its income to shareholders. As a regulated investment company, a Fund will not
be subject to federal income or excise tax on any net investment income and
net realized capital gains that are distributed to its shareholders in
accordance with certain timing requirements of the Code.
The Short Duration Tax-Free and Municipal Income Funds intend to satisfy
certain requirements of the Code so that it may distribute the tax-exempt
interest it receives as "exempt-interest dividends," as defined in
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<PAGE>
the Code. If such requirements are satisfied, distributions of the Short
Duration Tax-Free and Municipal Income Funds that are attributable to interest
on tax-exempt obligations and that the Fund properly designates as exempt-
interest dividends will be exempt from regular federal income tax, although
all or a portion of such a distribution may be subject to the federal
alternative minimum tax and the entire distribution may be includable in the
tax base for determining taxability of social security or railroad retirement
benefits. Persons who are "substantial users" (or related persons to such
substantial users) of facilities financed by industrial development or certain
private activity bonds should consult their own tax advisers before purchasing
shares of the Short Duration Tax-Free and Municipal Income Funds. Interest on
indebtedness incurred or continued to purchase or carry shares of the Short
Duration Tax-Free and Municipal Income Funds is not deductible to the extent
attributable to the Short Duration Tax-Free or Municipal Income Funds'
distributions that are exempt-interest dividends.
Dividends paid by a Fund from net investment income, certain net realized
foreign exchange gains, the excess of net short-term capital gain over net
long-term capital loss and original issue discount or market discount income
will be taxable to shareholders as ordinary income, except for any exempt-
interest dividends paid by Short Duration Tax-Free and Municipal Income Funds,
as described above. Dividends paid by a Fund from the excess of net long-term
capital gain over net short-term capital loss will be taxable as long-term
capital gains regardless of how long the shareholders have held their shares.
These tax consequences will apply regardless of whether distributions are
received in cash or reinvested in shares. Certain distributions paid by a Fund
in January of a given year may be taxable to shareholders as if received the
prior December 31. Shareholders will be informed annually about the amount and
character of distributions received from the Funds for federal income tax
purposes.
Investors should consider the tax implications of buying shares immediately
prior to a distribution. Investors who purchase shares shortly before the
record date for a distribution other than a daily dividend will pay a per
share price that includes the value of the anticipated distribution and will
be taxed on any taxable distribution even though the distribution represents a
return of a portion of the purchase price.
Redemptions and exchanges of shares are taxable events.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on distributions (other than exempt-
interest dividends), redemptions and exchanges if they fail to furnish their
correct taxpayer identification number and certain certifications required by
the Internal Revenue Services or if they are otherwise subject to backup
withholding. Individuals, corporations and other shareholders that are not
U.S. persons under the Code are subject to different tax rules and may be
subject to non-resident alien withholding at the rate of 30% (or a lower rate
provided by an applicable tax treaty) on amounts treated as ordinary dividends
from the Funds.
The Core Fixed Income, Global Income and High Yield Funds may be subject to
foreign withholding or other foreign taxes on income or gain from certain
foreign securities. If more than 50% of the value of the total assets of
either Fund is comprised of stock or securities of foreign corporations at the
end of its taxable year and the applicable Fund so elects, that Fund's
shareholders will include in their gross incomes (in addition to dividends and
distributions they receive) their pro rata shares of qualified foreign taxes
paid by that Fund and may be entitled under the Code to claim foreign tax
credits or deductions with respect to such taxes. It is not expected that the
Core Fixed Income Fund will qualify to make this election. If either Fund
cannot or does not so elect, it may deduct these taxes in computing its
taxable income, if any.
42
<PAGE>
OTHER TAXES
In addition to federal taxes, a shareholder may be subject to state, local
or foreign taxes on payments received from the Funds, including exempt-
interest dividends. A state income (and possibly local income and/or
intangible property) tax exemption is generally available to the extent (if
any) a Fund's distributions are derived from interest on (or, in the case of
intangible property taxes, the value of its assets is attributable to) certain
U.S. government obligations and/or tax-exempt municipal obligations issued by
or on behalf of the particular state or a political subdivision thereof,
provided in some states that certain thresholds for holdings of such
obligations and/or reporting requirements are satisfied. For a further
discussion of certain tax consequences of investing in shares of the Funds,
see "Taxation" in the Additional Statement. Shareholders are urged to consult
their own tax advisers regarding specific questions as to federal, state and
local taxes as well as to any foreign taxes.
ADDITIONAL INFORMATION
The term "a vote of the majority of the outstanding shares" of a Fund means
the vote of the lesser of (i) 67% or more of the shares 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 (ii) more than 50% of the outstanding
shares of the Fund.
As used in this Prospectus, the term "Business Day" means any day the New
York Stock Exchange is open for trading, which is Monday through Friday except
for holidays. The New York Stock Exchange is closed on the following holidays:
New Year's Day, Presidents' Day (observed), Good Friday, Memorial Day
(observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
43
<PAGE>
REPORTS TO SHAREHOLDERS
Recordholders of Institutional Shares of the Funds will receive an annual
report containing audited financial statements and a semi-annual report. Each
recordholder of Institutional Shares will also be provided with a printed
confirmation for each transaction in its account and an individual monthly
statement (quarterly in the case of Global Income Fund). A year-to-date
statement for any account will be provided upon request made to Goldman Sachs.
SUB-ACCOUNTING SERVICE
Each Fund has designed special procedures to assist institutional investors
(including banks) desiring to establish multiple accounts (master accounts and
their sub-accounts). Sub-accounts may be established with registration by name
and/or number. Institutions will not normally be charged for this service
unless otherwise agreed upon. Upon request, master accounts will be provided
with a monthly summary report which sets forth in order by account number (or
name) the share balance at month end and the income, if any, together with the
total share balance and income, if any, for the master account. The Global
Income Fund does not generally provide sub-accounting services.
PURCHASE OF INSTITUTIONAL SHARES
Institutional Shares may be purchased on any Business Day through Goldman
Sachs at the net asset value per share next determined after receipt of an
order. No sales load will be charged. If, by the close of regular trading on
the New York Stock Exchange (normally 3:00 p.m. Chicago time, 4:00 p.m. New
York time), an order is received by Goldman Sachs, the price per share will be
the net asset value per share computed on the day the purchase order is
received. See "Net Asset Value." Purchases of Institutional Shares of the
Funds must be settled within three (3) Business Days of receipt of a complete
purchase order. Payment of the proceeds of redemption of shares purchased by
check may be delayed for a period of time as described under "Redemption of
Institutional Shares."
Prior to making an initial investment in a Fund, an investor must open an
account with a Fund by furnishing necessary information to such Fund or
Goldman Sachs. An Account Information Form, a copy of which is attached to
this Prospectus, should be used to open such an account. Subsequent purchases
may be made in the manner set forth below.
PURCHASE PROCEDURES APPLICABLE TO EACH FUND OTHER THAN THE GLOBAL INCOME FUND
Purchases of Institutional Shares may be made by placing an order with
Goldman Sachs at 800-621-2550 and either wiring federal funds to The Northern
Trust Company ("Northern") as subcustodian for State Street Bank and Trust
Company ("State Street") on the next Business Day or initiating an ACH
transfer to ensure
44
<PAGE>
receipt by Northern on the next Business Day. Purchases may also be made by
check (except that the Trust will not accept a check drawn on a foreign bank
or a third-party check) or Federal Reserve draft payable to Goldman Sachs
Fixed Income Funds--Name of Fund and Class of shares and should be directed to
Goldman Sachs Fixed Income Funds--Name of Fund and Class of shares, c/o GSAM
Shareholder Services, 4900 Sears Tower, Chicago, Illinois 60606.
PURCHASE PROCEDURES APPLICABLE TO THE GLOBAL INCOME FUND
Purchases of Institutional Shares may be made by placing an order with
Goldman Sachs at 800-621-2550 and either wiring federal funds to State Street
or initiating an ACH transfer. Purchases may also be made by check (except
that the Trust will not accept a check drawn on a foreign bank or a third-
party check) or Federal Reserve draft made payable to Goldman Sachs Fixed
Income Funds-- Name of Fund and Class of shares and should be directed to
Goldman Sachs Fixed Income Funds--Name of Fund and Class of shares c/o
National Financial Data Services, Inc., P.O. Box 419711, Kansas City, MO
64141-6711.
MINIMUM INITIAL INVESTMENTS
In the case of each Fund other than Government Income, Municipal Income, the
Global Income and High Yield Funds, the minimum initial investment is $50,000
in Institutional Shares of a Fund alone or in combination with Institutional
Shares of any other mutual fund sponsored by Goldman Sachs and designated as
an eligible fund for this purpose and the corresponding class of any portfolio
of the Goldman Sachs Money Market Funds. The minimum investment requirement
may be waived for current and former officers, partners, directors or
employees of Goldman Sachs or any of its affiliates or for other investors at
the discretion of the Trust's officers. No minimum amount is required for
subsequent investments.
In the case of the Government Income, Municipal Income, Global Income and
High Yield Funds, the minimum initial investment is $1,000,000 in
Institutional Shares of a Fund alone or in combination with other assets under
the management of GSAM and its affiliates. Institutional Shares of the
Government Income, Municipal Income, Global Income and High Yield Funds are
offered to (a) banks, trust companies or other types of depository
institutions investing for their own account or on behalf of their clients;
(b) pension and profit sharing plans, pension funds and other company-
sponsored benefit plans; (c) qualified non-profit organizations, charitable
trusts, foundations and endowments; (d) any state, county, city or any
instrumentality, department, authority or agency thereof; (e) corporations and
other for-profit business organizations with assets of at least $100 million
or publicly traded securities outstanding; (f) "wrap" accounts for the benefit
of clients of broker-dealers, financial institutions or financial planners,
provided that they have entered into an agreement with GSAM specifying
aggregate minimums and certain operating policies and standards; (g)
registered investment advisers who have entered into an agreement with GSAM
specifying aggregate minimums and certain operating policies and standards;
and (h) accounts over which GSAM or its advisory affiliates have investment
discretion. The minimum investment requirement may be waived at the discretion
of the Trust's officers. No minimum amount is required for subsequent
investments.
OTHER PURCHASE INFORMATION
Institutional Shares of the Global Income Fund will be issued and dividends
will begin to be paid with respect to dividends which accrue on or after the
purchase of Institutional Shares. For the other Funds, the following applies:
PURCHASE BY FEDERAL FUNDS WIRE OR ACH TRANSFER. If a purchase order is
received by Goldman Sachs by 3:00 p.m. Chicago time and payment is made by
wire transfer or ACH transfer, shares will be
45
<PAGE>
issued and dividends will begin to accrue on the purchased shares on the
later of (i) the Business Day after receipt by Goldman Sachs of a purchase
order or (ii) the day of receipt of a federal funds wire or an ACH transfer
by State Street.
PURCHASE BY CHECK OR FEDERAL RESERVE DRAFT. If a check or Federal Reserve
draft is received by Goldman Sachs by 3:00 p.m. Chicago time, shares will
be issued and dividends will begin to accrue on the purchased shares on the
Business Day after the date payment is received.
Banks, trust companies or other institutions through which investors acquire
Institutional Shares may impose charges in connection with transactions in
Institutional Shares. Such institutions should be consulted for information
regarding such charges.
The Funds reserve the right to redeem the Institutional Shares of any
Institutional Shareholder whose account balance is less than $50 as a result
of earlier redemptions. Such redemptions will not be implemented if the value
of an Institutional Shareholder's account falls below the minimum account
balance solely as a result of market conditions. A Fund will give sixty (60)
days' prior written notice to Institutional Shareholders whose Institutional
Shares are being redeemed to allow them to purchase sufficient additional
Institutional Shares of a Fund to avoid such redemption.
The Funds and Goldman Sachs each reserves the right to reject any specific
purchase order (including exchanges) or to restrict purchases or exchanges by
a particular purchaser (or group of related purchasers). This may occur, for
example, when a purchaser or group of purchasers' pattern of frequent
purchases, sales or exchanges of Institutional Shares of a Fund is evident, or
if purchases, sales or exchanges are, or a subsequent abrupt redemption might
be, of a size that would disrupt management of a Fund.
In the sole discretion of Goldman Sachs, a Fund may accept securities
instead of cash for the purchase of shares of the Fund. Such purchases will be
permitted only if the Investment Adviser determines that any securities
acquired in this manner are consistent with the Fund's investment objectives,
restrictions and policies and are desirable investments for the Fund.
EXCHANGE PRIVILEGE
Institutional Shares of a Fund may be exchanged for (i) Institutional Shares
of any other mutual fund sponsored by Goldman Sachs and designated as an
eligible fund for this purpose and (ii) the corresponding class of any Goldman
Sachs Money Market Fund at the net asset value next determined either by
writing to Goldman Sachs, Attention: Goldman Sachs Fixed Income Funds--Name of
Fund and Class of shares, c/o GSAM Shareholders Services, 4900 Sears Tower,
Chicago, Illinois 60606 or, if previously elected in the Fund's Account
Information Form, by telephone at 800-621-2550 (7:00 a.m. to 5:30 p.m. Chicago
time). A shareholder should obtain and read the prospectus relating to any
other fund and its shares and consider its investment objective, policies and
applicable fees before making an exchange. Under the telephone exchange
privilege, Institutional Shares may be exchanged among accounts with different
names, addresses and social security or other taxpayer identification numbers
only if the exchange instructions are in writing and received in accordance
with the procedures set forth under "Redemption of Institutional Shares."
46
<PAGE>
In an effort to prevent unauthorized or fraudulent exchanges by telephone,
Goldman Sachs employs reasonable procedures as set forth under "Redemption of
Institutional Shares" to confirm that such instructions are genuine. In times
of drastic economic or market changes, the telephone exchange privilege may be
difficult to implement. For federal income tax purposes, an exchange is
treated as a redemption of the Institutional Shares surrendered in the
exchange, on which an investor may be subject to tax, followed by a purchase
of Institutional Shares, or the corresponding class of any Goldman Sachs Money
Market Fund received in the exchange. Shareholders should consult their own
tax advisers concerning the tax consequences of an exchange.
Each exchange which represents an initial investment in a Fund must satisfy
the minimum investment requirements of the fund into which the Institutional
Shares are being exchanged, except that this requirement may be waived at the
discretion of the officers of the Trust. Exchanges are available only in
states where exchanges may legally be made. The exchange privilege may be
modified or withdrawn at any time on sixty (60) days' written notice to
Institutional Shareholders and is subject to certain limitations. See
"Purchase of Institutional Shares."
REDEMPTION OF INSTITUTIONAL SHARES
The Funds will redeem their Institutional Shares upon request of an
Institutional Shareholder on any Business Day at the net asset value next
determined after the receipt by the Transfer Agent of such request in proper
form. See "Net Asset Value." If Institutional Shares to be redeemed were
recently purchased by check, a Fund may delay transmittal of redemption
proceeds until such time as it has assured itself that good funds have been
collected for the purchase of such Institutional Shares. This may take up to
fifteen (15) days. Redemption requests may be made by writing to or calling
the Transfer Agent at the address or telephone number set forth on the back
cover page of this Prospectus. An Institutional Shareholder may request
redemptions by telephone if the optional telephone redemption privilege is
elected on the Account Information Form accompanying this Prospectus. It may
be difficult to implement redemptions by telephone in times of drastic
economic or market changes.
In an effort to prevent unauthorized or fraudulent redemption or exchange
requests by telephone, Goldman Sachs employs reasonable procedures specified
by the Trust to confirm that such instructions are genuine. Among other
things, any redemption request that requires money to go to an account or
address other than that designated on the Account Information Form must be in
writing and signed by an authorized person designated on the Account
Information Form. Any such written request is also confirmed by telephone with
both the requesting party and the designated bank account to verify
instructions. Exchanges among accounts with different names, addresses and
social security or other taxpayer identification numbers must be in writing
and signed by an authorized person designated on the Account Information Form.
Other procedures may be implemented from time to time. If reasonable
procedures are not implemented, the Trust may be liable for any loss due to
unauthorized or fraudulent transactions. In all other cases, neither the
Funds, the Trust nor Goldman Sachs will be responsible for the authenticity of
redemption or exchange instructions received by telephone.
Written requests for redemptions must be signed by each Institutional
Shareholder whose signature has been guaranteed by a bank, a securities broker
or dealer, a credit union having authority to issue signature guarantees, a
savings and loan association, a building and loan association, a cooperative
bank, a federal savings bank or association, a national securities exchange, a
registered securities association or a clearing agency, provided that
47
<PAGE>
such institution satisfies the standards established by the Transfer Agent. If
Goldman Sachs receives a redemption request by 3:00 p.m. Chicago time, the
Institutional Shares of each Fund (other than Global Income Fund) to be
redeemed earn dividends declared on the day the request is received.
The Fund will arrange for the proceeds of redemptions effected by any means
to be wired as federal funds to the bank account designated in the
Institutional Shareholder's Account Information Form or, if the shareholder
elects in writing, by check. Redemption proceeds paid by wire transfer will
normally be wired on the next Business Day in federal funds (for a total one-
day delay), but may be paid up to three (3) Business Days after receipt of a
properly executed redemption request. Wiring of redemption proceeds may be
delayed one additional Business Day if the Federal Reserve Bank is closed on
the day redemption proceeds would ordinarily be wired. Redemption proceeds
paid by check will normally be mailed to the address of record within three
(3) Business Days of receipt of a properly executed redemption request. In
order to change the bank designated on the Account Information Form to receive
redemption proceeds, a written request must be received by the Transfer Agent.
This request must be signature guaranteed as set forth above. Further
documentation may be required for executors, trustees or corporations. Once
wire transfer instructions have been given by Goldman Sachs, neither the
Funds, the Trust nor Goldman Sachs assumes any further responsibility for the
performance of intermediaries or the Institutional Shareholder's bank in the
transfer process. If a problem with such performance arises, the Institutional
Shareholder should deal directly with such intermediaries or bank.
Additional documentation regarding a redemption by any means may be required
to effect a redemption when deemed appropriate by Goldman Sachs. The request
for such redemption will not be considered to have been received in proper
form until such additional documentation has been received.
----------------
48
<PAGE>
APPENDIX
GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON ACCOUNT INFORMATION FORM
You are required by law to provide a Fund with your correct Taxpayer
Identification Number (TIN), regardless of whether you file tax returns.
Failure to do so may subject you to penalties. Failure to provide your correct
TIN and to sign your name in the Certification section of the Account
Information Form could result in withholding of 31% by a Fund for the federal
backup withholding tax on distributions, redemptions, exchanges and other
payments relating to your account.
Any tax withheld may be credited against taxes owed on your federal income
tax return.
If you do not have a TIN, you should apply for one immediately by contacting
your local office of the Social Security Administration or the Internal
Revenue Service (IRS). Backup withholding could apply to payments relating to
your account while you are awaiting receipt of a TIN.
Special rules apply for certain entities. For example, for an account
established under a Uniform Gifts or Transfers to Minors Act, the TIN of the
minor should be furnished.
If you have been notified by the IRS that you are subject to backup
withholding because you failed to report your interest and/or dividend income
on your tax return and you have not been notified by the IRS that such
withholding should cease, you must cross out item (2) in the Certification
section of the Account Information Form.
If you are an exempt recipient, you should furnish your TIN and certify your
exemption by signing the Certification section and writing "exempt" after your
signature. Exempt recipients include: corporations, tax-exempt pension plans
and IRA's, governmental agencies, financial institutions, registered
securities and commodities dealers and others.
If you are a nonresident alien or foreign entity, you must provide a
completed Form W-8 to the Fund in order to avoid backup withholding on certain
payments. Other payments to you may be subject to nonresident alien
withholding of up to 30%.
For further information regarding backup and nonresident alien withholding,
see Sections 3406, 1441 and 1442 of the Internal Revenue Code and consult your
tax adviser.
A-1
<PAGE>
- --------------------------------------------------------------------------------
GOLDMAN SACHS ASSET
MANAGEMENT
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS FUNDS
MANAGEMENT, L.P.
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS ASSET
MANAGEMENT INTERNATIONAL
133 PETERBOROUGH COURT
LONDON, ENGLAND EC4A 2BB
GOLDMAN, SACHS & CO.
DISTRIBUTOR
85 BROAD STREET
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
TRANSFER AGENT
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN
1776 HERITAGE DRIVE
NORTH QUINCY, MASSACHUSETTS 02171
TOLL FREE (IN U.S.) . . . . . . . . 800-621-2550
FIPROINST
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GOLDMAN SACHS
FIXED INCOME FUNDS
- --------------------------------------------------------------------------------
PROSPECTUS
INSTITUTIONAL SHARES
LOGO GOLDMAN
SACHS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED JUNE 13, 1997
PROSPECTUS GOLDMAN SACHS FIXED INCOME FUNDS SERVICE SHARES
, 1997
GOLDMAN SACHS ADJUSTABLE RATE GOVERNMENT FUND
Seeks a high level of current income, consistent with low volatility of
principal. The Fund invests primarily in adjustable rate mortgage pass-
through securities and other mortgage securities with periodic interest rate
resets, which are issued or guaranteed by the U.S. government, its agencies,
instrumentalities or sponsored enterprises.
GOLDMAN SACHS SHORT DURATION GOVERNMENT FUND
Seeks a high level of current income and secondarily, in seeking current in-
come, may also consider the potential for capital appreciation. The Fund in-
vests primarily in securities issued or guaranteed by the U.S. government,
its agencies, instrumentalities or sponsored enterprises.
GOLDMAN SACHS SHORT DURATION TAX-FREE FUND
Seeks a high level of current income, consistent with relatively low vola-
tility of principal, that is exempt from regular federal income tax. The
Fund invests primarily in municipal securities.
GOLDMAN SACHS GOVERNMENT
INCOME FUND
Seeks a high level of current
income, consistent with
safety of principal. The Fund
invests primarily in
securities, including
mortgage-backed securities,
issued or guaranteed by the
U.S. government, its
agencies, instrumentalities
or sponsored enterprises.
GOLDMAN SACHS MUNICIPAL INCOME FUND
Seeks a high level of current income that is exempt from regular federal in-
come tax, consistent with preservation of capital. The Fund invests primar-
ily in municipal securities.
GOLDMAN SACHS CORE FIXED INCOME FUND
Seeks a total return consisting of capital appreciation and income that ex-
ceeds the total return of the Lehman Brothers Aggregate Bond Index. The Fund
invests primarily in fixed-income securities, including securities issued or
guaranteed by the U.S. government, its agencies, instrumentalities or spon-
sored enterprises, corporate securities, mortgage-backed securities and as-
set-backed securities.
GOLDMAN SACHS GLOBAL INCOME FUND
Seeks a high total return, emphasizing current income and, to a lesser ex-
tent, providing opportunities for capital appreciation. The Fund invests
primarily in a portfolio of high quality fixed-income securities of U.S. and
foreign issuers and foreign currencies.
GOLDMAN SACHS HIGH YIELD FUND
Seeks a high level of current income and, secondarily, capital appreciation.
The Fund invests primarily in fixed-income securities rated below investment
grade.
Goldman Sachs Funds Management, L.P. ("GSFM"), New York, New York, an
affiliate of Goldman, Sachs & Co. ("Goldman Sachs"), serves as investment
adviser to the Adjustable Rate Government and Short Duration Government Funds.
Goldman Sachs Asset Management ("GSAM"), New York, New York, a separate
operating division of Goldman Sachs, serves as investment adviser to the Short
Duration Tax-Free Government Income, Municipal Income, Core Fixed Income and
High Yield Funds. Goldman Sachs Asset Management International ("GSAMI"),
London, England, an affiliate of Goldman Sachs, serves as investment adviser to
the Global Income Fund. GSAM, GSFM and GSAMI are each referred to in this
Prospectus as the "Investment Adviser." Goldman Sachs serves as each Fund's
distributor and transfer agent.
SERVICE SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN A FUND INVOLVES INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
(continued on next page)
<PAGE>
(cover continued)
THE ADJUSTABLE RATE GOVERNMENT, SHORT DURATION GOVERNMENT AND GOVERNMENT
INCOME FUNDS' NET ASSET VALUES AND YIELDS ARE NOT GUARANTEED BY THE U.S.
GOVERNMENT OR BY ITS AGENCIES, INSTRUMENTALITIES OR SPONSORED ENTERPRISES.
THE CORE FIXED INCOME, GLOBAL INCOME AND HIGH YIELD FUNDS MAY INVEST IN
SECURITIES OF FOREIGN ISSUERS AND FOREIGN CURRENCIES THAT ENTAIL CERTAIN RISKS
NOT CUSTOMARILY ASSOCIATED WITH INVESTING IN U.S. DOLLAR-DENOMINATED FIXED-
INCOME SECURITIES. IN PARTICULAR, THE SECURITIES MARKETS OF EMERGING MARKET
COUNTRIES ARE LESS LIQUID, ARE SUBJECT TO GREATER PRICE VOLATILITY, HAVE
SMALLER MARKET CAPITALIZATIONS, HAVE LESS GOVERNMENT REGULATION AND ARE NOT
SUBJECT TO AS EXTENSIVE AND FREQUENT ACCOUNTING, FINANCIAL AND OTHER REPORTING
REQUIREMENTS AS THE SECURITIES MARKETS OF MORE DEVELOPED COUNTRIES.
THE HIGH YIELD FUND INVESTS PRIMARILY IN HIGH YIELD, FIXED-INCOME SECURITIES
RATED BELOW INVESTMENT GRADE THAT ARE CONSIDERED SPECULATIVE AND GENERALLY
INVOLVE GREATER PRICE VOLATILITY AND GREATER RISK OF LOSS OF PRINCIPAL AND
INTEREST THAN INVESTMENTS IN HIGHER RATED FIXED-INCOME SECURITIES.
INVESTORS SHOULD CONSIDER THE RISKS ASSOCIATED WITH INVESTMENT IN A FUND
INVESTING IN FOREIGN AND HIGH YIELD SECURITIES. THE FUNDS MAY NOT BE SUITABLE
FOR ALL INVESTORS. SEE "DESCRIPTION OF SECURITIES" AND "RISK FACTORS."
This Prospectus provides information about Goldman Sachs Trust (the "Trust")
and the Funds that a prospective investor should understand before investing.
This Prospectus should be retained for future reference. A Statement of
Additional Information (the "Additional Statement"), dated May 1, 1997,
containing further information about the Trust and the Funds which may be of
interest to investors, has been filed with the Securities and Exchange
Commission ("SEC"), is incorporated herein by reference in its entirety, and
may be obtained without charge from Service Organizations (as defined herein)
or Goldman Sachs by calling the telephone number, or writing to one of the
addresses, listed on the back cover of this Prospectus. The SEC maintains a
Web site (http://www.sec.gov) that contains the Additional Statement and other
information regarding the Trust.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Highlights..................... 1
Fees and Expenses................... 7
Financial Highlights................ 9
Investment Objectives and Policies.. 13
Description of Securities........... 20
Risk Factors........................ 27
Investment Techniques............... 30
Investment Restrictions............. 34
Portfolio Turnover.................. 34
Management.......................... 35
Dividends........................... 38
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Net Asset Value....................................................... 39
Performance Information............................................... 40
Shares of the Trust................................................... 41
Taxation.............................................................. 41
Additional Information................................................ 43
Additional Services................................................... 44
Reports to Shareholders............................................... 44
Purchase of Service Shares............................................ 45
Exchange Privilege.................................................... 46
Redemption of Service Shares.......................................... 47
Appendix.............................................................. A-1
</TABLE>
<PAGE>
FUND HIGHLIGHTS
The following is intended to highlight certain information contained in
this Prospectus and is qualified in its entirety by the more detailed
information contained herein.
WHAT IS THE GOLDMAN SACHS TRUST?
The Goldman Sachs Trust is an open-end management investment company that
offers its shares in several investment funds (mutual funds). Each Fund
pools the monies of investors by selling its shares to the public and
investing these monies in a portfolio of securities designed to achieve that
Fund's stated investment objectives.
WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS?
Each Fund has distinct investment objectives and policies. There can be no
assurance that a Fund's objectives will be achieved. For a complete
description of each Fund's investment objectives and policies, see
"Investment Objectives and Policies," "Description of Securities" and
"Investment Techniques."
1
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
INTEREST
INVESTMENT RATE
FUND NAME OBJECTIVES DURATION SENSITIVITY INVESTMENT SECTOR CREDIT QUALITY OTHER INVESTMENTS
- -------------- ------------------ ------------------- ------------ --------------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
ADJUSTABLE A high level of Target = 6-month 9-month note At least 65% of U.S. Government Fixed-rate
RATE current income, to 1-year total assets in Securities mortgage
GOVERNMENT consistent with U.S. Treasury securities issued or pass-through
FUND low volatility Security guaranteed by the securities and
of principal. Maximum = 2 years U.S. government, repurchase
its agencies, agreements
instrumentalities collateralized by
or sponsored U.S. Government
enterprises Securities.
("U.S. Government
Securities'')
that are adjustable
rate mortgage
pass-through
securities and
other mortgage
securities with
periodic interest
rate resets.
--------------------------------------------------------------------------------------------
SHORT DURATION A high level of Target = 2-year 2-year bond At least 65% of U.S. Government Mortgage pass-
GOVERNMENT current income, U.S. Treasury total assets in Securities through
FUND and secondarily, Security plus U.S. Government securities and
in seeking current or minus .5 years Securities other securities
income, may Maximum = 3 years and repurchase representing an
also consider agreements interest in or
the potential collateralized collateralized
for capital by such securities. by mortgage loans.
appreciation.
--------------------------------------------------------------------------------------------
SHORT DURATION A high level of Target = Lehman 3-year bond At least 80% of Minimum = BBB/Baa U.S. Government
TAX-FREE current income, Brothers net assets in Securities
FUND consistent with 3-year Municipal municipal securities. and repurchase
low volatility Bond Index agreements
of principal, plus or minus collateralized
that is exempt .5 years by such securities.
from regular Maximum = 4 years
federal
income tax.
--------------------------------------------------------------------------------------------
GOVERNMENT A high level of Target = Lehman 5-year bond At least 65% of U.S. Government Non-government
INCOME current income, Brothers Mutual assets in U.S. Securities and mortgage pass-
FUND consistent with Fund Government/ Government non-U.S. through securities,
safety of Mortgage Index Securities, including Government asset-backed
principal. plus or minus mortgage-backed Securities rated securities,
1 year U.S. Government AAA/Aaa corporate
Maximum = Securities. fixed-income
6 years securities and
repurchase
agreements
collateralized by
U.S. Government
Securities.
<CAPTION>
FUND NAME BENCHMARK
- --------------- -----------------
<S> <C>
ADJUSTABLE 6-month and
RATE 1-Year U.S.
GOVERNMENT Treasury Security
FUND
--------------------------------------------------------------------------------------------
SHORT DURATION 2-Year U.S.
GOVERNMENT Treasury Security
FUND
--------------------------------------------------------------------------------------------
SHORT DURATION Lehman Brothers
TAX-FREE 3-Year Municipal
FUND Bond Index
--------------------------------------------------------------------------------------------
GOVERNMENT Lehman Brothers
INCOME Mutual Fund
FUND Government/
Mortgage Index
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
INTEREST
INVESTMENT RATE
FUND NAME OBJECTIVES DURATION SENSITIVITY INVESTMENT SECTOR CREDIT QUALITY
- ----------- --------------------- -------------------- ------------ ---------------------- ---------------------
<S> <C> <C> <C> <C> <C>
CORE FIXED Total return Target = Lehman 5-year bond At least 65% of Minimum = BBB/Baa
INCOME FUND consisting Brothers assets in fixed-income Minimum for
of capital Aggregate Bond securities, including non-dollar securities
appreciation Index plus or U.S. Government = AA/Aa
and income that minus 1 year Securities, corporate,
exceeds the total Maximum = 6 years mortgage-backed
return of the and asset-backed
Lehman Brothers securities.
Aggregate Bond
Index.
--------------------------------------------------------------------------------------------
MUNICIPAL A high level of Target = Lehman 15-year bond At least 80% of Minimum =
INCOME current income Brothers 15-year net assets in BBB/Baa
FUND that is exempt Municipal Bond municipal securities. Average = AA/Aa
from regular Index plus
federal income or minus 1 year
tax, consistent Maximum = 12 years
with preservation
of capital.
--------------------------------------------------------------------------------------------
GLOBAL A high total return, Target = J.P. Morgan 6-year bond Securities of Minimum = AA/Aa
INCOME emphasizing current Global Government U.S. and foreign or A if sovereign
FUND income, and, to Bond Index governments and issuer
a lesser extent, (hedged) plus or corporations. At least 50% =
providing minus 2.5 years AAA/Aaa
opportunities Maximum = 7.5 years
for capital
appreciation.
--------------------------------------------------------------------------------------------
HIGH YIELD A high level of Target = Lehman 6-year bond At least 65% of At least 65% =
FUND current income Brothers High assets in fixed- BB/Ba or below
and, secondarily, Yield Bond Index income securities
capital appreciation. plus or minus rated below
2.5 years investment grade,
Maximum =7.5 years including U.S. and
non-U.S. dollar
corporate debt,
foreign
government
securities,
convertible
securities
and preferred stock
<CAPTION>
FUND NAME OTHER INVESTMENTS BENCHMARK
- ------------ ---------------------- ---------------
<S> <C> <C>
CORE FIXED Foreign fixed- Lehman Brothers
INCOME FUND income, Aggregate Bond
municipal and Index
convertible
securities,
foreign currencies
and repurchase
agreements
collateralized
by U.S.
Government
Securities.
--------------------------------------------------------------------------------------------
MUNICIPAL U.S. Government Lehman Brothers
INCOME Securities and 15-year
FUND repurchase Municipal
agreements Bond Index
collateralized by
such securities.
--------------------------------------------------------------------------------------------
GLOBAL Mortgage and J.P. Morgan
INCOME asset-backed Global
FUND securities, foreign Government
currencies and Bond Index
repurchase (hedged)
agreements
collateralized by
U.S. Government
Securities or
certain foreign
government securities.
--------------------------------------------------------------------------------------------
HIGH YIELD Mortgage-backed Lehman Brothers
FUND and asset-backed High Yield
securities, U.S. Bond Index
Government
Securities,
investment grade
corporate fixed-
income securities,
structured
securities,
foreign currencies
and repurchase
agreements
collateralized by
U.S. Government
Securities.
</TABLE>
3
<PAGE>
WHAT ARE THE RISK FACTORS AND SPECIAL CHARACTERISTICS THAT I SHOULD CONSIDER
BEFORE INVESTING?
Each Fund's share price will fluctuate with market, economic and, with
respect to the Core Fixed Income, Global Income and High Yield Funds,
foreign exchange conditions, so that an investment in any of the Funds may
be worth more or less when redeemed than when purchased. None of the Funds
should be relied upon as a complete investment program. There can be no
assurance that a Fund's investment objectives will be achieved. See "Risk
Factors."
Interest Rate Risk. When interest rates decline, the market value of
fixed-income securities tends to increase. Conversely, when interest rates
increase, the market value of fixed-income securities tends to decline.
Volatility of a security's market value will differ depending upon the
security's duration, the issuer and the type of instrument.
Default Risk/Credit Risk. Investments in fixed-income securities are
subject to the risk that the issuer could default on its obligations and a
Fund could sustain losses on such investments. A default could impact both
interest and principal payments.
Call Risk and Extension Risk. Fixed-income securities may be subject to
both call risk and extension risk. Call risk (i.e., where the issuer
exercises its right to pay principal on an obligation earlier than
scheduled) causes cash flow to be returned earlier than expected. This
typically results when interest rates have declined and a Fund will suffer
from having to reinvest in lower yielding securities. Extension risk (i.e.,
where the issuer exercises its right to pay principal on an obligation later
than scheduled) causes cash flows to be returned later than expected. This
typically results when interest rates have increased and a Fund will suffer
from the inability to invest in higher yielding securities. The investment
characteristics of Mortgage-Backed Securities (including adjustable rate
mortgage securities) and Asset-Backed Securities differ from those of
traditional fixed-income securities because they generally have both call
risk (also known as prepayment risk) and extension risk.
Tax Risk of Municipal Securities. Due to Municipal Securities' tax-exempt
status, their yields and market values may be more adversely impacted by
changes in tax rates and policies than taxable fixed-income securities.
Risks of investing in non-investment grade fixed-income securities. Non-
investment grade fixed-income securities (commonly referred to as "junk
bonds") are subject to greater volatility and risk of loss and are less
liquid than securities which are perceived to be of higher credit quality.
Such securities, also referred to as high yield securities, are considered
to be speculative by traditional investment standards. High yield securities
are subject to increased risk of an issuer's inability to meet principal and
interest payments. The High Yield Fund may invest in securities which are in
default at the time of investment. The market for non-investment grade
securities tends to be concentrated in a limited number of market makers,
which may affect liquidity. In addition, the market price of such securities
tends to reflect individual corporate developments to a greater extent than
that of higher rated securities which react primarily to the general level
of interest rates.
Foreign Risks. Investments in securities of foreign issuers and currencies
involve risks that are different from those associated with investments in
domestic securities. The risks associated with foreign investments and
currencies include changes in relative currency exchange rates, political
and economic developments, the imposition of exchange controls, confiscation
and other governmental restrictions. In addition, the securities
4
<PAGE>
markets of foreign countries are generally less liquid and subject to
greater price volatility. To the extent that the Core Fixed Income, Global
Income and High Yield Funds invest in emerging markets and countries, these
risks may be heightened.
Other. A Fund's use of certain investment techniques, including
derivatives, forward contracts, options, futures and swap transactions, will
subject the Fund to greater risk than funds that do not employ such
techniques.
Non-Diversification. Global Income Fund is a "non-diversified" fund as
defined under the Investment Company Act of 1940, as amended (the "Act"),
and is, therefore, subject only to certain federal tax diversification
requirements (to which the other Funds are also subject), in addition to the
policies adopted by the Investment Adviser. To the extent that the Fund is
not diversified under the Act, it will be more susceptible to adverse
developments affecting any single issuer of portfolio securities. See
"Investment Restrictions."
WHO MANAGES THE FUNDS?
Goldman Sachs Funds Management, L.P. serves as the Investment Adviser to
the Adjustable Rate Government and Short Duration Government Funds. Goldman
Sachs Asset Management serves as Investment Adviser to the Short Duration
Tax-Free Government Income, Municipal Income, Core Fixed Income and High
Yield Funds. Goldman Sachs Asset Management International serves as
Investment Adviser to the Global Income Fund. As of , 1997, the
Investment Advisers, together with their affiliates, acted as investment
adviser, administrator or distributor for assets in excess of $ billion.
WHO DISTRIBUTES THE FUNDS' SHARES?
Goldman Sachs acts as distributor of each Fund's shares.
WHAT IS THE MINIMUM INVESTMENT?
The Funds do not have any minimum purchase or account requirements with
respect to Service Shares. A Service Organization may, however, impose a
minimum amount for initial and subsequent investments in Service Shares, and
may establish other requirements such as a minimum account balance.
HOW DO I PURCHASE SERVICE SHARES?
Customers of Service Organizations may invest in Service Shares only
through their Service Organizations. Service Shares of a Fund are purchased
by Service Organizations through Goldman Sachs at the current net asset
value without any sales load. See "Purchase of Service Shares."
ADDITIONAL SERVICES. The Trust, on behalf of the Funds, has adopted a
Service Plan with respect to the Service Shares which authorizes a Fund to
compensate Service Organizations for providing account administration and
shareholder liaison services to their customers who are the beneficial
owners of such Shares. The Trust, on behalf of the Funds, will enter into
agreements with each Service Organization which will provide for
compensation to the Service Organization in an amount up to 0.50% (on an
annualized basis) of the average daily net assets of the Services Shares of
the Funds attributable to or held in the name of the Service Organization
for its customers. See "Additional Services."
5
<PAGE>
HOW DO I SELL MY SERVICE SHARES?
You may redeem Service Shares upon request on any Business Day, as defined
under "Additional Information," at the net asset value next determined after
receipt of such request in proper form. See "Redemption of Service Shares."
HOW DO I RECEIVE DIVIDENDS AND DISTRIBUTIONS?
<TABLE>
<CAPTION>
INVESTMENT INCOME
FUND DIVIDENDS
---- ------------------ CAPITAL GAINS
DECLARED PAID DISTRIBUTION
------------------ -------------
<S> <C> <C> <C>
Adjustable Rate Government.................. Daily Monthly Annually
Short Duration Government .................. Daily Monthly Annually
Short Duration Tax-Free..................... Daily Monthly Annually
Government Income........................... Daily Monthly Annually
Municipal Income............................ Daily Monthly Annually
Core Fixed Income........................... Daily Monthly Annually
Global Income .............................. Monthly Monthly Annually
High Yield.................................. Daily Monthly Annually
</TABLE>
Recordholders of Service Shares may receive dividends in additional
Service Shares of the Fund in which you have invested or you may elect to
receive cash. For further information concerning dividends, see "Dividends."
6
<PAGE>
FEES AND EXPENSES (SERVICE SHARES)
<TABLE>
<CAPTION>
ADJUSTABLE RATE SHORT DURATION GOVERNMENT MUNICIPAL CORE FIXED GLOBAL HIGH
GOVERNMENT GOVERNMENT SHORT DURATION INCOME INCOME INCOME INCOME YIELD
FUND/1/ FUND TAX-FREE FUND FUND/1/ FUND/1/ FUND FUND FUND/1/
--------------- -------------- -------------- ---------- --------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge Im-
posed on Purchases....... none none none none none none none none
Maximum Sales Charge Im-
posed on Reinvested Divi-
dends.................... none none none none none none none none
Redemption Fees........... none none none none none none none none
Exchange Fees............. none none none none none none none none
ANNUAL FUND OPERATING EXPENSES:
(as a percentage of average daily
net assets)
Management Fees (after ap-
plicable limita-
tions)/2/................ 0.40% 0.40% 0.40% 0.25% 0.55% 0.40% 0.59% 0.65%
Service Fees*............. 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Other Expenses (after ap-
plicable limita-
tions)/3/................ 0.11% 0.05% 0.05% 0.00% 0.05% 0.05% 0.06% 0.05%
---- ---- ---- ---- ---- ---- ---- ----
TOTAL FUND OPERATING
EXPENSES (AFTER FEE AND
EXPENSE LIMITA-
TIONS)/4/............... 1.01% 0.95% 0.95% 0.75% 1.10% 0.95% 1.15% 1.20%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
EXAMPLE
You would pay the following expenses on a hypothetical $1,000 investment
assuming (i) a 5% annual return and (ii) redemption at the end of each time
period.
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Adjustable Rate Government...................... $10 $32 $56 $124
Short Duration Government....................... $10 $30 $53 $117
Short Duration Tax-Free......................... $10 $30 $53 $117
Government Income............................... $ 8 $24 $42 $ 93
Municipal Income................................ $11 $35 $61 $134
Core Fixed Income............................... $10 $30 $53 $117
Global Income................................... $12 $37 $63 $140
High Yield...................................... $12 $38 N/A N/A
</TABLE>
- --------
/1/Based on estimated amounts for the current fiscal year for the Adjustable
Rate Government Government Income, Municipal Income and High Yield Funds.
/2/The Investment Advisers have voluntarily agreed that a portion of the
management fee would not be imposed on the Short Duration Government,
Government Income, Global Income and High Yield Funds equal to .10%,
.40%, .31% and .05%, respectively. Without such limitations,
management fees would be .50%, .65%, .90% and .70% of each
Fund's average daily net assets, respectively.
/3/The Investment Advisers voluntarily have agreed to reduce or limit certain
other expenses (excluding management fees, service fees, taxes, interest
and brokerage fees and litigation, indemnification and other extraordinary
expenses (and transfer agency fees in the case of the Global Income and
High Yield Funds)) to the extent such expenses exceed .05%, .05%, .00%,
.05%, .05%, .06% and .01% of the average daily net assets of the Short
Duration Government, Short Duration Tax-Fee, Government Income, Municipal
Income, Core Fixed Income, Global Income and High Yield Funds,
respectively.
/4/Without.the limitations described above, "Other Expenses" and "Total
Operating Expenses" of each Fund (other than Adjustable Rate Government,
Government Income, Municipal Income and High Yield Funds) for the fiscal
year ended October 31, 1996 would have been as follows:
7
<PAGE>
<TABLE>
<CAPTION>
TOTAL
OTHER OPERATING
EXPENSES EXPENSES
-------- ---------
<S> <C> <C>
Short Duration Government.................................... .21% 1.21%
Short Duration Tax-Free...................................... .61% 1.51%
Core Fixed Income............................................ .43% 1.33%
Global Income................................................ .21% 1.61%
</TABLE>
In addition, without the limitations described above, "Other Expenses" and
"Total Operating Expenses" for the Government Income, Municipal Income and
High Yield Funds the current fiscal year are estimated to be:
<TABLE>
<CAPTION>
TOTAL
OTHER OPERATING
EXPENSES EXPENSES
-------- ---------
<S> <C> <C>
Government Income............................................ .74% 1.89%
Municipal Income............................................. .50% 1.55%
High Yield................................................... .60% 1.80%
</TABLE>
* Service Organizations may charge other fees to their customers who are
beneficial owners of Service Shares in connection with their customer
accounts. Due to the service fees, a long-term shareholder may pay more than
the economic equivalent of the maximum front- end sales charge permitted
under the NASD's rules regarding investment companies. See "Additional
Services."
The Investment Advisers have no current intention of modifying or
discontinuing any of the limitations set forth above but may do so in the
future at their discretion. The information set forth in the foregoing table
and hypothetical example relates only to Service Shares of the Funds. The
Short Duration Government Fund, Short Duration Tax-Free Fund and Core Fixed
Income Fund also offer Institutional Shares, Administration Shares, Class A
Shares, Class B Shares and Class C Shares; Adjustable Rate Government Fund
also offers Institutional Shares, Administration Shares and Class A Shares;
and Government Income, Municipal Income, Global Income and High Yield Funds
also offer Institutional Shares, Class A Shares, Class B Shares and Class C
Shares. The other classes of the Funds are subject to different fees and
expenses (which affect performance), have different minimum investment
requirements and are entitled to different services. Information regarding any
other class of the Funds may be obtained from your sales representative or
from Goldman Sachs by calling the number on the back cover page of this
Prospectus.
The purpose of the foregoing table is to assist investors in understanding
the various fees and expenses of a Fund that an investor will bear directly or
indirectly. The information on the fees and expenses included in the table and
the hypothetical example above are based on each Fund's fees and expenses
(actual or estimated) and should not be considered as representative of past
or future expenses. Actual fees and expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, a Fund's
actual performance will vary and may result in an actual return greater or
less than 5%. See "Management--Investment Advisers" and "Additional Services."
8
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
The following data with respect to a share (of the Class specified) of the
Funds outstanding during the period(s) indicated has been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report
incorporated by reference into the Additional Statement from the Annual Report
to shareholders for the Funds for the year ended October 31, 1996 (the "Annual
Report"). This information should be read in conjunction with the financial
statements and related notes incorporated by reference and attached to the
Additional Statement. The Annual Report also contains performance information
and is available upon request and without charge by calling the telephone
number or writing to one of the addresses on the back cover of this
Prospectus. During the periods shown, the Trust did not offer Institutional or
Service shares of the High Yield Fund. Accordingly, there are no financial
highlights for these classes.
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS
--------------------------------------------------
NET REALIZED NET
AND REALIZED
UNREALIZED AND
GAIN (LOSS) UNREALIZED TOTAL
ON GAIN (LOSS) INCOME
NET ASSET INVESTMENT, ON FOREIGN (LOSS)
VALUE AT NET OPTION AND CURRENCY FROM
BEGINNING INVESTMENT FUTURES RELATED INVESTMENT
OF PERIOD INCOME TRANSACTIONS TRANSACTIONS OPERATIONS
--------- ---------- ------------ ------------ ----------
ADJUSTABLE RATE GOVERNMENT FUND
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional
Shares..........
Administration
Shares..........
Class A Shares..
FOR THE YEAR ENDED OCTOBER 31,
1996-Institu-
tional Shares... 9.77 0.5759(a) 0.0772 (a) -- 0.6531
1996-Administra-
tion Shares..... 9.77 0.5489(a) 0.0797 (a) -- 0.6286
1996-Class A
Shares.......... 9.77 0.5481(a) 0.0806 (a) -- 0.6287
1995-Institu-
tional Shares... 9.74 0.5630(a) 0.0717 (a) -- 0.6347
1995-Administra-
tion Shares..... 9.74 0.5366(a) 0.0737 (a) -- 0.6103
1995-Class A
Shares(c)....... 9.79 0.2721(a) (0.0090)(a) -- 0.2631
1994-Institu-
tional Shares... 10.00 0.4341(a) (0.2455)(a) -- 0.1886
1994-Administra-
tion Shares..... 10.00 0.4211(a) (0.2572)(a) -- 0.1639
1993-Institu-
tional Shares... 10.04 0.4397 (0.0376)(d) -- 0.4021
1993-Administra-
tion Shares(e).. 10.02 0.2146 (0.0173)(d) -- 0.1973
1992-Institu-
tional Shares... 10.03 0.5599 (0.0029)(d) -- 0.5570
FOR THE PERIOD JULY 17, 1991(G) THROUGH OCTOBER 31,
1991-Institu-
tional Shares... 10.00 0.1531 0.0322 (d) -- 0.1853
<CAPTION>
DISTRIBUTIONS TO SHAREHOLDERS
---------------------------------------------------------------------
IN EXCESS
FROM NET OF NET
REALIZED REALIZED NET NET
GAIN ON GAIN ON INCREASE ASSET
INVESTMENT, IN EXCESS INVESTMENT, FROM TOTAL (DECREASE) VALUE
FROM NET OPTION AND OF NET OPTION AND PAID DISTRIBUTIONS IN NET AT END
INVESTMENT FUTURES INVESTMENT FUTURES IN TO ASSET OF TOTAL
INCOME TRANSACTIONS INCOME TRANSACTIONS CAPITAL SHAREHOLDERS VALUE PERIOD RETURN(K)
---------- ------------ ---------- ------------ ------- ------------- ---------- ------ ---------
ADJUSTABLE RATE GOVERNMENT FUND
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional
Shares..........
Administration
Shares..........
Class A Shares..
FOR THE YEAR ENDED OCTOBER 31,
1996-Institu-
tional Shares... (0.5725) -- (0.0206) -- -- (0.5931) 0.0600 9.83 6.86
1996-Administra-
tion Shares..... (0.5489) -- (0.0198) -- -- (0.5687) 0.0600 9.83 6.60
1996-Class A
Shares.......... (0.5489) -- (0.0198) -- -- (0.5687) 0.0600 9.83 6.60
1995-Institu-
tional Shares... (0.5759) -- (0.0287) -- -- (0.6046) 0.0301 9.77 6.75
1995-Administra-
tion Shares..... (0.5528) -- (0.0275) -- -- (0.5803) 0.0300 9.77 6.48
1995-Class A
Shares(c)....... (0.2697) -- (0.0134) -- -- (0.2831) (0.0200) 9.77 2.74(f)
1994-Institu-
tional Shares... (0.4486) -- -- -- -- (0.4486) (0.2600) 9.74 1.88
1994-Administra-
tion Shares..... (0.4239) -- -- -- -- (0.4239) (0.2600) 9.74 1.63
1993-Institu-
tional Shares... (0.4397) -- (0.0024) -- -- (0.4421) (0.0400) 10.00 4.13
1993-Administra-
tion Shares(e).. (0.2146) -- (0.0027) -- -- (0.2173) (0.0200) 10.00 2.01(f)
1992-Institu-
tional Shares... (0.5470) -- -- -- -- (0.5470) 0.0100 10.04 6.12
FOR THE PERIOD JULY 17, 1991(G) THROUGH OCTOBER 31,
1991-Institu-
tional Shares... (0.1553) -- -- -- -- (0.1553) 0.0300 10.03 2.14(f)
<CAPTION>
RATIOS ASSUMING NO
VOLUNTARY WAIVER OF
FEES OR EXPENSE
LIMITATIONS
----------------------
RATIO OF RATIO OF RATIO OF
NET NET RATIO OF NET
EXPENSES INVESTMENT EXPENSES INVESTMENT
TO INCOME PORT NET ASSETS TO INCOME
AVERAGE (LOSS) TO FOLIO AT END OF AVERAGE (LOSS) TO
NET AVERAGE TURNOVER PERIOD NET AVERAGE
ASSETS NET ASSETS RATE(D) (IN 000S) ASSETS NET ASSETS
-------- ---------- -------- ---------- -------- ----------
ADJUSTABLE RATE GOVERNMENT FUND
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional Shares....
Administration Shares...
Class A Shares..........
FOR THE YEAR ENDED OCTOBER 31,
1996-Institutional
Shares.................. 0.45 5.85 52.36 613,149 0.51 5.79
1996-Administration
Shares.................. 0.70 5.59 52.36 3,792 0.76 5.53
1996-Class A Shares..... 0.70 5.59 52.36 10,728 1.01 5.28
1995-Institutional
Shares.................. 0.46 5.77 24.12 657,358 0.53 5.70
1995-Administration
Shares.................. 0.71 5.50 24.12 3,572 0.78 5.43
1995-Class A Shares(c).. 0.69(b) 5.87(b) 24.12 15,203 1.01(b) 5.55(b)
1994-Institutional
Shares.................. 0.46 4.38 37.81 942,523 0.49 4.35
1994-Administration
Shares.................. 0.71 4.27 37.81 6,960 0.74 4.24
1993-Institutional
Shares.................. 0.45 4.36 103.74 2,760,871 0.48 4.33
1993-Administration
Shares(e)............... 0.70(b) 3.81(b) 103.74 5,326 0.73(b) 3.78(b)
1992-Institutional
Shares.................. 0.42 5.61 286.40 2,145,064 0.55 5.48
FOR THE PERIOD JULY 17, 1991(G) THROUGH OCTOBER 31,
1991-Institutional
Shares.................. 0.20(b) 7.31(b) 145.67(b) 239,642 1.02(b) 6.49(b)
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
RATIOS ASSUMING NO
VOLUNTARY WAIVER OF
FEES OR EXPENSE
LIMITATIONS
----------------------
RATIO OF RATIO OF RATIO OF
NET NET RATIO OF NET
EXPENSES INVESTMENT EXPENSES INVESTMENT
TO INCOME PORT NET ASSETS TO INCOME
AVERAGE (LOSS) TO FOLIO AT END OF AVERAGE (LOSS) TO
NET AVERAGE TURNOVER PERIOD NET AVERAGE
ASSETS NET ASSETS RATE(D) (IN 000S) ASSETS NET ASSETS
-------- ---------- -------- ---------- -------- ----------
ADJUSTABLE RATE GOVERNMENT FUND
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional Shares....
Administration Shares...
Class A Shares..........
FOR THE YEAR ENDED OCTOBER 31,
1996-Institutional
Shares.................. 0.45 5.85 52.36 613,149 0.51 5.79
1996-Administration
Shares.................. 0.70 5.59 52.36 3,792 0.76 5.53
1996-Class A Shares..... 0.70 5.59 52.36 10,728 1.01 5.28
1995-Institutional
Shares.................. 0.46 5.77 24.12 657,358 0.53 5.70
1995-Administration
Shares.................. 0.71 5.50 24.12 3,572 0.78 5.43
1995-Class A Shares(c).. 0.69(b) 5.87(b) 24.12 15,203 1.01(b) 5.55(b)
1994-Institutional
Shares.................. 0.46 4.38 37.81 942,523 0.49 4.35
1994-Administration
Shares.................. 0.71 4.27 37.81 6,960 0.74 4.24
1993-Institutional
Shares.................. 0.45 4.36 103.74 2,760,871 0.48 4.33
1993-Administration
Shares(e)............... 0.70(b) 3.81(b) 103.74 5,326 0.73(b) 3.78(b)
1992-Institutional
Shares.................. 0.42 5.61 286.40 2,145,064 0.55 5.48
FOR THE PERIOD JULY 17, 1991(G) THROUGH OCTOBER 31,
1991-Institutional
Shares.................. 0.20(b) 7.31(b) 145.67(b) 239,642 1.02(b) 6.49(b)
</TABLE>
9--1
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS
--------------------------------------------------
NET REALIZED NET
AND REALIZED
UNREALIZED AND
GAIN (LOSS) UNREALIZED TOTAL
ON GAIN (LOSS) INCOME
NET ASSET INVESTMENT, ON FOREIGN (LOSS)
VALUE AT NET OPTION AND CURRENCY FROM
BEGINNING INVESTMENT FUTURES RELATED INVESTMENT
OF PERIOD INCOME TRANSACTIONS TRANSACTIONS OPERATIONS
--------- ---------- ------------ ------------ ----------
SHORT DURATION GOVERNMENT FUND
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional
Shares.........
Administration
Shares.........
Service Shares
FOR THE YEAR ENDED OCTOBER 31,
1996-Institu-
tional Shares
................ 9.82 0.6290(a) 0.0136 (a) -- 0.6426
1996-Administra-
tion
Shares(h)...... 9.86 0.3837(a) 0.0003 (a) -- 0.3840
1996-Service
Shares(i)...... 9.72 0.3134(a) 0.1018 (a) -- 0.4152
1995-Institu-
tional Shares.. 9.64 0.6652(a) 0.1666 (a) -- 0.8318
1995-Administra-
tion Shares.... 9.64 0.2384(a) (0.0433)(a) -- 0.1951
1994-Institu-
tional Shares.. 10.14 0.5628(a) (0.4592)(a) -- 0.1036
1994-Administra-
tion Shares.... 10.14 0.5329(a) (0.4539)(a) -- 0.0790
1993-Institu-
tional Shares.. 10.16 0.5627 (0.0135)(d) -- 0.5492
1993-Administra-
tion
Shares(e)...... 10.23 0.2725 (0.0900)(d) -- 0.1825
1992-Institu-
tional Shares.. 10.22 0.6703 (0.0600)(d) -- 0.6103
1991-Institu-
tional Shares.. 10.00 0.8020 0.2200 (d) -- 1.0220
1990-Institu-
tional Shares.. 10.07 0.8300 (0.0700)(d) -- 0.7600
1989-Institu-
tional Shares.. 10.10 0.8800 -- -- 0.8800
FOR THE PERIOD AUGUST 15, 1988(G) THROUGH OCTOBER 31,
1988-Institu-
tional Shares.. 10.00 0.1800 0.1000 (d) -- 0.2800
<CAPTION>
DISTRIBUTIONS TO SHAREHOLDERS
-----------------------------------------------------------------------
IN EXCESS
FROM NET OF NET
REALIZED REALIZED NET NET
GAIN ON GAIN ON INCREASE ASSET
INVESTMENT, IN EXCESS INVESTMENT, FROM TOTAL (DECREASE) VALUE
FROM NET OPTION AND OF NET OPTION AND PAID DISTRIBUTIONS IN NET AT END
INVESTMENT FUTURES INVESTMENT FUTURES IN TO ASSET OF TOTAL
INCOME TRANSACTIONS INCOME TRANSACTIONS CAPITAL SHAREHOLDERS VALUE PERIOD RETURN(K)
---------- ------------ ---------- ------------ -------- ------------- ---------- ------ ---------
SHORT DURATION GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional
Shares.........
Administration
Shares.........
Service Shares
FOR THE YEAR ENDED OCTOBER 31,
1996-Institu-
tional Shares
................ (0.6326) -- -- -- -- (0.6326) 0.0100 9.83 6.75
1996-Administra-
tion
Shares(h)...... (0.3940) -- -- -- -- (0.3940) (0.0100) 9.85 4.00(f)
1996-Service
Shares(i)...... (0.3152) -- -- -- -- (0.3152) 0.1000 9.82 4.35(f)
1995-Institu-
tional Shares.. (0.6518) -- -- -- -- (0.6518) 0.1800 9.82 8.97
1995-Administra-
tion Shares.... (0.2051) -- -- -- -- (0.2051) (0.0100) 9.63(h) 2.10
1994-Institu-
tional Shares.. (0.5598) (0.0438) -- -- -- (0.6036) (0.5000) 9.64 0.99
1994-Administra-
tion Shares.... (0.5352) (0.0438) -- -- -- (0.5790) (0.5000) 9.64 0.73
1993-Institu-
tional Shares.. (0.5627) -- (0.0065) -- -- (0.5692) (0.0200) 10.14 5.55
1993-Administra-
tion
Shares(e)...... (0.2725) -- -- -- -- (0.2725) (0.0900) 10.14 1.74
1992-Institu-
tional Shares.. (0.6703) -- -- -- -- (0.6703) (0.0600) 10.16 6.24
1991-Institu-
tional Shares.. (0.8020) -- -- -- -- (0.8020) 0.2200 10.22 10.93
1990-Institu-
tional Shares.. (0.8300) -- -- -- -- (0.8300) (0.0700) 10.00 8.23
1989-Institu-
tional Shares.. (0.8800) -- -- -- (0.0300) (0.9100) (0.0300) 10.07 9.08
FOR THE PERIOD AUGUST 15, 1988(G) THROUGH OCTOBER 31,
1988-Institu-
tional Shares.. (0.1800) -- -- -- -- (0.1800) 0.1000 10.10 3.30(f)
<CAPTION>
RATIOS ASSUMING NO
VOLUNTARY WAIVER OF
FEES OR EXPENSE
LIMITATIONS
--------------------
RATIO OF RATIO OF NET RATIO OF
NET NET ASSETS RATIO OF NET
EXPENSES INVESTMENT AT END EXPENSES INVESTMENT
TO INCOME OF TO INCOME
AVERAGE (LOSS) TO PORTFOLIO PERIOD AVERAGE (LOSS) TO
NET AVERAGE TURNOVER (IN NET AVERAGE
ASSETS NET ASSETS RATE(D) 000S) ASSETS NET ASSETS
-------- ---------- --------- ------- -------- ----------
SHORT DURATION GOVERNMENT FUND
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional Shares....
Administration Shares...
Service Shares
FOR THE YEAR ENDED OCTOBER 31,
1996-Institutional
Shares ................ 0.45 6.44 115.45 99,944 0.71 6.18
1996-Administration
Shares(h).............. 0.70(b) 5.97(b) 115.45 252 0.96(b) 5.71(b)
1996-Service Shares(i).. 0.95(b) 6.05(b) 115.45 1,822 1.21(b) 5.79(b)
1995-Institutional
Shares................. 0.45 6.87 292.56 103,760 0.72 6.60
1995-Administration
Shares................. 0.70(b) 7.91(b) 292.56 -- 0.90(b) 7.71(b)
1994-Institutional
Shares................. 0.45 5.69 289.79 193,095 0.59 5.55
1994-Administration
Shares................. 0.70 5.38 289.79 730 0.84 5.24
1993-Institutional
Shares................. 0.45 5.46 411.66 359,708 0.64 5.31
1993-Administration
Shares(e).............. 0.70(b) 4.84(b) 411.66 16,490 0.80(b) 4.74(b)
1992-Institutional
Shares................. 0.45 6.60 216.07 277,927 0.69 6.36
1991-Institutional
Shares................. 0.45 8.25 155.44 158,848 0.79 7.91
1990-Institutional
Shares................. 0.45 8.62 173.21 68,995 0.95 8.12
1989-Institutional
Shares................. 0.46 8.71 137.37 31,015 1.39 7.78
FOR THE PERIOD AUGUST 15, 1988(G) THROUGH OCTOBER 31,
1988-Institutional
Shares................. 0.55(b) 8.55(b) 167.00(b) 39,052 1.42(b) 7.68(b)
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
RATIOS ASSUMING NO
VOLUNTARY WAIVER OF
FEES OR EXPENSE
LIMITATIONS
--------------------
RATIO OF RATIO OF NET RATIO OF
NET NET ASSETS RATIO OF NET
EXPENSES INVESTMENT AT END EXPENSES INVESTMENT
TO INCOME OF TO INCOME
AVERAGE (LOSS) TO PORTFOLIO PERIOD AVERAGE (LOSS) TO
NET AVERAGE TURNOVER (IN NET AVERAGE
ASSETS NET ASSETS RATE(D) 000S) ASSETS NET ASSETS
-------- ---------- --------- ------- -------- ----------
SHORT DURATION GOVERNMENT FUND
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional Shares....
Administration Shares...
Service Shares
FOR THE YEAR ENDED OCTOBER 31,
1996-Institutional
Shares ................ 0.45 6.44 115.45 99,944 0.71 6.18
1996-Administration
Shares(h).............. 0.70(b) 5.97(b) 115.45 252 0.96(b) 5.71(b)
1996-Service Shares(i).. 0.95(b) 6.05(b) 115.45 1,822 1.21(b) 5.79(b)
1995-Institutional
Shares................. 0.45 6.87 292.56 103,760 0.72 6.60
1995-Administration
Shares................. 0.70(b) 7.91(b) 292.56 -- 0.90(b) 7.71(b)
1994-Institutional
Shares................. 0.45 5.69 289.79 193,095 0.59 5.55
1994-Administration
Shares................. 0.70 5.38 289.79 730 0.84 5.24
1993-Institutional
Shares................. 0.45 5.46 411.66 359,708 0.64 5.31
1993-Administration
Shares(e).............. 0.70(b) 4.84(b) 411.66 16,490 0.80(b) 4.74(b)
1992-Institutional
Shares................. 0.45 6.60 216.07 277,927 0.69 6.36
1991-Institutional
Shares................. 0.45 8.25 155.44 158,848 0.79 7.91
1990-Institutional
Shares................. 0.45 8.62 173.21 68,995 0.95 8.12
1989-Institutional
Shares................. 0.46 8.71 137.37 31,015 1.39 7.78
FOR THE PERIOD AUGUST 15, 1988(G) THROUGH OCTOBER 31,
1988-Institutional
Shares................. 0.55(b) 8.55(b) 167.00(b) 39,052 1.42(b) 7.68(b)
</TABLE>
10--1
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS
--------------------------------------------------
NET REALIZED NET
AND REALIZED
UNREALIZED AND
GAIN (LOSS) UNREALIZED TOTAL
ON GAIN (LOSS) INCOME
NET ASSET INVESTMENT, ON FOREIGN (LOSS)
VALUE AT NET OPTION AND CURRENCY FROM
BEGINNING INVESTMENT FUTURES RELATED INVESTMENT
OF PERIOD INCOME TRANSACTIONS TRANSACTIONS OPERATIONS
--------- ---------- ------------ ------------ ----------
SHORT DURATION TAX-FREE FUND
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional
Shares.........
Administration
Shares.........
Service Shares
FOR THE YEAR ENDED OCTOBER 31,
1996-Institu-
tional Shares.. 9.94 0.4192(a) 0.0200 (a) -- 0.4392
1996-Administra-
tion Shares.... 9.94 0.3944(a) 0.0200 (a) -- 0.4144
1996-Service
Shares......... 9.95 0.3697(a) 0.0200 (a) -- 0.3897
1995-Institu-
tional Shares.. 9.79 0.4235(a) 0.1500 (a) -- 0.5735
1995-Administra-
tion Shares.... 9.79 0.3989(a) 0.1500 (a) -- 0.5489
1995-Service
Shares......... 9.79 0.3744(a) 0.1600 (a) -- 0.5344
1994-Institu-
tional Shares.. 10.23 0.3787(a) (0.3575)(a) -- 0.0212
1994-Administra-
tion Shares.... 10.23 0.3537(a) (0.3575)(a) -- (0.0038)
1994-Service
Shares(j)...... 9.86 0.0475(a) (0.0700)(a) (0.0225)
1993-Institu-
tional Shares.. 9.93 0.3834 0.3000(d) -- 0.6834
1993-Administra-
tion
Shares(j)...... 10.16 0.1555 0.0720(d) -- 0.2275
FOR THE PERIOD OCTOBER 1, 1992(G) THROUGH OCTOBER 31,
1992-Institu-
tional Shares.. 10.00 0.0341 (0.0700)(d) -- (0.0359)
GOVERNMENT INCOME FUND
- -------------------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31,
1996-Class A
shares.......... $14.47 $ 0.92 $ (0.11) -- $ 0.81
1996-Class B
shares(m)....... 14.11 0.41 0.26 -- 0.67
1995-Class A
shares.......... 13.47 0.94 1.00 -- 1.94
1994-Class A
shares.......... 14.90 0.85 (1.28) -- (0.43)
FOR THE PERIOD FEBRUARY 10, 1993(G) THROUGH OCTOBER 31,
1993-Class A
shares.......... 14.32 0.56 0.58 -- 1.14
MUNICIPAL INCOME FUND
- -------------------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31,
1996-Class A
shares.......... $14.17 $ 0.65 $0.20 -- $ 0.85
1996-Class B
shares(m)....... 14.03 0.27 0.34 -- 0.61
1995-Class A
shares.......... 13.08 0.67 1.09 -- 1.76
1994-Class A
shares.......... 14.64 0.73 (1.51) -- (0.78)
FOR THE PERIOD JULY 20, 1993(G) THROUGH OCTOBER 31,
1993-Class A
shares.......... 14.32 0.22 0.32 -- 0.54
<CAPTION>
DISTRIBUTIONS TO SHAREHOLDERS
---------------------------------------------------------------------
IN EXCESS
FROM NET OF NET
REALIZED REALIZED NET NET
GAIN ON GAIN ON INCREASE ASSET
INVESTMENT, IN EXCESS INVESTMENT, FROM TOTAL (DECREASE) VALUE
FROM NET OPTION AND OF NET OPTION AND PAID DISTRIBUTIONS IN NET AT END
INVESTMENT FUTURES INVESTMENT FUTURES IN TO ASSET OF TOTAL
INCOME TRANSACTIONS INCOME TRANSACTIONS CAPITAL SHAREHOLDERS VALUE PERIOD RETURN(K)
---------- ------------ ---------- ------------ ------- ------------- ---------- ------ ---------
SHORT DURATION TAX-FREE FUND
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional
Shares.........
Administration
Shares.........
Service Shares
FOR THE YEAR ENDED OCTOBER 31,
1996-Institu-
tional Shares.. (0.4192) -- -- -- -- (0.4192) 0.0300 9.96 4.50
1996-Administra-
tion Shares.... (0.3944) -- -- -- -- (0.3944) 0.0300 9.96 4.24
1996-Service
Shares......... (0.3697) -- -- -- -- (0.3697) 0.0200 9.97 3.98
1995-Institu-
tional Shares.. (0.4235) -- -- -- -- (0.4235) 0.1500 9.94 5.98
1995-Administra-
tion Shares.... (0.3989) -- -- -- -- (0.3989) 0.1500 9.94 5.76
1995-Service
Shares......... (0.3744) -- -- -- -- (0.3744) 0.1600 9.95 5.59
1994-Institu-
tional Shares.. (0.3787) (0.0825) -- -- -- (0.4612) (0.4400) 9.79 0.17
1994-Administra-
tion Shares.... (0.3537) (0.0825) -- -- -- (0.4362) (0.4400) 9.79 (0.11)
1994-Service
Shares(j)...... (0.0475) -- (0.0475) (0.0700) 9.79 (0.32)(f)
1993-Institu-
tional Shares.. (0.3834) -- -- -- -- (0.3834) 0.3000 10.23 7.03
1993-Administra-
tion
Shares(j)...... (0.1555) -- -- -- -- (0.1555) 0.0720 10.23 2.28(f)
FOR THE PERIOD OCTOBER 1, 1992(G) THROUGH OCTOBER 31,
1992-Institu-
tional Shares.. (0.0341) -- -- -- -- (0.0341) (0.0700) 9.93 (0.34)(f)
GOVERNMENT INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31,
1996-Class A
shares.......... $(0.92) -- -- -- -- $ (0.92) $ (0.11) $14.36 5.80%
1996-Class B
shares(m)....... (0.41) -- -- -- -- (0.41) 0.26 14.37 4.85(f)
1995-Class A
shares.......... (0.94) -- -- -- -- (0.94) 1.00 14.47 14.90
1994-Class A
shares.......... (0.85) (0.12) (0.02) (0.01) -- (1.00) (1.43) 13.47 (2.98)
FOR THE PERIOD FEBRUARY 10, 1993(G) THROUGH OCTOBER 31,
1993-Class A
shares.......... (0.56) -- -- -- -- (0.56) 0.58 14.90 8.03(f)
MUNICIPAL INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31,
1996-Class A
shares.......... $ (0.65) -- -- -- -- $ (0.65) $ 0.20 $14.37 6.13%
1996-Class B
shares(m)....... (0.27) -- -- -- -- (0.27) 0.34 14.37 4.40(f)
1995-Class A
shares.......... (0.67) -- -- -- -- (0.67) 1.09 14.17 13.79
1994-Class A
shares.......... (0.73) (0.05) -- -- -- (0.78) (1.56) 13.08 (5.51)
FOR THE PERIOD JULY 20, 1993(G) THROUGH OCTOBER 31,
1993-Class A
shares.......... (0.22) -- -- -- -- (0.22) 0.32 14.64 3.73(f)
<CAPTION>
RATIOS ASSUMING NO
VOLUNTARY WAIVER OF
FEES OR EXPENSE
LIMITATIONS
--------------------
RATIO OF RATIO OF NET RATIO OF
NET NET ASSETS RATIO OF NET
EXPENSES INVESTMENT AT END EXPENSES INVESTMENT
TO INCOME OF TO INCOME
AVERAGE (LOSS) TO PORTFOLIO PERIOD AVERAGE (LOSS) TO
NET AVERAGE TURNOVER (IN NET AVERAGE
ASSETS NET ASSETS RATE(D) 000S) ASSETS NET ASSETS
-------- ---------- --------- ------- -------- ----------
SHORT DURATION TAX-FREE FUND
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional Shares....
Administration Shares...
Service Shares
FOR THE YEAR ENDED OCTOBER 31,
1996-Institutional
Shares................. 0.45 4.21 231.65 34,814 1.01 3.65
1996-Administration
Shares................. 0.70 3.96 231.65 48 1.26 3.40
1996-Service Shares..... 0.95 3.74 231.65 695 1.51 3.18
1995-Institutional
Shares................. 0.45 4.31 259.52 58,389 0.77 3.99
1995-Administration
Shares................. 0.70 4.14 259.52 46 1.02 3.82
1995-Service Shares..... 0.95 3.87 259.52 454 1.27 3.55
1994-Institutional
Shares................. 0.45 3.74 354.00 83,704 0.61 3.58
1994-Administration
Shares................. 0.70 3.51 354.00 3,866 0.86 3.35
1994-Service Shares(j).. 0.95(b) 4.30(b) 354.00 440 1.11(b) 4.14(b)
1993-Institutional
Shares................. 0.41 3.70 404.60 115,803 1.06 3.05
1993-Administration
Shares(j).............. 0.70(b) 3.32(b) 404.60 911 1.07(b) 2.95(b)
FOR THE PERIOD OCTOBER 1, 1992(G) THROUGH OCTOBER 31,
1992-Institutional
Shares................. 0.05(b) 4.58(b) 31.19(f) 14,601 2.68(b) 1.95(b)
GOVERNMENT INCOME FUND
- ---------------------------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31,
1996-Class A shares..... 0.50% 6.42% 485.09% $30,603 1.89% 5.03%
1996-Class B shares(m).. 1.25(b) 5.65(b) 485.09 234 2.39(b) 4.51(b)
1995-Class A shares..... 0.47 6.67 449.53 29,503 2.34 4.80
1994-Class A shares..... 0.11 6.06 654.90 14,452 2.86 3.31
FOR THE PERIOD FEBRUARY 10, 1993(G) THROUGH OCTOBER 31,
1993-Class A shares..... 0.00(b) 4.87(b) 725.41(f) 12,860 4.00(b) 0.87(b)
MUNICIPAL INCOME FUND
- ---------------------------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31,
1996-Class A shares..... 0.85% 4.58% 344.13% $52,267 1.55% 3.88%
1996-Class B shares(m).. 1.60(b) 3.55(b) 344.13 255 2.05(b) 3.10(b)
1995-Class A shares..... 0.76 4.93 335.55 53,797 1.49 4.20
1994-Class A shares..... 0.45 5.28 357.54 47,373 1.55 4.18
FOR THE PERIOD JULY 20, 1993(G) THROUGH OCTOBER 31,
1993-Class A shares..... 0.00(b) 5.15(b) 99.99(f) 30,166 2.42(b) 2.73(b)
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
RATIOS ASSUMING NO
VOLUNTARY WAIVER OF
FEES OR EXPENSE
LIMITATIONS
--------------------
RATIO OF RATIO OF NET RATIO OF
NET NET ASSETS RATIO OF NET
EXPENSES INVESTMENT AT END EXPENSES INVESTMENT
TO INCOME OF TO INCOME
AVERAGE (LOSS) TO PORTFOLIO PERIOD AVERAGE (LOSS) TO
NET AVERAGE TURNOVER (IN NET AVERAGE
ASSETS NET ASSETS RATE(D) 000S) ASSETS NET ASSETS
-------- ---------- --------- ------- -------- ----------
SHORT DURATION TAX-FREE FUND
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional Shares....
Administration Shares...
Service Shares
FOR THE YEAR ENDED OCTOBER 31,
1996-Institutional
Shares................. 0.45 4.21 231.65 34,814 1.01 3.65
1996-Administration
Shares................. 0.70 3.96 231.65 48 1.26 3.40
1996-Service Shares..... 0.95 3.74 231.65 695 1.51 3.18
1995-Institutional
Shares................. 0.45 4.31 259.52 58,389 0.77 3.99
1995-Administration
Shares................. 0.70 4.14 259.52 46 1.02 3.82
1995-Service Shares..... 0.95 3.87 259.52 454 1.27 3.55
1994-Institutional
Shares................. 0.45 3.74 354.00 83,704 0.61 3.58
1994-Administration
Shares................. 0.70 3.51 354.00 3,866 0.86 3.35
1994-Service Shares(j).. 0.95(b) 4.30(b) 354.00 440 1.11(b) 4.14(b)
1993-Institutional
Shares................. 0.41 3.70 404.60 115,803 1.06 3.05
1993-Administration
Shares(j).............. 0.70(b) 3.32(b) 404.60 911 1.07(b) 2.95(b)
FOR THE PERIOD OCTOBER 1, 1992(G) THROUGH OCTOBER 31,
1992-Institutional
Shares................. 0.05(b) 4.58(b) 31.19(f) 14,601 2.68(b) 1.95(b)
GOVERNMENT INCOME FUND
- ---------------------------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31,
1996-Class A shares..... 0.50% 6.42% 485.09% $30,603 1.89% 5.03%
1996-Class B shares(m).. 1.25(b) 5.65(b) 485.09 234 2.39(b) 4.51(b)
1995-Class A shares..... 0.47 6.67 449.53 29,503 2.34 4.80
1994-Class A shares..... 0.11 6.06 654.90 14,452 2.86 3.31
FOR THE PERIOD FEBRUARY 10, 1993(G) THROUGH OCTOBER 31,
1993-Class A shares..... 0.00(b) 4.87(b) 725.41(f) 12,860 4.00(b) 0.87(b)
MUNICIPAL INCOME FUND
- ---------------------------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31,
1996-Class A shares..... 0.85% 4.58% 344.13% $52,267 1.55% 3.88%
1996-Class B shares(m).. 1.60(b) 3.55(b) 344.13 255 2.05(b) 3.10(b)
1995-Class A shares..... 0.76 4.93 335.55 53,797 1.49 4.20
1994-Class A shares..... 0.45 5.28 357.54 47,373 1.55 4.18
FOR THE PERIOD JULY 20, 1993(G) THROUGH OCTOBER 31,
1993-Class A shares..... 0.00(b) 5.15(b) 99.99(f) 30,166 2.42(b) 2.73(b)
</TABLE>
11--1
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS(N)
-----------------------------------------------
NET REALIZED NET
AND REALIZED
UNREALIZED AND
GAIN (LOSS) UNREALIZED TOTAL
ON GAIN (LOSS) INCOME
NET ASSET INVESTMENT, ON FOREIGN (LOSS)
VALUE AT NET OPTION AND CURRENCY FROM
BEGINNING INVESTMENT FUTURES RELATED INVESTMENT
OF PERIOD INCOME TRANSACTIONS TRANSACTIONS OPERATIONS
--------- ---------- ------------ ------------ ----------
CORE FIXED INCOME FUND
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional
Shares..........
Administration
Shares..........
Service Shares
FOR THE YEAR ENDED OCTOBER 31,
1996-Institu-
tional Shares... 10.00 0.6448 (0.0704) -- 0.5744
1996-Administra-
tion Shares(1).. 9.91 0.4083 (0.0703) -- 0.3380
1996-Service
Shares(1)....... 9.77 0.3756 0.0898 -- 0.4654
1995-Institu-
tional Shares... 9.24 0.6423 0.7610 -- 1.4033
FOR THE PERIOD JANUARY 5, 1994(G) THROUGH OCTOBER 31,
1994-Institu-
tional Shares... 10.00 0.4648 (0.7617) -- (0.2969)
GLOBAL INCOME FUND
- ---------------- ----------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Class A Shares..
Class B Shares..
Institutional
Shares..........
FOR THE YEARS ENDED OCTOBER 31,
1996-Class A
shares.......... 14.45 0.71 0.62 0.18 1.51
1996-Class B
shares(m)....... 14.03 0.34 0.41 0.11 0.86
1996-
Institutional
shares.......... 14.45 1.15 0.32 0.10 1.57
1995-Class A
shares.......... 13.43 0.89 0.92 0.15 1.96
1995-
Institutional
shares(m)....... 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(G) THROUGH OCTOBER 31,
1991-Class A
shares.......... 14.55 0.25 0.23 (0.19) 0.29
- -------------------------------------------------------------------------------
<CAPTION>
DISTRIBUTIONS TO SHAREHOLDERS
-----------------------------------------------------------------------
IN EXCESS
FROM NET OF NET
REALIZED REALIZED NET NET
GAIN ON GAIN ON INCREASE ASSET
INVESTMENT, IN EXCESS INVESTMENT, FROM TOTAL (DECREASE) VALUE
FROM NET OPTION AND OF NET OPTION AND PAID DISTRIBUTIONS IN NET AT END
INVESTMENT FUTURES INVESTMENT FUTURES IN TO ASSET OF TOTAL
INCOME TRANSACTIONS INCOME TRANSACTIONS CAPITAL SHAREHOLDERS VALUE PERIOD RETURN(K)
---------- ------------ ---------- ------------ -------- ------------- ---------- ------ ---------
CORE FIXED INCOME FUND
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional
Shares..........
Administration
Shares..........
Service Shares
FOR THE YEAR ENDED OCTOBER 31,
1996-Institu-
tional Shares... (0.6438) (0.0806) -- -- -- (0.7244) (0.1500) 9.85 5.98
1996-Administra-
tion Shares(1).. (0.4080) -- -- -- -- (0.4080) (0.0700) 9.84 3.56(f)
1996-Service
Shares(1)....... (0.3754) -- -- -- -- (0.3754) 0.0900 9.86 4.90(f)
1995-Institu-
tional Shares... (0.6433) -- -- -- -- (0.6433) 0.7600 10.00 15.72
FOR THE PERIOD JANUARY 5, 1994(G) THROUGH OCTOBER 31,
1994-Institu-
tional Shares... (0.4648) -- -- -- -- (0.4648) (0.7617) 9.24 (3.00)
GLOBAL INCOME FUND
- ---------------- ----------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Class A Shares..
Class B Shares..
Institutional
Shares..........
FOR THE YEARS ENDED OCTOBER 31,
1996-Class A
shares.......... (1.43) -- -- -- -- (1.43) 0.08 14.53 11.0%
1996-Class B
shares(m)....... (0.36) -- -- -- -- (0.36) 0.50 14.53 6.24(f)
1996-
Institutional
shares.......... (1.50) -- -- -- -- (1.50) 0.07 14.52 11.55
1995-Class A
shares.......... (0.94) -- -- -- -- (0.94) 1.02 14.45 15.08
1995-
Institutional
shares(m)....... (0.26) -- -- -- -- (0.26) 0.36 14.45 4.42(f)
1994-Class A
shares.......... (0.22) (0.16) -- -- (0.61) (0.99) (1.64) 13.43 (4.49)
1993-Class A
shares.......... (0.85) (0.27) -- -- -- (1.12) 0.38 15.07 10.75
1992-Class A
shares.......... (1.14) -- -- -- -- (1.14) 0.09 14.69 8.77
FOR THE PERIOD AUGUST 2, 1991(G) THROUGH OCTOBER 31,
1991-Class A
shares.......... (0.24) -- -- -- -- (0.24) 0.05 14.60 2.00
<CAPTION>
RATIOS ASSUMING NO
VOLUNTARY WAIVER OF
FEES OR EXPENSE
LIMITATIONS
--------------------
RATIO OF NET RATIO OF
NET RATIO OF ASSETS RATIO OF NET
EXPENSES NET AT END EXPENSES INVESTMENT
TO INVESTMENT OF TO INCOME
AVERAGE INCOME TO PORTFOLIO PERIOD AVERAGE (LOSS) TO
NET AVERAGE TURNOVER (IN NET AVERAGE
ASSETS NET ASSETS RATE(D) 000S) ASSETS NET ASSETS
-------- ---------- --------- ------- -------- ----------
CORE FIXED INCOME FUND
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional Shares....
Administration Shares...
Service Shares
FOR THE YEAR ENDED OCTOBER 31,
1996-Institutional
Shares.................. 0.45 6.51 414.20 72,061 0.83 6.13
1996-Administration
Shares(1)............... 0.70(b) 6.41(b) 414.20 702 1.08(b) 6.03(b)
1996-Service Shares(1).. 0.95(b) 6.37(b) 414.20 381 1.33(b) 5.99(b)
1995-Institutional
Shares.................. 0.45 6.56 383.26 55,502 0.96 6.05
FOR THE PERIOD JANUARY 5, 1994(G) THROUGH OCTOBER 31,
1994-Institutional
Shares.................. 0.45(b) 6.48(b) 288.25 24,508 1.46(b) 5.47(b)
GLOBAL INCOME FUND
- ------------------------ -------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Class A Shares..........
Class B Shares..........
Institutional Shares....
FOR THE YEARS ENDED OCTOBER 31,
1996-Class A shares..... 1.16 5.81 232.15 198,665 1.64 5.33
1996-Class B shares(m).. 1.70(b) 5.16(b) 232.15 256 2.14(b) 4.72(b)
1996-Institutional
shares.................. 0.65 6.35 232.15 54,254 1.11 5.89
1995-Class A shares..... 1.29 6.23 265.86 245,835 1.58 5.94
1995-Institutional
shares(m)............... 0.65(b) 6.01(b) 265.86 31,619 1.08(b) 5.58(b)
1994-Class A shares..... 1.28 5.73 343.74 396,584 1.53 5.48
1993-Class A shares..... 1.30 5.78 313.88 675,662 1.55 5.53
1992-Class A shares..... 1.37 7.85 270.75 588,893 1.62 7.60
FOR THE PERIOD AUGUST 2, 1991(G) THROUGH OCTOBER 31,
1991-Class A shares..... 0.38(f) 1.72(f) 34.22(f) 388,744 0.44(f) 1.66(f)
- ---------------------------------------------------------------------------------------
</TABLE>
(a) Calculated based on the average shares outstanding methodology.
(b) Annualized.
(c) Class A share activity commenced on May 15, 1995.
(d) Includes the effect of mortgage dollar roll transactions.
(e) Administration share activity commenced on April 15, 1993.
(f) Not annualized.
(g) Commencement of operations.
(h) GS Short Duration Government Fund Administration shares were redeemed in
full on February 23, 1995 and re-commenced on February 28, 1996 at $9.86.
(i) Service share activity commenced on April 10, 1996.
(j) Administration and service share activity commenced on May 20, 1993 and
September 20, 1994 respectively.
(k) 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 not
sales charges. For Class A shares only, total return would be reduced if a
sales charge were taken into account.
(l) Administration and Service share activity commenced operations on February
28, 1996 and March 13, 1996 respectively.
(m) Institutional and Class B shares commenced operations on June 1, 1995 and
May 1, 1996, respectively.
(n) Includes the balancing effect of calculating per share amounts.
12
<PAGE>
<TABLE>
<CAPTION>
RATIOS ASSUMING NO
VOLUNTARY WAIVER OF
FEES OR EXPENSE
LIMITATIONS
--------------------
RATIO OF NET RATIO OF
NET RATIO OF ASSETS RATIO OF NET
EXPENSES NET AT END EXPENSES INVESTMENT
TO INVESTMENT OF TO INCOME
AVERAGE INCOME TO PORTFOLIO PERIOD AVERAGE (LOSS) TO
NET AVERAGE TURNOVER (IN NET AVERAGE
ASSETS NET ASSETS RATE(D) 000S) ASSETS NET ASSETS
-------- ---------- --------- ------- -------- ----------
CORE FIXED INCOME FUND
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional Shares....
Administration Shares...
Service Shares
FOR THE YEAR ENDED OCTOBER 31,
1996-Institutional
Shares.................. 0.45 6.51 414.20 72,061 0.83 6.13
1996-Administration
Shares(1)............... 0.70(b) 6.41(b) 414.20 702 1.08(b) 6.03(b)
1996-Service Shares(1).. 0.95(b) 6.37(b) 414.20 381 1.33(b) 5.99(b)
1995-Institutional
Shares.................. 0.45 6.56 383.26 55,502 0.96 6.05
FOR THE PERIOD JANUARY 5, 1994(G) THROUGH OCTOBER 31,
1994-Institutional
Shares.................. 0.45(b) 6.48(b) 288.25 24,508 1.46(b) 5.47(b)
GLOBAL INCOME FUND
- ------------------------ -------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Class A Shares..........
Class B Shares..........
Institutional Shares....
FOR THE YEARS ENDED OCTOBER 31,
1996-Class A shares..... 1.16 5.81 232.15 198,665 1.64 5.33
1996-Class B shares(m).. 1.70(b) 5.16(b) 232.15 256 2.14(b) 4.72(b)
1996-Institutional
shares.................. 0.65 6.35 232.15 54,254 1.11 5.89
1995-Class A shares..... 1.29 6.23 265.86 245,835 1.58 5.94
1995-Institutional
shares(m)............... 0.65(b) 6.01(b) 265.86 31,619 1.08(b) 5.58(b)
1994-Class A shares..... 1.28 5.73 343.74 396,584 1.53 5.48
1993-Class A shares..... 1.30 5.78 313.88 675,662 1.55 5.53
1992-Class A shares..... 1.37 7.85 270.75 588,893 1.62 7.60
FOR THE PERIOD AUGUST 2, 1991(G) THROUGH OCTOBER 31,
1991-Class A shares..... 0.38(f) 1.72(f) 34.22(f) 388,744 0.44(f) 1.66(f)
- ---------------------------------------------------------------------------------------
</TABLE>
12--1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and principal investment policies of each Fund are
described below. Other investment practices and management techniques, which
involve certain risks are described under "Description of Securities," "Risk
Factors" and "Investment Techniques." There can be no assurance that a Fund's
investment objectives will be achieved.
A Fund's duration approximates its price sensitivity to changes in interest
rates. Maturity measures the time until final payment is due; it takes no
account of the pattern of a security's cash flows over time. In computing
portfolio duration, a Fund will estimate the duration of obligations that are
subject to prepayment or redemption by the issuer taking into account the
influence of interest rates on prepayments and coupon flows. This method of
computing duration is known as "option-adjusted" duration. A Fund will not be
limited as to its maximum weighted average portfolio maturity or the maximum
stated maturity with respect to individual securities unless otherwise noted.
A Fund will deem a security to have met its minimum credit rating
requirement if the security receives the minimum required long-term rating (or
the equivalent short-term credit rating) at the time of purchase from at least
one rating organization (including, but not limited to, Standard & Poor's
Ratings Group ("S&P") and Moody's Investors Service, Inc. ("Moody's")) even
though it has been rated below the minimum rating by one or more other rating
organizations, or, if unrated by a rating organization, is determined by the
Investment Adviser to be of comparable quality. If a security satisfies a
Fund's minimum rating criteria at the time of purchase and is subsequently
downgraded below such rating, the Fund will not be required to dispose of such
security. If a downgrade occurs, the Investment Adviser will consider what
action, including the sale of such security, is in the best interest of a Fund
and its shareholders.
The Investment 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.
ADJUSTABLE RATE GOVERNMENT FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income, consistent with low volatility of principal.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be in a range approximately equal to that of a six-month to one-
year U.S. Treasury security. In addition, under normal interest rate
conditions, the Fund's maximum duration will not exceed two years. The
approximate interest rate sensitivity of the Fund is comparable to a nine-
month note.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
65% of its total assets in U.S. Government Securities that are adjustable rate
mortgage pass-through securities and other U.S. Government Securities. The
remainder of the Fund's assets (up to 35%) may be invested in other U.S.
Government Securities, including mortgage pass-through securities, other
securities representing an interest in or collateralized by adjustable rate
and fixed rate mortgage loans ("Mortgage-Backed Securities") and repurchase
agreements collateralized by U.S. Government Securities. Substantially all of
the Fund's assets will be invested in U.S. Government Securities. 100% of the
Fund's portfolio will be invested in U.S. dollar-denominated securities.
13
<PAGE>
CREDIT QUALITY. The Fund invests in U.S. Government Securities and
repurchase agreements collateralized by such securities.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), mortgage and
interest rate swaps and interest rate floors, caps and collars. The Fund may
also employ other investment techniques to seek to enhance returns, such as
lending portfolio securities and entering into mortgage dollar rolls,
repurchase agreements and other investment practices described under
"Investment Techniques."
SHORT DURATION GOVERNMENT FUND
OBJECTIVE. The Fund's investment objective is to provide a high level of
current income. Secondarily, the Fund may, in seeking current income, also
consider the potential for capital appreciation.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the two-year U.S.
Treasury security, plus or minus .5 years. In addition, under normal interest
rate conditions, the Fund's maximum duration will not exceed three years. The
approximate interest rate sensitivity of the Fund is comparable to a two-year
bond.
INVESTMENT SECTOR. The Fund invests, under normal market conditions, at
least 65% of its total assets in U.S. Government Securities and in repurchase
agreements collateralized by such securities. Substantially all of the Fund's
assets will be invested in U.S. Government Securities. 100% of the Fund's
portfolio will be invested in U.S. dollar-denominated securities.
CREDIT QUALITY. The Fund invests in U.S. Government Securities and
repurchase agreements collateralized by such securities.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), mortgage and
interest rate swaps and interest rate floors, caps and collars. The Fund may
also employ other investment techniques to seek to enhance returns, such as
lending portfolio securities and entering into mortgage dollar rolls,
repurchase agreements and other investment practices described under
"Investment Techniques."
SHORT DURATION TAX-FREE FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income, consistent with relatively low volatility of
principal, that is exempt from regular federal income tax.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers
three-year Municipal Bond Index, plus or minus .5 years. In addition, under
normal interest rate conditions, the Fund's maximum duration will not exceed
four years. The approximate interest rate sensitivity of the Fund is
comparable to a three-year bond.
INVESTMENT SECTOR. The Fund invests, under normal conditions, at least 80%
of its net assets in fixed-income securities issued by or on behalf of states,
territories and possessions of the United States (including the District of
Columbia) and the political subdivisions, agencies and instrumentalities
thereof ("Municipal
14
<PAGE>
Securities"), the interest on which is exempt from regular federal income tax
(i.e., excluded from gross income for federal income tax purposes), and is not
a tax preference item under the federal alternative minimum tax. Under normal
circumstances, the Fund's investments in private activity bonds and taxable
investments will not exceed, in the aggregate, 20% of the Fund's net assets.
The interest from certain private activity bonds (including the Fund's
distributions of such interest) may be a preference item for purposes of the
federal alternative minimum tax. 100% of the Fund's portfolio will be invested
in U.S. dollar-denominated securities.
CREDIT QUALITY. The Municipal Securities in which the Fund invests will be
rated, at the time of investment, at least BBB by S&P or Baa by Moody's.
Municipal Securities rated BBB or Baa are considered medium-grade obligations
with speculative characteristics, and adverse economic conditions or changing
circumstances may weaken their issuers' capability to pay interest and repay
principal. The credit rating assigned to Municipal Securities by these rating
organizations or by the Investment Adviser may reflect the existence of
guarantees, letters of credit or other credit enhancement features available
to the issuers or holders of such Municipal Securities.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), interest rate
swaps, floors, caps and collars. The Fund may also employ other investment
techniques to seek to enhance returns, such as lending portfolio securities
and entering into repurchase agreements and other investment practices
described under "Investment Techniques."
While the Fund, under normal market conditions, invests substantially all of
its assets in Municipal Securities, the recognition of certain accrued market
discount income (if the Fund acquires Municipal Securities or other
obligations at a market discount), income from investments other than
Municipal Securities and any capital gains generated from the disposition of
investments, will result in taxable income. In addition to federal income tax,
shareholders may be subject to state, local or foreign taxes on distributions
of such income received from the Fund. See "Description of Securities."
GOVERNMENT INCOME FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income, consistent with safety of principal.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers
Mutual Fund Government/Mortgage Index, plus or minus one year. In addition,
under normal interest rate conditions, the Fund's maximum duration will not
exceed six years. The approximate interest rate sensitivity of the Fund is
comparable to a five-year bond.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
65% of its total assets in U.S. Government Securities and in repurchase
agreements collateralized by such securities. The remainder of the Fund's
assets may be invested in non-government securities such as privately issued
Mortgage-Backed Securities, Asset-Backed Securities and corporate securities.
100% of the Fund's portfolio will be invested in U.S. dollar-denominated
securities.
CREDIT QUALITY. The Fund's non-U.S. Government Securities will be rated, at
the time of investment, AAA by S&P or Aaa by Moody's.
15
<PAGE>
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), mortgage and
interest rate swaps and interest rate floors, caps and collars. The Fund may
also employ other investment techniques to seek to enhance returns, such as
lending portfolio securities and entering into mortgage dollar rolls,
repurchase agreements and other investment practices described under
"Investment Techniques."
MUNICIPAL INCOME FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income that is exempt from regular federal income tax,
consistent with preservation of capital.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers
fifteen-year Municipal Bond Index, plus or minus one year. In addition, under
normal interest rate conditions, the Fund's maximum duration will not exceed
twelve years. The approximate interest rate sensitivity of the Fund is
comparable to a fifteen-year bond.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
80% of its net assets in Municipal Securities, the interest on which is exempt
from regular federal income tax (i.e., excluded from gross income for federal
income tax purposes). The Fund may invest up to 100% of its net assets in
private activity bonds, the interest from certain of which (including the
Fund's distributions of such interest) may be a preference item for purposes
of the federal alternative minimum tax. 100% of the Fund's portfolio will be
invested in U.S. dollar-denominated securities.
CREDIT QUALITY. Under normal market conditions, the weighted average credit
quality of the Fund's portfolio will be equivalent to that of securities rated
AA by S&P or Aa by Moody's. All securities purchased by the Fund will be
rated, at the time of investment, at least BBB by S&P or Baa by Moody's.
Fixed-income securities rated BBB or Baa are considered medium-grade
obligations with speculative characteristics, and adverse economic conditions
or changing circumstances may weaken their issuers' capability to pay interest
and repay principal. The credit rating assigned to Municipal Securities by
these rating organizations or by the Investment Adviser may reflect the
existence of guarantees, letters of credit or other credit enhancement
features available to the issuers or holders of such Municipal Securities.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), interest rate
swaps, interest rate floors, caps and collars. The Fund may also employ other
investment techniques to seek to enhance returns, such as lending portfolio
securities and entering into repurchase agreements and other investment
practices described under "Investment Techniques."
While the Fund, under normal market conditions, invests substantially all of
its assets in Municipal Securities, the recognition of certain accrued market
discount income (if the Fund acquires Municipal Securities or other
obligations at a market discount), income from investments other than
Municipal Securities and any capital gains generated from the disposition of
investments, will result in taxable income. In addition to federal income tax,
shareholders may be subject to state, local or foreign taxes on distributions
of such income received from the Fund. See "Description of Securities."
16
<PAGE>
CORE FIXED INCOME FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
total return consisting of capital appreciation and income that exceeds the
total return of the Lehman Brothers Aggregate Bond Index (the "Index").
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers
Aggregate Bond Index, plus or minus one year. In addition, under normal
interest rate conditions, the Fund's maximum duration will not exceed six
years. The approximate interest rate sensitivity of the Fund is comparable to
a five-year bond.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
65% of its total assets in fixed-income securities, including U.S. Government
Securities, corporate debt securities, Mortgage-Backed Securities, and Asset-
Backed Securities. The Fund may invest up to 25% of its total assets in
obligations of domestic and foreign issuers which are denominated in
currencies other than the U.S. dollar, 10% of which may be invested in issuers
in countries with emerging markets and economies. A number of investment
strategies will be used to achieve the Fund's investment objective, including
market sector selection, determination of yield curve exposure, and issuer
selection. In addition, the Investment Adviser will attempt to take advantage
of pricing inefficiencies in the fixed-income markets.
The Index currently includes U.S. Government Securities and fixed-rate,
publicly issued, U.S. dollar-denominated fixed-income securities rated at
least BBB or Baa or in their equivalent ratings category by S&P or Moody's.
The securities currently included in the Index have at least one year
remaining to maturity; have an outstanding principal amount of at least $100
million; and are issued by the following types of issuers, with each category
receiving a different weighting in the Index: U.S. Treasury; agencies,
authorities or instrumentalities of the U.S. government; issuers of Mortgage-
Backed Securities; utilities; industrial issuers; financial institutions;
foreign issuers; and issuers of Asset-Backed Securities. The Index is a
trademark of Lehman Brothers. Inclusion of a security in the Index does not
imply an opinion by Lehman Brothers as to its attractiveness or
appropriateness for investment. Although Lehman Brothers obtains factual
information used in connection with the Index from sources which it considers
reliable, Lehman Brothers claims no responsibility for the accuracy,
completeness or timeliness of such information and has no liability to any
person for any loss arising from results obtained from the use of the Index
data.
CREDIT QUALITY. All U.S. dollar-denominated fixed-income securities
purchased by the Fund will be rated, at the time of investment, at least BBB
by S&P or Baa by Moody's. The non-U.S. dollar-denominated fixed-income
securities in which the Fund may invest will be rated, at the time of
investment, at least AA by S&P or Aa by Moody's. Fixed-income securities rated
BBB or Baa are considered medium-grade obligations with speculative
characteristics, and adverse economic conditions or changing circumstances may
weaken their issuers' capability to pay interest and repay principal.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund, to seek to hedge its exposure to
foreign currencies and to seek to enhance returns. These techniques include,
but are not limited to, the use of financial futures contracts, option
contracts (including options on futures), forward foreign currency exchange
contracts, currency options and futures, currency, mortgage and interest rate
swaps and interest rate floors, caps and collars. Currency and interest rate
management techniques involve risks different from those associated with
investing solely in U.S. dollar-denominated fixed-income securities of U.S.
issuers. It is expected that the Fund will use certain currency techniques to
seek to
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hedge against currency exchange rate fluctuations or to seek to increase total
return. The Fund may invest in custodial receipts, Municipal Securities and
convertible securities. The Fund may also employ other investment techniques
to seek to enhance returns, such as lending portfolio securities and entering
into mortgage dollar rolls, repurchase agreements and other investment
practices, described under "Investment Techniques."
GLOBAL INCOME FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high total return, emphasizing current income, and, to a lesser extent,
providing opportunities for capital appreciation.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the J.P. Morgan Global
Government Bond Index (hedged), plus or minus 2.5 years. In addition, under
normal interest rate conditions, the Fund's maximum duration will not exceed
7.5 years. The approximate interest rate sensitivity of the Fund is comparable
to a six-year bond.
INVESTMENT SECTOR. The Fund invests primarily in a portfolio of high quality
fixed-income securities of U.S. and foreign issuers and enters into
transactions in foreign currencies. Under normal market conditions, the Fund
will (i) have at least 30% of its total assets, after considering the effect
of currency positions, denominated in U.S. dollars and (ii) invest in
securities of issuers in at least three countries. The Fund may also invest up
to 10% of its total assets in issuers in countries with emerging markets and
economies. The Fund seeks to meet its investment objective by pursuing
investment opportunities in foreign and domestic fixed-income securities
markets and by engaging in currency transactions to seek to enhance returns
and to seek to hedge its portfolio against currency exchange rate
fluctuations.
The fixed-income securities in which the Fund may invest include: (i) U.S.
Government Securities and custodial receipts therefor; (ii) securities issued
or guaranteed by a foreign government or any of its political subdivisions,
authorities, agencies, instrumentalities or by supranational entities (i.e.,
international organizations designated or supported by governmental entities
to promote economic reconstruction or development, such as the World Bank);
(iii) corporate debt securities; (iv) certificates of deposit and bankers'
acceptances issued or guaranteed by, or time deposits maintained at, U.S. or
foreign banks (and their branches wherever located) having total assets of
more than $1 billion; (v) commercial paper and (vi) Mortgage-Backed and Asset-
Backed Securities.
CREDIT QUALITY. All securities purchased by the Fund will be rated, at the
time of investment, at least AA by S&P or Aa by Moody's. However, the Fund may
also invest in obligations of a sovereign issuer, denominated in the issuer's
own currency, rated at least A by S&P or Moody's. The Fund will invest at
least 50% of its total assets in securities rated, at the time of investment,
AAA by S&P or Aaa by Moody's.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund, to seek to hedge its exposure to
foreign currencies and to seek to enhance returns. These techniques include,
but are not limited to, the use of financial futures contracts, option
contracts (including options on futures), forward foreign currency exchange
contracts, currency options and futures, currency, mortgage and interest rate
swaps and interest rate floors, caps and collars. Currency and interest rate
management techniques involve risks different from those associated with
investing solely in U.S. dollar-denominated fixed-income securities of U.S.
issuers. It is expected that the Fund will use certain currency techniques to
seek to hedge against currency exchange rate fluctuations or to seek to
increase total return. While the Fund will have both long and short currency
positions, its net long and short foreign currency exposure will not exceed
the value
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of the Fund's total assets. To the extent that the Fund is fully invested in
foreign securities while also maintaining currency positions, it may be
exposed to greater combined risk. The Fund's net currency positions may expose
it to risks independent of its securities positions. The Fund may also employ
other investment techniques to seek to enhance returns, such as lending
portfolio securities and entering into mortgage dollar rolls, repurchase
agreements and other investment practices described under "Investment
Techniques."
The Fund may invest more than 25% of its total assets in the securities of
corporate and governmental issuers located in each of Canada, Germany, Japan,
and the United Kingdom as well as in the securities of U.S. issuers.
Concentration of the Fund's investments in such issuers will subject the Fund,
to a greater extent than if investment was more limited, to the risks of
adverse securities markets, exchange rates and social, political or economic
events which may occur in those countries. With respect to other countries,
not more than 25% of the Fund's total assets will be invested in securities of
issuers in any other foreign country.
HIGH YIELD FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income. Secondarily, the Fund may, in seeking current
income, also consider the potential for capital appreciation.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers High
Yield Bond Index, plus or minus 2.5 years. In addition, under normal interest
rate conditions, the Fund's maximum duration will not exceed 7.5 years. The
approximate interest rate sensitivity of the Fund is comparable to a 6-year
bond.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
65% of its total assets in high yield, fixed-income securities rated, at the
time of investment, below investment grade. Non-investment grade securities
are securities rated BB or below by S&P, Ba or below by Moody's, an equivalent
rating by another rating organization, or if unrated by a rating organization,
determined by the Investment Adviser to be of comparable quality. The Fund may
invest in all types of fixed-income securities, including senior and
subordinated corporate debt obligations (such as bonds, debentures, notes and
commercial paper), convertible and non-convertible corporate debt obligations,
and preferred stock. The Fund may invest up to 25% of its total assets in
obligations of domestic and foreign issuers (including securities of issuers
located in countries with emerging markets and economies) which are
denominated in currencies other than the U.S. dollar. Under normal market
conditions, the Fund may invest up to 35% of its total assets in investment
grade fixed-income securities, including U.S. Government Securities, Asset-
Backed and Mortgage-Backed Securities and corporate securities. The Fund may
also invest in common stocks, warrants, rights and other equity securities,
but will generally hold such equity investments only when debt or preferred
stock of the issuer of such equity securities is held by the Fund. A number of
investment strategies are used to seek to achieve the Fund's investment
objective, including market sector selection, determination of yield curve
exposure, and issuer selection. In addition, the Investment Adviser will
attempt to take advantage of pricing inefficiencies in the fixed-income
markets.
CREDIT QUALITY. The Fund invests primarily in high yield, fixed income
securities rated below investment grade. Non-investment grade securities
(commonly known as "junk bonds") tend to offer higher yields than higher rated
securities with similar maturities. Non-investment grade securities are,
however, considered speculative and generally involve greater price volatility
and greater risk of loss of principal and interest than higher rated
securities. See "Description of Securities." A description of the corporate
bond and preferred stock ratings is contained in Appendix B to the Additional
Statement.
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OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund, to seek to hedge its exposure to
foreign securities and to seek to enhance returns. These techniques include,
but are not limited to, the use of financial futures contracts, option
contracts (including options on futures), forward foreign currency exchange
contracts, currency options and futures, currency, mortgage and interest rate
swaps, and interest rate floors, caps and collars. Currency and interest rate
management techniques involve risks different from those associated with
investing solely in U.S. dollar-denominated fixed-income securities of U.S.
issuers. It is expected that the Fund will use currency techniques to seek to
hedge against currency exchange rate fluctuations or to seek to increase total
return. The Fund may also employ other investment techniques to seek to
enhance returns, such as lending portfolio securities and entering into
repurchase agreements and other investment practices described under
"Investment Techniques."
DESCRIPTION OF SECURITIES
U.S. GOVERNMENT SECURITIES
Each Fund may invest in U.S. Government Securities. Generally, these
securities include U.S. Treasury obligations and obligations issued or
guaranteed by U.S. government agencies, instrumentalities or sponsored
enterprises which are supported by (a) the full faith and credit of the U.S.
Treasury (such as the Government National Mortgage Association ("Ginnie
Mae")), (b) the right of the issuer to borrow from the U.S. Treasury (such as
securities of the Student Loan Marketing Association), (c) the discretionary
authority of the U.S. government to purchase certain obligations of the issuer
(such as the Federal National Mortgage Association ("Fannie Mae") and Federal
Home Loan Mortgage Corporation ("Freddie Mac")), or (d) only the credit of the
issuer. No assurance can be given that the U.S. government will provide
financial support to U.S. government agencies, instrumentalities or sponsored
enterprises in the future.
U.S. Government Securities also include Treasury receipts, zero coupon bonds
and other stripped U.S. Government Securities, where the interest and
principal components of stripped U.S. Government Securities are traded
independently. The most widely recognized program is the Separate Trading of
Registered Interest and Principal of Securities Program.
MORTGAGE-BACKED SECURITIES
CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES. Mortgage-Backed Securities
represent direct or indirect participations in, or are collateralized by and
payable from, mortgage loans secured by real property. Mortgagors can
generally prepay interest or principal on their mortgage whenever they choose.
Therefore, Mortgage-Backed Securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of
principal prepayments on the underlying loans. This can result in
significantly greater price and yield volatility than is the case with
traditional fixed-income securities. During periods of declining interest
rates, prepayments can be expected to accelerate, and thus impair a Fund's
ability to reinvest the returns of principal at comparable yields. Conversely,
in a rising interest rate environment, a declining prepayment rate will extend
the average life of many Mortgage-Backed Securities and prevent a Fund from
taking advantage of such higher yields.
FIXED RATE MORTGAGE LOANS. Generally, fixed-rate mortgage loans pay interest
at fixed annual rates and have original terms to maturity ranging from 5 to 40
years. Fixed-rate mortgage loans typically 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.
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ADJUSTABLE RATE MORTGAGE LOANS ("ARMS"). The Adjustable Rate Government Fund
will primarily, and the Short Duration Government, Government Income, Core
Fixed Income, Global Income and High Yield Funds may, invest in ARMs, which
are pass-through mortgage securities collateralized by mortgages with
adjustable rather than fixed coupon rates. ARMs generally provide for a fixed
initial mortgage interest rate for a set period. Thereafter, the interest
rates are subject to periodic adjustments based on changes to a designated
benchmark index.
ARMs allow a Fund to participate in increases in interest rates through
periodic increases in the securities' coupon rates. During periods of
declining interest rates, coupon rates may readjust downward resulting in
lower yields to a Fund. Therefore, the value of an ARM is unlikely to rise
during periods of declining interest rates to the same extent as fixed-rate
securities. Interest rate declines may result in accelerated prepayment of
mortgages with the result that proceeds from prepayments will be reinvested at
lower interest rates. During periods of rising interest rates, changes in the
coupon rate will lag behind changes in the market rate. ARMs are also
typically subject to maximum increases and decreases in the interest rate
adjustment which can be made on any one adjustment date, in any one year, or
during the life of the security. In the event of dramatic increases or
decreases in prevailing market interest rates, the value of a Fund's
investments in ARMs may fluctuate more substantially since these limits may
prevent the security from fully adjusting its interest rate to the prevailing
market rates.
U.S. GOVERNMENT GUARANTEED MORTGAGE-BACKED SECURITIES. Certain Mortgage-
Backed Securities are issued or guaranteed by the U.S. government, its
agencies, instrumentalities or sponsored enterprises. Such issuers include,
but are not limited to, Ginnie Mae, Fannie Mae and Freddie Mac. See "U.S.
Government Securities."
PRIVATELY ISSUED MORTGAGE-BACKED SECURITIES. The Government Income, Core
Fixed Income, Global Income and High Yield Funds may invest in Mortgage-Backed
Securities issued or sponsored by non-governmental entities. Privately issued
Mortgage-Backed Securities are generally backed by pools of conventional
(i.e., non-government guaranteed or insured) mortgage loans. Since such
Mortgage-Backed Securities normally are not guaranteed by an entity having the
credit standing of Ginnie Mae, Fannie Mae or Freddie Mac, in order to receive
a high quality rating from the rating organizations (i.e., S&P or Moody's),
they normally are structured with one or more types of "credit enhancement."
MULTIPLE CLASS MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE
OBLIGATIONS. The Adjustable Rate Government, Short Duration Government,
Government Income, Core Fixed Income, Global Income and High Yield Funds may
also invest in multiple class securities, including collateralized mortgage
obligations ("CMOs") and Real Estate Mortgage Investment Conduit ("REMIC")
pass-through or participation certificates. CMOs provide an investor with a
specified interest in the cash flow from a pool of underlying mortgages or of
other Mortgage-Backed Securities. CMOs are issued in multiple classes, each
with a specified fixed or floating interest rate and a final scheduled
distribution date. In most cases, payments of principal are applied to the CMO
classes in the order of their respective stated maturities, so that no
principal payments will be made on a CMO class until all other classes having
an earlier stated maturity date are paid in full. A REMIC is a CMO that
qualifies for special tax treatment under the Internal Revenue Code of 1986,
as amended (the "Code"), and invests in certain mortgages principally secured
by interests in real property and other permitted investments. The Funds do
not intend to purchase residual interests in REMICs.
STRIPPED MORTGAGE-BACKED SECURITIES. The Adjustable Rate Government, Short
Duration Government, Government Income, Core Fixed Income, Global Income and
High Yield Funds may invest in Stripped Mortgage-Backed Securities ("SMBS"),
which are derivative multiple class Mortgage-Backed Securities.
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SMBS are usually structured with two different classes; one that receives 100%
of the interest payments and the other that receives 100% of the principal
payments from a pool of mortgage loans. If the underlying mortgage loans
experience different than anticipated prepayments of principal, a Fund may
fail to fully recoup its initial investment in these securities. 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 loans
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.
ASSET-BACKED SECURITIES
The Government Income, Core Fixed Income, Global Income and High Yield Funds
may invest in Asset-Backed Securities. The principal and interest payments on
Asset-Backed Securities are collateralized by pools of assets such as auto
loans, credit card receivables, leases, installment contracts and personal
property. Such asset pools are securitized through the use of special purpose
trusts or corporations. Principal and interest payments may be credit enhanced
by a letter of credit, a pool insurance policy or a senior/subordinated
structure.
MUNICIPAL SECURITIES
GENERAL. Municipal Securities in which the Short Duration Tax-Free and
Municipal Income Funds and, to a limited extent, the Core Fixed Income and
High Yield Funds, invest consist of bonds, notes, commercial paper and other
instruments (including participation interests in such securities) issued by
or on behalf of states, territories and possessions of the United States
(including the District of Columbia) and their political subdivisions,
agencies or instrumentalities, the interest on which, in the opinion of bond
counsel for the issuers or counsel selected by the Investment Adviser, is
exempt from regular federal income tax (i.e., excluded from gross income for
federal income tax purposes but not necessarily exempt from federal
alternative minimum tax or from state or local taxes). Such securities may pay
fixed, variable or floating rates of interest. Municipal Securities are often
issued to obtain funds for various public purposes, including the construction
of a wide range of public facilities such as bridges, highways, housing,
hospitals, mass transportation, schools, streets and water and sewer works.
Other public purposes for which Municipal Securities may be issued include
refunding outstanding obligations, obtaining funds for general operating
expenses, and obtaining funds to lend to other public institutions and
facilities.
PRIVATE ACTIVITY BONDS. Municipal Securities also include "private activity
bonds" or industrial development bonds, which are issued by or on behalf of
public authorities to obtain funds for such projects as privately-operated
housing facilities, airport, mass transit or port facilities and sewage
disposal. In addition, proceeds of certain industrial development bonds are
used for constructing, equipping, repairing or improving privately operated
industrial or commercial facilities. The Short Duration Tax-Free and Municipal
Income Funds distributions attributable to the interest income from private
activity bonds may subject certain investors to the federal alternative
minimum tax.
MUNICIPAL LEASES AND CERTIFICATES OF PARTICIPATION. 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. Certificates of
participation represent undivided interests in municipal leases, installment
purchase agreements or other instruments. The primary risk associated with
municipal lease obligations and certificates of participation is that the
governmental lessee will fail to appropriate funds to enable it to meet its
payment obligations under the lease. Although the obligations may be secured
by the leased equipment or facilities, the disposition of the
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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 the Fund's original investment. To the extent
that a Fund invests in unrated municipal leases or participates in such
leases, the Trustees will monitor on an ongoing basis the credit quality
rating and risk of cancellation of such unrated leases. Certain municipal
lease obligations and certificates of participation may be deemed illiquid for
the purpose of a Fund's limitation on investments in illiquid securities.
PRE-REFUNDED MUNICIPAL SECURITIES. The interest and principal payments on
pre-refunded Municipal Securities are typically paid from the cash flow
generated from an escrow fund consisting of U.S. Government Securities. These
payments have been "pre-refunded" using the escrow fund.
INSURED SECURITIES. "Insured" Municipal Securities are those for which
scheduled payments of interest and principal are guaranteed by a private (non-
governmental) insurance company. The insurance entitles a Fund to receive only
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 net asset
value of a Fund's shares.
AUCTION RATE SECURITIES. Auction rate Municipal Securities permit the holder
to sell the securities in an auction at par value at specified intervals. The
dividend or interest is typically 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 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 the risk that an auction will fail due to insufficient
demand for the securities. A Fund will take the time remaining until the next
scheduled auction date into account for purposes of determining the
securities' duration.
CORPORATE DEBT OBLIGATIONS
The Government Income, Core Fixed Income, Global Income and High Yield Funds
may invest in corporate debt obligations. In addition to obligations of
corporations, corporate debt obligations include securities issued by banks
and other financial institutions. Corporate debt obligations are subject to
the risk of an issuer's inability to meet principal and interest payments on
the obligations.
CONVERTIBLE SECURITIES
The Core Fixed Income and High Yield Funds may invest in convertible
securities, including debt obligations, and for High Yield Fund preferred
stock, of an issuer convertible at a stated exchange rate into common stock of
the issuer. Convertible securities generally offer lower interest or dividend
yields than non-convertible securities of similar quality. 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. 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 market price 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 a Fund invests are subject to the same rating
criteria as its other investments in fixed-income securities.
PREFERRED STOCK, WARRANTS AND RIGHTS
The High Yield Fund may invest in preferred stock, warrants and rights.
Preferred stocks are securities that represent an ownership interest providing
the holder with claims on the issuer's earnings and assets before
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common stock owners but after bond owners. Unlike debt securities, the
obligations of an issuer of preferred stock, including dividend and other
payment obligations, may not typically be accelerated by the holders of such
preferred stock on the occurrence of an event of default (such as a covenant
default or filing of a bankruptcy petition) or other non-compliance by the
issuer with the terms of the preferred stock. Often, however, on the
occurrence of any such event of default or non-compliance by the issuer,
preferred stockholders will be entitled to gain representation on the issuer's
board of directors or increase their existing board representation. In
addition, preferred stockholders may be granted voting rights with respect to
certain issues on the occurrence of any event of default.
Warrants and other rights are options to buy a stated number of shares of
common stock at a specified price at any time during the life of the warrant.
The holders of warrants and rights have no voting rights, receive no dividends
and have no rights with respect to the assets of the issuer.
FOREIGN INVESTMENTS
FOREIGN SECURITIES. The Global Income Fund will, and the Core Fixed Income
and High Yield Funds may, invest in fixed-income securities of foreign issuers
denominated in any currency. However, the Core Fixed Income and High Yield
Funds will limit their investments in non-U.S. dollar-denominated fixed-income
securities to 25% of their total assets. This may offer potential benefits
that are not available from investing exclusively in U.S. dollar-denominated
domestic issues. Foreign countries may have economic policies or business
cycles different from those of the U.S. and markets for foreign fixed-income
securities do not necessarily move in a manner parallel to U.S. markets.
Investing in the securities of foreign issuers involves risks that are not
typically associated with investing in fixed-income securities of domestic
issuers quoted in U.S. dollars. Such investments may be affected by changes in
currency rates, changes in foreign or U.S. laws or restrictions applicable to
such investments and in exchange control regulations (e.g., currency
blockage). A decline in the exchange rate of the currency (i.e., weakening of
the currency against the U.S. dollar) in which a portfolio security is quoted
or denominated relative to the U.S. dollar would reduce the value of the
portfolio security. In addition, if the currency in which a Fund receives
dividends, interest or other payments declines in value against the U.S.
dollar before such income is distributed as dividends to shareholders or
converted to U.S. dollars, the Fund may have to sell portfolio securities to
obtain sufficient cash to pay such dividends. In addition, clearance and
settlement procedures may be different in foreign countries and, in certain
markets, such procedures have on occasion been unable to keep pace with the
volume of securities transactions, making it more difficult to conduct such
transactions.
The Core Fixed Income, Global Income and High Yield Funds may invest in an
issuer domiciled in one country yet issuing the security in the currency of
another country. The Funds may also invest in debt securities denominated in
the European Currency Unit ("ECU"), which is a "basket" consisting of
specified amounts in the currencies of certain of the twelve member states of
the European Community. The specific amounts of currencies comprising the ECU
may be adjusted by the Council of Ministers of the European Community from
time to time to reflect changes in relative values of the underlying
currencies. In addition, the Funds may invest in securities denominated in
other currency "baskets."
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to U.S.
issuers. There may be less publicly available information about a foreign
issuer than about a U.S. issuer. In addition, there is generally less
government regulation of foreign markets, companies and securities dealers
than in the U.S. Foreign securities markets may have substantially less volume
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than U.S. securities markets and securities of many foreign issuers may be
less liquid and more volatile than securities of comparable domestic issuers.
Furthermore, with respect to certain foreign countries, there is a possibility
of nationalization, expropriation or confiscatory taxation, imposition of
withholding or other taxes on dividend or interest payments (or, in some cases
capital gains), limitations on the removal of funds or other assets of a Fund,
political or social instability or diplomatic developments which could affect
investments in those countries.
FOREIGN GOVERNMENT SECURITIES. The Core Fixed Income, Global Income and High
Yield Funds may invest in debt obligations of foreign governments and
governmental agencies, including those of emerging countries. Investment in
sovereign debt obligations involves special risks not present in debt
obligations of corporate issuers. The issuer of the debt or the governmental
authorities that control the repayment of the debt may be unable or unwilling
to repay principal or interest when due in accordance with the terms of such
debt, and a Fund may have limited recourse in the event of a default. Periods
of economic uncertainty may result in the volatility of market prices of
sovereign debt, and in turn a Fund's net asset value, to a greater extent than
the volatility inherent in debt obligations of U.S. issuers. A sovereign
debtor's willingness or ability to repay principal and pay interest in a
timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's
policy toward international lenders and the political constraints to which a
sovereign debtor may be subject.
EMERGING MARKETS. The Core Fixed Income and Global Income Funds may invest
up to 10% and the High Yield Fund may invest up to 25% of their total assets
in securities of issuers located in countries with emerging economies or
securities markets ("emerging markets"). Political and economic structures in
many emerging markets may be undergoing significant evolution and rapid
development, and emerging markets may lack the social, political and economic
stability characteristic of more developed countries. As a result, the risks
relating to investments in foreign securities described above, including the
possibility of nationalization, expropriation and confiscatory taxation, may
be heightened. In addition, unanticipated political and social developments
may affect the value of the Fund's investments in emerging markets and the
availability to the Fund of additional investments in such countries. The
small size and inexperience of the securities markets in certain emerging
markets and the limited volume of trading in securities in those countries may
make the Fund's investments in such countries less liquid and more volatile
than investments in countries with more developed securities markets (such as
the U.S., Japan and most Western European countries). See the Additional
Statement for further information regarding a Fund's investments in emerging
markets.
FOREIGN CURRENCY TRANSACTIONS. Because investment in foreign issuers by the
Core Fixed Income, Global Income and High Yield Funds will usually involve
currencies of foreign countries, and because the Funds may have currency
exposure independent of their securities positions, the value of the assets of
a Fund as measured in U.S. dollars will be affected by changes in foreign
currency exchange rates. A Fund may, to the extent it invests in foreign
securities, purchase or sell forward foreign currency exchange contracts for
hedging purposes and to seek to protect against anticipated changes in future
foreign currency exchange rates. A Fund also may enter into such contracts to
seek to increase total return when the Investment Adviser anticipates that the
foreign currency will appreciate or depreciate in value, but securities
denominated or quoted in that currency do not present attractive investment
opportunities and are not held in the Fund's portfolio. When entered into to
seek to increase total return, forward foreign currency exchange contracts are
considered speculative. The Funds may also engage in cross-hedging by using
forward contracts in a currency different from that in which the hedged
security is denominated or quoted if the Investment Adviser determines that
there is a pattern of correlation between the two currencies. If a Fund enters
into a forward foreign currency exchange contract to buy foreign
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currency for any purpose or to sell foreign currency to seek to increase total
return, the Fund will be required to place cash or liquid assets in a
segregated account with the Fund's custodian in an amount equal to the value
of the Fund's total assets committed to the consummation of the forward
contract. A Fund will incur costs in connection with conversions between
various currencies. A Fund may hold foreign currency received in connection
with investments in foreign securities when, in the judgment of the Investment
Adviser, it would be beneficial to convert such currency into U.S. dollars at
a later date, based on anticipated changes in the relevant exchange rate.
Currency exchange rates may fluctuate significantly over short periods of
time causing, along with other factors, a Fund's net asset value to fluctuate.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments
in different countries, actual or anticipated changes in interest rates and
other complex factors, as seen from an international perspective. Currency
exchange rates also can be affected unpredictably by the intervention of U.S.
or foreign governments or central banks, or the failure to intervene, or by
currency controls or political developments in the U.S. or abroad. To the
extent that a substantial portion of a Fund's total assets, adjusted to
reflect the Fund's net position after giving effect to currency transactions,
is denominated or quoted in the currencies of foreign countries, the Fund will
be more susceptible to the risk of adverse economic and political developments
within those countries.
The market in forward foreign currency exchange contracts, currency swaps
and other privately negotiated currency instruments offers less protection
against defaults by the other party to such instruments than is available for
currency instruments traded on an exchange. Such contracts are subject to the
risk that the counterparty to the contract will default on its obligations.
Since these contracts are not guaranteed by an exchange or clearinghouse, a
default on a 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 forward foreign currency exchange contracts, currency swaps or
other privately negotiated currency instruments 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 Investment Adviser.
The Core Fixed Income, Global Income and High Yield Fund's use of foreign
currency management techniques in emerging markets may be limited. Due to the
limited market for these instruments in emerging markets, the Investment
Adviser does not currently anticipate that a significant portion of the Fund's
currency exposure in emerging markets, if any, will be covered by such
instruments. For a discussion of such instruments and the risks associated
with their use, see "Investment Objectives and Policies" in the Additional
Statement.
STRUCTURED SECURITIES
The Core Fixed Income, Global Income and High Yield Funds may invest in
structured securities. The value of the principal of and/or interest on such
securities is determined by reference to changes in the value of specific
currencies, interest rates, commodities, indices or other financial indicators
(the "Reference") or the relative change in two or more References. The
interest rate or the principal amount payable upon maturity or redemption may
be increased or decreased depending upon changes in the applicable Reference.
The terms of the structured securities may provide that in certain
circumstances no principal is due at maturity and, therefore, result in the
loss of a Fund's investment. Structured securities may be positively or
negatively indexed, so that appreciation of the Reference may produce an
increase or decrease in the interest rate or value of the security at
maturity. In addition, changes in the interest rates or the value of the
security at maturity may be a multiple of changes in the
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value of the Reference. Consequently, structured securities may entail a
greater degree of market risk than other types of fixed-income securities.
Structured securities may also be more volatile, less liquid and more
difficult to accurately price than less complex securities.
ZERO COUPON, DEFERRED INTEREST, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS
Each Fund may invest in zero coupon, deferred interest, and capital
appreciation bonds. These are securities issued at a discount from their face
value because interest payments are typically postponed until maturity. The
amount of the discount rate varies depending on factors including the time
remaining until maturity, prevailing interest rates, the security's liquidity
and the issuer's credit quality. These securities also may take the form of
debt securities that have been stripped of their interest payments. Each Fund
may also invest in pay-in-kind securities which are securities that have
interest payable by the delivery of additional securities. A portion of the
discount with respect to stripped tax-exempt securities or their coupons may
be taxable. The market prices of zero coupon, deferred interest, pay-in-kind
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. A Fund's investments in zero coupon,
deferred interest, pay-in-kind and capital appreciation bonds or stripped
securities may require the Fund to sell certain of its portfolio securities to
generate sufficient cash to satisfy certain income distribution requirements.
See "Taxation" in the Additional Statement.
RISK FACTORS
INTEREST RATE RISK. When interest rates decline, the market value of fixed-
income securities tends to increase. Conversely, when interest rates increase,
the market value of fixed-income securities tends to decline. Volatility of a
security's market value will differ depending upon the security's duration,
the issuer and the type of instrument.
DEFAULT RISK/CREDIT RISK. Investments in fixed-income securities are subject
to the risk that the issuer could default on its obligations and a Fund could
sustain losses on such investments. A default could impact both interest and
principal payments.
CALL RISK AND EXTENSION RISK. Fixed-income securities may be subject to both
call risk and extension risk. Call risk (i.e., where the issuer exercises its
right to pay principal on an obligation earlier than scheduled) causes cash
flow to be returned earlier than expected. This typically results when
interest rates have declined and a Fund will suffer from having to reinvest in
lower yielding securities. Extension risk (i.e., where the issuer exercises
its right to pay principal on an obligation later than scheduled) causes cash
flows to be returned later than expected. This typically results when interest
rates have increased and a Fund will suffer from the inability to invest in
higher yielding securities. Certain types of U.S. Government, Asset-Backed,
corporate, foreign, Mortgage-Backed and Municipal Securities have this call
and/or extension risk.
The investment characteristics of Mortgage-Backed Securities and Asset-
Backed Securities differ from those of traditional fixed-income securities
because they generally have both call risk (also known as prepayment risk) and
extension risk. Homeowners have the option to prepay their mortgage.
Therefore, the duration of a security backed by home mortgages can either
shorten (call risk) or lengthen (extension risk). Investors are exposed to the
fluctuating principal and interest payments associated with such securities.
In general, if interest
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rates on new mortgage loans fall sufficiently below the interest rates on
existing outstanding mortgage loans, the rate of prepayment would be expected
to increase. Conversely, if mortgage loan interest rates rise above the
interest rates on existing outstanding mortgage loans, the rate of prepayment
would be expected to decrease.
ARMs also have the risk of prepayments, which will have a greater impact on
the Adjustable Rate Government Fund. The rate of principal prepayments with
respect to ARMs has fluctuated in recent years. As with fixed-rate mortgage
loans, ARMs may be subject to a greater rate of principal repayments in a
declining interest rate environment. For example, if prevailing interest rates
fall significantly, ARMs could be subject to higher prepayment rates (than if
prevailing interest rates remain constant or increase) because the
availability of low fixed-rate mortgages may encourage mortgagors to refinance
their ARMs to "lock-in" a fixed-rate mortgage. Conversely, if prevailing
interest rates rise significantly, ARMs may prepay slower. As with fixed-rate
mortgages, ARM prepayment rates vary in both stable and changing interest rate
environments. There are certain ARMs where the homeowner's payments do not
fully cover interest, so the principal balance increases over time. These
"negative amortizing" ARMs may be subject to greater default risk.
DERIVATIVE MORTGAGE-BACKED SECURITIES. Because derivative Mortgage-Backed
Securities (such as principal-only (POs), interest-only (IOs) or inverse
floating rate securities) are more exposed to mortgage prepayments, they
generally involve a greater amount of risk. Small changes in prepayments can
significantly impact the cash flow and the market value of these securities.
The risk of faster than anticipated prepayments generally adversely affects
IOs, super floaters and premium priced Mortgage-Backed Securities. The risk of
slower than anticipated prepayments generally adversely affects POs, floating-
rate securities subject to interest rate caps, support tranches and discount
priced Mortgage-Backed Securities. In addition, particular derivative
securities may be leveraged such that their exposure (i.e., price sensitivity)
to interest rate and/or prepayment risk is magnified.
TAX RISK OF MUNICIPAL SECURITIES. Due to Municipal Securities' tax-exempt
status, their yields and market values may be more adversely impacted by
changes in tax rates and policies than taxable fixed-income securities.
Because interest income from Municipal Securities is not subject to regular
federal income taxation, the attractiveness of Municipal Securities in
relation to other investment alternatives is affected by changes in federal
income tax rates applicable to, or the continuing federal income tax-exempt
status of, such interest income. Any proposed or actual changes in such rates
or exempt status, therefore, can significantly affect the demand for and
supply, liquidity and marketability of Municipal Securities, which could in
turn affect a Fund's ability to acquire and dispose of Municipal Securities at
desirable yield and price levels.
RISKS OF INVESTING IN NON-INVESTMENT GRADE FIXED-INCOME SECURITIES. Non-
investment grade fixed-income securities are considered predominantly
speculative by traditional investment standards. In some cases, these
obligations may be highly speculative and have poor prospects for reaching
investment grade standing. Non-investment grade fixed-income securities and
unrated securities of comparable credit quality (commonly known as "junk
bonds") are subject to the increased risk of an issuer's inability to meet
principal and interest obligations. These securities, also referred to as high
yield securities, may be subject to greater price volatility due to such
factors as specific corporate developments, interest rate sensitivity,
negative perceptions of the junk bond markets generally and less secondary
market liquidity.
Non-investment grade fixed-income securities are often issued in connection
with a corporate reorganization or restructuring or as part of a merger,
acquisition, takeover or similar event. They are also issued by less
established companies seeking to expand. Such issuers are often highly
leveraged and generally less able than
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more established or less leveraged entities to make scheduled payments of
principal and interest in the event of adverse developments or business
conditions.
The market value of non-investment grade fixed-income securities tends to
reflect individual corporate developments to a greater extent than that of
higher rated securities which react primarily to fluctuations in the general
level of interest rates. As a result, a Fund's ability to achieve its
investment objectives may depend to a greater extent on the Investment
Adviser's judgment concerning the creditworthiness of issuers than funds which
invest in higher-rated securities. Issuers of non-investment grade fixed-
income securities may not be able to make use of more traditional methods of
financing and their ability to service debt obligations may be more adversely
affected than issuers of higher-rated securities by economic downturns,
specific corporate developments or the issuer's inability to meet specific
projected business forecasts. Negative publicity about the junk bond market
and investor perceptions regarding lower rated securities, whether or not
based on fundamental analysis, may depress the prices for such securities.
A holder's risk of loss from default is significantly greater for non-
investment grade fixed-income securities than is the case for holders of other
debt securities because such non-investment grade securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities. Investment by a Fund in defaulted securities poses
additional risk of loss should nonpayment of principal and interest continue
in respect of such securities. Even if such securities are held to maturity,
recovery by a Fund of its initial investment and any anticipated income or
appreciation is uncertain.
The secondary market for non-investment grade fixed-income securities is
concentrated in relatively few market makers and is dominated by institutional
investors, including mutual funds, insurance companies and other financial
institutions. Accordingly, the secondary market for such securities is not as
liquid as, and is more volatile than, the secondary market for higher-rated
securities. In addition, market trading volume for high yield fixed-income
securities is generally lower and the secondary market for such securities
could contract under adverse market or economic conditions, independent of any
specific adverse changes in the condition of a particular issuer. These
factors may have an adverse effect on the market price and a Fund's ability to
dispose of particular portfolio investments. A less liquid secondary market
also may make it more difficult for a Fund to obtain precise valuations of the
high yield securities in its portfolio.
Credit ratings issued by credit rating agencies are designed to evaluate the
safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities
and, therefore, may not fully reflect the true risks of an investment. In
addition, credit rating agencies may or may not make timely changes in a
rating to reflect changes in the economy or in the conditions of the issuer
that affect the market value of the security. Consequently, credit ratings are
used only as a preliminary indicator of investment quality. Investments in
non-investment grade and comparable unrated obligations will be more dependent
on the Investment Adviser's credit analysis than would be the case with
investments in investment-grade debt obligations. The Investment Adviser
employs its own credit research and analysis, which includes a study of
existing debt, capital structure, ability to service debt and to pay
dividends, the issuer's sensitivity to economic conditions, its operating
history and the current trend of earnings. The Investment Adviser continually
monitors the investments in a Fund's portfolio and evaluates whether to
dispose of or to retain non-investment grade and comparable unrated securities
whose credit ratings or credit quality may have changed.
OTHER RISKS. Floating-rate derivative debt securities present more complex
types of interest rate risks. For example, range floaters are subject to the
risk that the coupon will be reduced below market rates if a designated
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interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to lower prices in the event of an
unfavorable change in the spread between two designated interest rates.
Asset-Backed Securities present certain credit risks that are not presented
by Mortgage-Backed Securities because Asset-Backed Securities generally do not
have the benefit of a security interest in collateral that is comparable to
mortgage assets. There is the possibility that, in some cases, recoveries on
repossessed collateral may not be available to support payments on these
securities.
FOREIGN RISKS. See "Foreign Securities" for a description of the risks of
investing in foreign securities and currencies.
INVESTMENT TECHNIQUES
MORTGAGE DOLLAR ROLLS. The Adjustable Rate Government, Short Duration
Government, Government Income, Core Fixed Income and Global Income 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 substantially similar (same type, coupon and
maturity) but not identical securities on a specified future date. During the
roll period, the Fund loses the right to receive principal and interest paid
on the securities sold. However, the 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 or fee income plus the interest earned
on the cash proceeds of the securities sold until the settlement date for 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 the Fund. Successful use
of mortgage dollar rolls depends upon the Investment Adviser's ability to
predict correctly interest rates and mortgage prepayments. There is no
assurance that mortgage dollar rolls can be successfully employed. The Fund
will hold and maintain in a segregated account until the settlement date cash
or liquid assets in an amount equal to the forward purchase price. For
financial reporting and tax purposes, each Fund treats 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.
OPTIONS ON SECURITIES AND SECURITIES INDICES. Each Fund may write (sell)
covered call and put options and purchase put and call options on any
securities in which it may invest or on any securities index composed of
securities in which it may invest. 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 use of options to seek to increase total return involves the
risk of loss if the Investment Adviser is incorrect in its expectation of
fluctuations in securities prices or interest rates. The successful use of
options for hedging purposes also depends in part on the ability of the
Investment Adviser to manage future price fluctuations and the degree of
correlation between the options and securities markets. If the Investment
Adviser is incorrect in its expectation of changes in securities prices or
determination of the correlation between the securities indices on which
options are written and purchased and the securities in a Fund's investment
portfolio, the investment performance of the Fund will be less favorable than
it would have been in the absence of such options transactions. The writing of
options could increase a Fund's portfolio turnover rate and, therefore,
associated brokerage commissions or spreads.
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OPTIONS ON FOREIGN CURRENCIES. The Core Fixed Income, Global Income and High
Yield Funds may, to the extent they invest in foreign securities, purchase and
sell (write) put and call options on foreign currencies for the purpose of
protecting against declines in the U.S. dollar value of foreign portfolio
securities and against increases in the U.S. dollar cost of foreign securities
to be acquired. In addition, the Core Fixed Income, Global Income and High
Yield Funds may use options on currency to cross-hedge, which involves writing
or purchasing options on one currency to hedge against changes in exchange
rates for a different currency, if there is a pattern of correlation between
the two currencies. As with other kinds of option transactions, however, the
writing of an option on foreign currency will constitute only a partial hedge,
up to the amount of the premium received. If an option that a Fund has written
is exercised, the Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against exchange rate fluctuations; however, in the event of exchange rate
movements adverse to a Fund's position, the Fund may forfeit the entire amount
of the premium plus related transaction costs. In addition to purchasing put
and call options for hedging purposes, a Fund may purchase call or put options
on currency to seek to increase total return when the Investment Adviser
anticipates that the currency will appreciate or depreciate in value, but the
securities quoted or denominated in that currency do not present attractive
investment opportunities and are not held in the Fund's portfolio. When
purchased or sold to seek to increase total return, options on currencies are
considered speculative. Options on foreign currencies to be written or
purchased by the Funds will be traded on U.S. and foreign exchanges or over-
the-counter.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. To seek to increase
total return, to hedge against changes in interest rates or securities prices,
or in the case of the Core Fixed Income, Global Income and High Yield Funds,
currency exchange rates, a 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 such contracts and options. The futures
contracts may be based on various securities (such as U.S. Government
Securities), foreign currencies, in the case of the Core Fixed Income, Global
Income and High Yield Funds, securities indices and other financial
instruments and indices. A Fund will engage in futures and related options
transactions for bona fide hedging purposes as defined in regulations of the
Commodity Futures Trading Commission or to seek to increase total return to
the extent permitted by such regulations. A Fund may not purchase or sell
futures contracts or purchase or sell related options to seek to increase
total return, except for closing purchase or sale transactions, if immediately
thereafter the sum of the amount of initial margin deposits and premiums paid
on a Fund's outstanding positions in futures and related options entered into
for the purpose of seeking to increase total return would exceed 5% of the
market value of a Fund's net assets. These transactions 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
segregate and maintain cash or liquid assets with a value equal to the amount
of the Fund's obligations.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. See
"Investment Techniques--Futures Contracts and Options on Futures Contracts" in
the Additional Statement. Thus, while a Fund may benefit from the use of
futures and options on futures, unanticipated changes in interest rates,
securities prices or currency exchange rates may result in a poorer overall
performance than if the Fund had not entered into any futures contracts or
options transactions. Because perfect correlation between a futures position
and portfolio position which is intended to be protected is impossible to
achieve, the desired protection may not be obtained and a Fund may be exposed
to risk of loss. The loss incurred by a Fund in entering into futures
contracts and in writing call options on futures is potentially unlimited and
may exceed the amount of the premium received. Futures markets are highly
volatile and the use of futures may increase the volatility of a Fund's net
asset value. The profitability of a Fund's trading in futures
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to seek to increase total return depends upon the ability of the Investment
Adviser to correctly analyze the futures markets. In addition, because of the
low margin deposits normally required in futures trading, a relatively small
price movement in a futures contract may result in substantial losses to a
Fund. Further, futures contracts and options on futures may be illiquid, and
exchanges may limit fluctuations in futures contract prices during a single
day.
CURRENCY SWAPS. The Core Fixed Income, Global Income and High Yield Funds
may enter into currency swaps for hedging purposes or to seek to increase
total return. Currency swaps involve the exchange by a Fund with another party
of their respective rights to make or receive payments in specified
currencies. Currency swaps usually involve the delivery of a gross payment
stream in one designated currency in exchange for the gross payment stream in
another designated currency. Therefore, the entire payment stream under a
currency swap is subject to the risk that the other party to the swap will
default on its contractual delivery obligations. A Fund will not enter into
swap transactions unless the unsecured commercial paper, senior debt or
claims-paying ability of the other party thereto is rated either AA or A-1 or
better by S&P or Aa or P-1 or better by Moody's, or, if unrated by such rating
organizations, determined to be of comparable quality by the Investment
Adviser. The use of currency swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Investment Adviser is
incorrect in its forecasts of 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. The staff of the SEC currently take the
position that swaps are illiquid and thus subject to a Fund's limitation on
investments in illiquid securities.
RISKS OF DERIVATIVE TRANSACTIONS. A Fund's transactions, if any, in options,
futures, options on futures, swap transactions, interest rate caps, floors and
collars, structured securities, inverse floating-rate securities and currency
forward contracts involve certain risks, including a possible lack of
correlation between changes in the value of hedging instruments and the
portfolio assets being hedged, the potential illiquidity of the markets for
derivative instruments, the risks arising from the margin requirements and
related leverage factors associated with such transactions. The use of these
management techniques to seek to increase total return may be regarded as a
speculative practice and involves the risk of loss if the Investment Adviser
is incorrect in its expectation of fluctuations in securities prices, interest
rates or currency prices. A Fund's use of certain derivative transactions may
be limited by the requirements of the Code for qualification as a regulated
investment company.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. Each Fund may purchase when-
issued securities. When-issued transactions arise when securities are
purchased by a Fund with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous price and yield to
the Fund at the time of entering into the transaction. Each Fund may also
purchase securities on a forward commitment basis; that is, make contracts to
purchase securities for a fixed price at a future date beyond the customary
three-day settlement. A 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 assets 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. The purchase of securities on a when-
issued or forward commitment basis involves a risk of loss if the value of the
security to be purchased declines prior to the settlement date. Although a
Fund would generally purchase securities on a when-issued or forward
commitment basis with the intention of acquiring securities for its portfolio,
a Fund may dispose of when-issued securities or forward commitments prior to
settlement if the Investment Adviser deems it appropriate to do so.
ILLIQUID AND RESTRICTED SECURITIES. A Fund may not invest more than 15% of
its net assets in illiquid investments, which includes securities (both
foreign and domestic) that are not readily marketable, swap
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transactions, certain SMBS, certain municipal leases and participation
interests, repurchase agreements maturing in more than seven days, time
deposits with a notice or demand period of more than seven days and certain
restricted securities, unless it is determined, based upon the continuing
review of the trading markets for a specific restricted security, that such
restricted security is eligible for resale under Rule 144A under the
Securities Act of 1933 and, therefore, is liquid. The Trustees have adopted
guidelines and delegated to the Investment Adviser the daily function of
determining and monitoring the liquidity of portfolio securities. The
Trustees, however, retain oversight focusing on factors such as valuation,
liquidity and availability of information and are ultimately responsible for
each determination. Investing in restricted securities eligible for resale
pursuant to Rule 144A may decrease the liquidity 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 and illiquid securities normally reflect a discount, which may be
significant, from the market price of comparable securities for which a liquid
market exists.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements with
dealers in U.S. Government Securities and member banks of the Federal Reserve
System which furnish collateral at least equal in value or market price to the
amount of their repurchase obligation. The Core Fixed Income, Global Income
and High Yield Funds may also enter into repurchase agreements involving
certain foreign government securities. If the other party or "seller"
defaults, a Fund might suffer a loss to the extent that the proceeds from the
sale of the underlying securities and other collateral held by the Fund in
connection with the related repurchase agreement are less than the repurchase
price. In addition, in the event of bankruptcy of the seller or failure of the
seller to repurchase the securities as agreed, a Fund could suffer losses,
including loss of interest on or principal of the security and costs
associated with delay and enforcement of the repurchase agreement. The
Trustees have reviewed and approved certain counterparties whom they believe
to be creditworthy and have authorized the Funds to enter into repurchase
agreements with such counterparties. In addition, each Fund, together with
other registered investment companies having management agreements with the
Investment Adviser, 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.
TEMPORARY INVESTMENTS. Each Fund may, for temporary defensive purposes,
invest up to 100% of its total assets in (a) U. S. Government Securities or
(b) repurchase agreements collateralized by U.S. Government Securities. The
Short Duration Tax-Free and Municipal Income Funds may for temporary defensive
purposes depart from their stated investment objectives and invest more than
20% of its net assets in taxable investments. The High Yield Fund may for
temporary defensive purposes invest in investment grade securities.
MISCELLANEOUS TECHNIQUES
In addition to the techniques and investments described above, each Fund
may, with respect to no more than 5% of its net assets, engage in the
following techniques and investments: (i) portfolio securities lending, (ii)
mortgage swaps (other than Short Duration Tax-Free and Municipal Income Funds)
and interest rate swaps, caps, floors and collars, (iii) inverse floating-rate
securities, (iv) yield curve options, (v) other investment companies, (vi)
custodial receipts and (vii) with respect to the Short Duration Tax-Free and
Municipal Income Funds, tender option bonds and standby commitments. For more
information, see the Additional Statement.
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INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions that are described
in detail under "Investment Restrictions" in the Additional Statement.
Fundamental investment restrictions of a Fund cannot be changed without
approval of a majority of the outstanding shares of that Fund. Each Fund's
investment objectives and all policies not specifically designated as
fundamental are non-fundamental and may be changed without shareholder
approval. If there is a change in a Fund's investment objectives, shareholders
should consider whether that Fund still remains an appropriate investment in
light of their then current financial positions and needs.
The Short Duration Tax-Free and Municipal Income Funds' policy to invest,
under normal market conditions, at least 80% of its net assets in Municipal
Securities, the interest on which is exempt from regular federal income tax,
is fundamental and may not be changed without shareholder approval. For more
information on a Fund's investment restrictions, an investor should obtain the
Additional Statement.
NON-DIVERSIFICATION STATUS. Since the Global Income Fund is "non-
diversified" under the Act, it is subject only to certain federal tax
diversification requirements. Under federal tax laws, the Global Income Fund
may, with respect to 50% of its total assets, invest up to 25% of its total
assets in the securities of any issuer (except that this limitation does not
apply to U.S. Government Securities). With respect to the remaining 50% of the
Fund's total assets, (1) the Fund may not invest more than 5% of its total
assets in the securities of any one issuer (other than the U.S. government),
and (2) the Fund may not acquire more than 10% of the outstanding voting
securities of any one issuer. These tests apply at the end of each quarter of
its taxable year and are subject to certain conditions and limitations under
the Code. Since the Global Income Fund is not diversified under the Act, it
will be more susceptible to adverse developments affecting any single issuer.
The Adjustable Rate Government, Short Duration Government, Short Duration Tax-
Free, Government Income, Municipal Income, Core Fixed Income and High Yield
Funds are, in addition to these tax diversification requirements, also subject
to the diversification requirements arising out of their diversified status
under the Act.
PORTFOLIO TURNOVER
Each Fund may engage in active short-term trading to benefit from yield
disparities among different issues of securities or among the markets for
fixed-income securities, or for other reasons. It is anticipated that the
portfolio turnover rate of each Fund will vary from year to year. It is
anticipated that the annual portfolio turnover rate for the High Yield Fund
will generally not exceed 150%. The portfolio turnover rate is computed by
dividing the lesser of the dollar amount of securities purchased or securities
sold (excluding all securities whose maturities at acquisition are one year or
less) by the average monthly value of such securities owned during the year. A
100% turnover rate would occur, for example, if all of the securities held by
a Fund were sold and replaced within one year. The Investment Adviser will not
consider the portfolio turnover rate a limiting factor in making investment
decisions for a Fund consistent with the Fund's investment objectives and
portfolio management policies. A high rate of portfolio turnover results in
increased transaction costs to a Fund. The portfolio turnover rate includes
the effect of entering into mortgage dollar rolls. See "Financial Highlights"
for a statement of each Fund's historical portfolio turnover rates.
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MANAGEMENT
TRUSTEES AND OFFICERS
The Trustees are responsible for deciding matters of general policy and
reviewing the actions of the Investment Advisers, distributor and transfer
agent. The officers of the Trust conduct and supervise each Fund's daily
business operations. The Additional Statement contains information as to the
identity of, and other information about, the Trustees and officers of the
Trust.
INVESTMENT ADVISERS
INVESTMENT ADVISERS. Goldman Sachs Funds Management, L.P., One New York
Plaza, New York, New York 10004, a Delaware limited partnership, which is an
affiliate of Goldman Sachs, serves as investment adviser to the Short Duration
Government and Adjustable Rate Government Funds. Goldman Sachs Funds
Management, L.P. registered as an investment adviser in 1990. Goldman Sachs
Asset Management, One New York Plaza, New York, New York 10004, a separate
operating division of Goldman Sachs, serves as the investment adviser to the
Short Duration Tax-Free, Government Income, Municipal Income, Core Fixed
Income and High Yield Funds. Goldman Sachs registered as an investment adviser
in 1981. Goldman Sachs Asset Management International, 133 Peterborough Court,
London EC4A 2BB, England, an affiliate of Goldman Sachs, serves as investment
adviser to the Global Income Fund. Goldman Sachs Asset Management
International became a member of the Investment Management Regulatory
Organization Limited in 1990 and registered as an investment adviser in 1991.
As of , 1997, GSAM, GSFM and GSAMI, together with their affiliates, acted
as investment adviser, administrator or distributor for assets in excess of
$ billion.
Under a Management Agreement with each Fund, the applicable Investment
Adviser, subject to the general supervision of the Trustees, provides day-to-
day advice as to the Fund's portfolio transactions. Goldman Sachs has agreed
to permit the Trust to use the name "Goldman Sachs" or a derivative thereof as
part of each Fund's name for as long as a Fund's Management Agreement is in
effect.
In performing its investment advisory services, each Investment Adviser,
while remaining ultimately responsible for the management of the Funds, is
able to draw upon the research and expertise of its affiliate offices for
portfolio decisions and management with respect to certain portfolio
securities. In addition, the Investment Advisers will have access to the
research of, and proprietary technical models developed by, Goldman Sachs and
may apply quantitative and qualitative analysis in determining the appropriate
allocations among the categories of issuers and types of securities.
Under the Management Agreement, each Investment Adviser also: (i) supervises
all non-advisory operations of each Fund that it advises; (ii) provides
personnel to perform such executive, administrative and clerical services as
are reasonably necessary to provide effective administration of each Fund;
(iii) arranges for at each Fund's expense (a) the preparation of all required
tax returns, (b) the preparation and submission of reports to existing
shareholders, (c) the periodic updating of prospectuses and statements of
additional information and (d) the preparation of reports to be filed with the
SEC and other regulatory authorities; (iv) maintains each Fund's records; and
(v) provides the Fund with office space and all necessary office equipment and
services.
ADJUSTABLE RATE GOVERNMENT AND SHORT DURATION GOVERNMENT FUNDS. The Funds'
portfolio manager is Jonathan A. Beinner. Mr. Beinner is a Vice President of
Goldman Sachs and Co-Head of GSAM's U.S. Fixed
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<PAGE>
Income Department. Mr. Beinner joined the Investment Adviser in 1990 after
working in the trading and arbitrage group of Franklin Savings Association.
GOVERNMENT INCOME AND CORE FIXED INCOME FUNDS. The Funds' portfolio managers
are Jonathan A. Beinner and Richard C. Lucy. See above for information about
Mr. Beinner. Messrs. Beinner and Lucy each specialize in investing in a
particular type of security the Fund may hold. Mr. Lucy is a Vice President of
Goldman Sachs and Co-Head of GSAM's U.S. Fixed Income Department. Mr. Lucy
joined the Investment Adviser in 1992 after spending nine years managing fixed
income assets at Brown Brothers Harriman & Co.
SHORT DURATION TAX-FREE AND MUNICIPAL INCOME FUNDS. The Funds' portfolio
managers are Benjamin S. Thompson and Elisabeth Schupf Lonsdale. Mr. Thompson
and Ms. Lonsdale each specialize in municipal securities. Mr. Thompson's
responsibilities include developing investment strategy and structuring
portfolios. Ms. Lonsdale is also responsible for GSAM's municipal credit
research. Mr. Thompson worked in the institutional sales and marketing group
at GSAM until he joined the fixed-income team in 1993. Prior to joining GSAM
in early 1992, Mr. Thompson worked in the Structured Finance Group of the
Chase Manhattan Bank. Before rejoining Goldman Sachs in 1995, Ms. Lonsdale was
a Director of Fitch Investors Service evaluating the credit ratings of tax-
backed issues. Prior to that, she worked for ten years in the Goldman Sachs
Municipal Finance Department.
GLOBAL INCOME FUND. The Fund's portfolio managers are Stephen Fitzgerald and
Andrew Wilson. Mr. Fitzgerald joined GSAMI in 1992 and is an Executive
Director and Chief Investment Officer for international fixed income. Prior to
1992, he spent two years managing multi-currency fixed-income and balanced
portfolios at Invesco MIM Limited, where he was a senior member of the
derivative products group. Mr. Wilson joined GSAMI in 1995 and is Executive
Director and Portfolio Manager for international fixed income. Prior to
joining GSAMI, he spent three years as an Assistant Director at Rothschild
Asset Management where he was responsible for managing global and
international bond portfolios, with specific focus on the U.S., Canadian,
Australian and Japanese economies. Prior to his employment at Rothschild, Mr.
Wilson spent seven years at the Reserve Bank of New Zealand, his most recent
position as Trading Manager of foreign reserves management. Mr. Wilson's
employment at the Reserve Bank at New Zealand also included a two year
assignment to the foreign investment unit at the Bank of England in London.
It is the responsibility of the Investment Adviser to make investment
decisions for a Fund and to place the purchase and sale orders for a Fund's
portfolio transactions in U.S. and foreign securities and currency markets.
Such orders may be directed to any broker including, to the extent and in the
manner permitted by applicable law, Goldman Sachs or its affiliates. In
effecting purchases and sales of portfolio securities for the Funds, the
Investment Advisers will seek the best price and execution of a Fund's orders.
In doing so, where two or more brokers or dealers offer comparable prices and
execution for a particular trade, consideration may be given to whether the
broker or dealer provides investment research or brokerage services or sells
shares of any Goldman Sachs Fund. See the Additional Statement for a further
description of the Investment Advisers' brokerage allocation practices.
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As compensation for its services rendered and assumption of certain expenses
pursuant to separate Management Agreements, GSAM, GSFM and GSAMI are entitled
to the following fees, computed daily and payable monthly at the annual rates
listed below:
<TABLE>
<CAPTION>
FOR THE FISCAL
CONTRACTUAL YEAR ENDED
RATE* OCTOBER 31, 1996*
----------- ------------------
<S> <C> <C>
GSAM
- ----
Short Duration Tax-Free 0.40% 0.40%
Government Income 0.65% 0.25%
Municipal Income 0.55% 0.55%
Core Fixed Income 0.40% 0.40%
High Yield 0.70% N/A
GSFM
- ----
Short Duration Government 0.50% 0.40%
Adjustable Rate Government 0.40% 0.40%
GSAMI
- -----
Global Income 0.90% 0.59%
</TABLE>
- --------
* With respect to Government Income, Municipal Income and Global Income
Funds, a Management Agreement combining advisory and administration
services (and subadvisory services in the case of Global Income Fund) was
adopted effective April 30, 1997. The Management Agreements for the other
funds previously combined such services. The contractual rate set forth in
the table is the rate payable under the Management Agreements (and, in the
case of Global Income Fund, is identical to the aggregate advisory,
subadvisory and administration fee rate payable by the Fund under the
previously separate investment advisory, subadvisory and administration
agreements). For the fiscal year ended October 31, 1996, the annual rate
expressed is the combined advisory and administration fees paid (after
voluntary fee limitations). The difference, if any, between the stated fees
and the actual fees paid by the Funds reflects that the applicable
Investment Adviser did not charge the full amount of the fees to which it
would have been entitled. The Investment Advisers may discontinue or modify
such limitations in the future at their discretion, although they have no
current intention to do so.
The Investment Advisers to the Short Duration Government, Short Duration
Tax-Free, Core Fixed Income, Government Income, Municipal Income, Global
Income and High Yield Funds have voluntarily agreed to reduce or limit certain
"Other Expenses" of such Funds (excluding management fees, fees under service
and administration plans, taxes, interest and brokerage fees and litigation,
indemnification and other extraordinary expenses (and transfer agency fees in
the case of the Global Income and High Yield Funds) to the extent such
expenses exceed 0.05%, 0.05%, 0.05%, 0.00%, 0.05%, 0.06% and 0.01% per annum
of such Funds' average daily net assets, respectively. Such reductions or
limits, if any, are calculated monthly on a cumulative basis and may be
discontinued or modified by the applicable Investment Adviser in its
discretion at any time.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
GOLDMAN SACHS. The involvement of the Investment Advisers, 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 a Fund or limit a Fund's investment activities. Goldman Sachs and
its affiliates engage in proprietary trading and advise accounts and funds
which have investment objectives similar to those of the Funds and/or which
engage in and compete for transactions in the same types of securities,
currencies and instruments as the Funds. Goldman
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Sachs and its affiliates will not 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 in general it is not anticipated
that the Investment Advisers will have access to proprietary information for
the purpose of managing a Fund. The results of a Fund's investment activities,
therefore, may differ from those of Goldman Sachs and its affiliates and it is
possible that a Fund could sustain losses during periods in which Goldman
Sachs and its affiliates and other accounts achieve significant profits on
their trading for proprietary or other accounts. From time to time, a Fund's
activities may be limited because of regulatory restrictions applicable to
Goldman Sachs and its affiliates, and/or their internal policies designed to
comply with such restrictions. See "Management -- Activities of Goldman Sachs
and its Affiliates and Other Accounts Managed by Goldman Sachs" in the
Additional Statement for further information.
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of each Fund's shares. Goldman
Sachs, 4900 Sears Tower, Chicago, Illinois 60606 also serves as each Fund's
transfer agent (the "Transfer Agent") and as such performs various shareholder
servicing functions. Shareholders with inquiries regarding any Fund should
contact Goldman Sachs (as Transfer Agent) at the address or the telephone
number set forth on the back cover page of this Prospectus. Goldman Sachs is
not entitled to receive a fee from the Global Income Fund for transfer agency
services. Goldman Sachs is entitled to receive a fee from the Adjustable Rate
Government, Short Duration Government, Short Duration Tax-Free Government
Income, Municipal Income and Core Fixed Income Funds equal to each class'
proportionate share of the total transfer agency fees borne by the Fund. Such
fees are equal to the fixed per account charge of $12,000 per year plus $7.50
per account, together with out-of-pocket and transaction related expenses
(including those out-of-pocket expenses payable to servicing and/or sub-
transfer agents) applicable to Class A and B shares where applicable plus
0.04% of the average daily net assets of the other classes of the Funds.
Goldman Sachs is entitled to receive a fee from the High Yield Fund equal to
..04% of the average daily net assets of Institutional and Service shares.
DIVIDENDS
Each Fund (other than the Global Income Fund) will declare a daily dividend.
Such dividend will accrue to shareholders of record as of 3:00 p.m. Chicago
time, and will be paid monthly. The Global Income Fund will declare and pay
dividends monthly. Shares of Global Income Fund will be eligible for dividends
which accrue on or after the date such shares are purchased and will be paid
monthly. Over the course of the fiscal year, dividends accrued and paid will
constitute all or substantially all of the Funds' net investment income. From
time to time a portion of such dividends may constitute a return of capital.
In the case of Core Fixed Income, Global Income and High Yield Funds, net
loss, if any, from certain foreign currency transactions or instruments that
is otherwise taken into account in calculating net investment income or net
realized capital gains for accounting purposes may not be taken into account
in determining the amount of dividends to be declared and paid, with the
result that a portion of the Fund's dividends may be treated as a return of
capital, nontaxable to the extent of a shareholder's tax basis in his shares.
The Funds also intend that all net realized long-term and short-term capital
gains will be declared as a dividend at least annually. In determining amounts
of capital gains to be distributed, capital losses, including any available
capital loss carryovers from prior years will be offset against capital gains.
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<PAGE>
A Fund's net investment income is determined on a daily basis (monthly in
the case of the Global Income Fund). On days on which net asset value is
calculated, such determination is made immediately prior to the calculation of
a Fund's net asset value as of 3:00 p.m. Chicago time. On days on which net
asset value is not calculated, such determination is made as of 3:00 p.m.
Chicago time.
Payment of dividends (other than the Global Income Fund) from net investment
income will be made on the last calendar day of each month in additional
shares of a Fund at the net asset value on such day, unless cash distributions
are elected, in which case, cash payment will be made on the first Business
Day of the succeeding month. In the case of Global Income Fund, reinvestment
of dividends from net investment income in additional shares of the Fund will
be made on the second to last Business Day of each month. Cash dividends will
be paid on or about the last Business Day of the month. Payment of dividends
with respect to capital gains, if any, when declared will be made in
additional shares of the Fund at the net asset value on the payment date,
unless cash distributions are elected. This election to receive dividends in
cash is initially made on the Account Information Form and may be changed upon
written notice to the Transfer Agent at any time prior to the record date for
a particular dividend or distribution. If cash dividends are elected with
respect to the Fund's monthly net investment income dividends, then cash
dividends must also be elected with respect to the non-long-term capital gains
component, if any, of the Fund's annual dividend.
At the time of an investor's purchase of shares of a Fund, a portion of the
net asset value per share may be represented by undistributed income (in the
case of the Global Income Fund) or realized or unrealized appreciation of any
Fund's portfolio securities. Therefore, subsequent distributions on such
shares from such income or realized appreciation may be taxable to the
investor even if the net asset value of the shares is, as a result of the
distributions, reduced below the cost of such shares and the distributions (or
portions thereof) represent a return of a portion of the purchase price.
NET ASSET VALUE
The net asset value per share of each class of a Fund is calculated by the
Fund's custodian as of the close of regular trading on the New York Stock
Exchange (normally 3:00 p.m. Chicago time, 4:00 p.m. New York time) on each
Business Day (as such term is defined under "Additional Information")
immediately after the determination, if any, of the income to be declared as a
dividend (except in the case of the Global Income Fund). Net asset value per
share of each class is calculated by determining the net assets attributable
to each class and dividing by the number of outstanding shares of that class.
Each Fund's portfolio securities for which accurate market quotations 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 and
other portfolio securities are valued at fair value, based on yield
equivalents, a pricing matrix or other sources, under valuation procedures
established by the Trustees. Debt obligations with a remaining maturity of 60
days or less are valued at amortized cost. The Board of Trustees has
determined that the amortized cost of such securities approximates fair market
value.
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<PAGE>
PERFORMANCE INFORMATION
From time to time each Fund may publish yield, distribution rate and average
annual total return and the Short Duration Tax-Free and Municipal Income Funds
may publish its tax equivalent yield in advertisements and communications to
shareholders or prospective investors. Average annual total return is
determined by computing the average annual percentage change in value of
$1,000 invested at the maximum public offering price for specified periods
ending with the most recent calendar quarter, assuming reinvestment of all
dividends and distributions at net asset value. The total return calculation
assumes a complete redemption of the investment at the end of the relevant
period. Each Fund may also from time to time advertise total return on a
cumulative, average, year-by-year or other basis for various specified periods
by means of quotations, charts, graphs or schedules. In addition to the above,
each Fund may from time to time advertise its performance relative to certain
averages, performance rankings, indices, other information prepared by
recognized mutual fund statistical services and investments for which reliable
performance data is available.
Yield is computed by dividing net investment income earned during a recent
thirty-day period by the product of the average daily number of shares
outstanding and entitled to receive dividends during the period and the
maximum offering price per share on the last day of the relevant period. The
results are compounded on a bond equivalent (semiannual) basis and then
annualized. 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, the Short Duration Tax-Free and Municipal Income Funds'
tax-free yield. Tax equivalent yield is calculated by dividing the Short
Duration Tax-Free Fund's tax-exempt yield by one minus a stated federal tax
rate.
Quotations of distribution rates are calculated by annualizing the most
recent distribution of net investment income for a monthly, quarterly or other
relevant period and dividing this amount by the net asset value per share or
maximum public offering price on the last day of the period for which the
distribution rates are being calculated.
Each Fund's yield, total return and distribution rate will be calculated
separately for each class of shares in existence. Because each class of shares
may be subject to different expenses, the yield, total return and distribution
rate calculations with respect to each class of shares for the same period
will differ. See "Shares of the Trust."
The investment results of a Fund will fluctuate over time and any
presentation of investment results for any prior period should not be
considered a representation of what an investment may earn or what the Fund's
performance may be in any future period. In addition to information provided
in shareholder reports, the Funds may, in their discretion, from time to time,
make a list of their holdings available to investors upon request.
40
<PAGE>
SHARES OF THE TRUST
Each Fund is a series of the Goldman Sachs Trust, which was formed under the
laws of the state of Delaware on January 28, 1997. The Funds were formerly
series of Goldman Sachs Trust, a Massachusetts business trust, and were
reorganized into the Trust as of April 30, 1997. The Trustees have authority
under the Trust's Declaration of Trust to create and classify shares of
beneficial interest in separate series, without further action by
shareholders. Additional series may be added in the future. The Trustees also
have authority to classify or reclassify any series or portfolio of shares
into one or more classes.
When issued, shares are fully paid and non-assessable. In the event of
liquidation, shareholders are entitled to share pro rata in the net assets of
the applicable Fund available for distribution to such shareholders. All
shares are freely transferable and have no preemptive, subscription or
conversion rights. Shareholders are entitled to one vote per share, provided
that at the option of the Trustees, shareholders will be entitled to a number
of votes based upon the net asset values represented by their shares.
The Trust does not intend to hold annual meetings of shareholders. However,
pursuant to the Trust's By-Laws, the recordholders of at least 10% of the
shares outstanding and entitled to vote at a special meeting may require the
Trust to hold such special meeting of shareholders for any purpose and
recordholders may, under certain circumstances, as permitted by the Act,
communicate with other shareholders in connection with requiring a special
meeting of shareholders. The Trustees will call a special meeting of
shareholders for the purpose of electing Trustees, if, at any time, less than
a majority of Trustees holding office at the time were elected by
shareholders.
In the interest of economy and convenience, the Trust does not issue
certificates representing the Funds' shares. Instead, the Transfer Agent
maintains a record of each shareholder's ownership. Each shareholder receives
confirmation of purchase and redemption orders from the Transfer Agent. Fund
shares and any dividends and distributions paid by the Funds are reflected in
account statements from the Transfer Agent.
As of , 1997, the shareholders listed below owned beneficially and of
record 25% or more of the outstanding shares of such Fund: Short Duration
Government Fund--State Street Bank and Trust Company, P.O. Box 1992, Boston,
MA 02105-1992 (34.05%).
TAXATION
FEDERAL TAXES
Each Fund is treated as a separate entity for tax purposes, has elected or
intends to elect to be treated as a regulated investment company and intends
to qualify for such treatment for each taxable year under Subchapter M of the
Code. To qualify as such, a Fund must satisfy certain requirements relating to
the sources of its income, diversification of its assets and distribution of
its income to shareholders. As a regulated investment company, a Fund will not
be subject to federal income or excise tax on any net investment income and
net realized capital gains that are distributed to its shareholders in
accordance with certain timing requirements of the Code.
The Short Duration Tax-Free and Municipal Income Funds intend to satisfy
certain requirements of the Code so that it may distribute the tax-exempt
interest it receives as "exempt-interest dividends," as defined in
41
<PAGE>
the Code. If such requirements are satisfied, distributions of the Short
Duration Tax-Free and Municipal Income Funds that are attributable to interest
on tax-exempt obligations and that the Fund properly designates as exempt-
interest dividends will be exempt from regular federal income tax, although
all or a portion of such a distribution may be subject to the federal
alternative minimum tax and the entire distribution may be includable in the
tax base for determining taxability of social security or railroad retirement
benefits. Persons who are "substantial users" (or related persons to such
substantial users) of facilities financed by industrial development or certain
private activity bonds should consult their own tax advisers before purchasing
shares of the Short Duration Tax-Free and Municipal Income Funds. Interest on
indebtedness incurred or continued to purchase or carry shares of the Short
Duration Tax-Free and Municipal Income Funds is not deductible to the extent
attributable to the Short Duration Tax-Free or Municipal Income Funds'
distributions that are exempt-interest dividends.
Dividends paid by a Fund from net investment income, certain net realized
foreign exchange gains, the excess of net short-term capital gain over net
long-term capital loss and original issue discount or market discount income
will be taxable to shareholders as ordinary income, except for any exempt-
interest dividends paid by Short Duration Tax-Free and Municipal Income Funds,
as described above. Dividends paid by a Fund from the excess of net long-term
capital gain over net short-term capital loss will be taxable as long-term
capital gains regardless of how long the shareholders have held their shares.
These tax consequences will apply regardless of whether distributions are
received in cash or reinvested in shares. Certain distributions paid by a Fund
in January of a given year may be taxable to shareholders as if received the
prior December 31. Shareholders will be informed annually about the amount and
character of distributions received from the Funds for federal income tax
purposes.
Investors should consider the tax implications of buying shares immediately
prior to a distribution. Investors who purchase shares shortly before the
record date for a distribution other than a daily dividend will pay a per
share price that includes the value of the anticipated distribution and will
be taxed on any taxable distribution even though the distribution represents a
return of a portion of the purchase price.
Redemptions and exchanges of shares are taxable events.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on distributions (other than exempt-
interest dividends), redemptions and exchanges if they fail to furnish their
correct taxpayer identification number and certain certifications required by
the Internal Revenue Services or if they are otherwise subject to backup
withholding. Individuals, corporations and other shareholders that are not
U.S. persons under the Code are subject to different tax rules and may be
subject to non-resident alien withholding at the rate of 30% (or a lower rate
provided by an applicable tax treaty) on amounts treated as ordinary dividends
from the Funds.
The Core Fixed Income, Global Income and High Yield Funds may be subject to
foreign withholding or other foreign taxes on income or gain from certain
foreign securities. If more than 50% of the value of the total assets of
either Fund is comprised of stock or securities of foreign corporations at the
end of its taxable year and the applicable Fund so elects, that Fund's
shareholders will include in their gross incomes (in addition to dividends and
distributions they receive) their pro rata shares of qualified foreign taxes
paid by that Fund and may be entitled under the Code to claim foreign tax
credits or deductions with respect to such taxes. It is not expected that the
Core Fixed Income Fund will qualify to make this election. If either Fund
cannot or does not so elect, it may deduct these taxes in computing its
taxable income, if any.
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OTHER TAXES
In addition to federal taxes, a shareholder may be subject to state, local
or foreign taxes on payments received from the Funds, including exempt-
interest dividends. A state income (and possibly local income and/or
intangible property) tax exemption is generally available to the extent (if
any) a Fund's distributions are derived from interest on (or, in the case of
intangible property taxes, the value of its assets is attributable to) certain
U.S. government obligations and/or tax-exempt municipal obligations issued by
or on behalf of the particular state or a political subdivision thereof,
provided in some states that certain thresholds for holdings of such
obligations and/or reporting requirements are satisfied. For a further
discussion of certain tax consequences of investing in shares of the Funds,
see "Taxation" in the Additional Statement. Shareholders are urged to consult
their own tax advisers regarding specific questions as to federal, state and
local taxes as well as to any foreign taxes.
ADDITIONAL INFORMATION
The term "a vote of the majority of the outstanding shares" of a Fund means
the vote of the lesser of (i) 67% or more of the shares 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 (ii) more than 50% of the outstanding
shares of the Fund.
As used in this Prospectus, the term "Business Day" means any day the New
York Stock Exchange is open for trading, which is Monday through Friday except
for holidays. The New York Stock Exchange is closed on the following holidays:
New Year's Day, Presidents' Day (observed), Good Friday, Memorial Day
(observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
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ADDITIONAL SERVICES
The Trust, on behalf of the Funds, has adopted a Service Plan with respect
to the Service Shares which authorizes a Fund to compensate certain
institutions ("Service Organizations") for providing account administration
and personal and account maintenance services to their customers who are
beneficial owners of such Shares. The Trust, on behalf of the Funds, enters
into agreements with Service Organizations which purchase Service Shares on
behalf of their customers ("Service Agreements"). The Service Agreements
provide for compensation to the Service Organizations in an amount up to 0.50%
(on an annualized basis) of the average daily net assets of the Service Shares
of the Fund attributable to or held in the name of the Service Organization
for its customers; provided, however, that the fee paid for personal and
account maintenance services shall not exceed 0.25% of such average daily net
assets. The services provided by the Service Organizations may include acting,
directly or through an agent, as the sole shareholder of record, maintaining
account records for customers, processing orders to purchase, redeem or
exchange Service Shares for customers, responding to inquiries from
prospective and existing shareholders and assisting customers with investment
procedures.
For the fiscal year ended October 31, 1996, the Trust, on behalf of the
Short Duration Government, Short Duration Tax-Free and Core Fixed Income
Funds, paid the Service Organizations fees at the annual rate of 0.50% of each
Fund's average daily net assets attributable to Service Shares. No Service
Shares of the other Funds were outstanding during the period.
Holders of Service Shares of a Fund bear all expenses and fees paid to
Service Organizations for their services with respect to such Shares as well
as any other expenses which are directly attributable to such Shares.
Service Organizations may charge other fees to their customers who are the
beneficial owners of Service Shares in connection with their customer
accounts. These fees would be in addition to any amounts received by the
Service Organization under a Service Agreement and may affect the return
earned on an investment in the Fund. The Trust, on behalf of the Funds,
accrues payments made pursuant to a Service Agreement daily. All inquiries of
beneficial owners of Service Shares should be directed to such owners' Service
Organization.
REPORTS TO SHAREHOLDERS
Recordholders of Service Shares of the Funds will receive an annual report
containing audited financial statements and a semi-annual report. Each
recordholder of Service Shares will also be provided with a printed
confirmation for each transaction in its account and a monthly account
statement (quarterly in the case of Global Income Fund). A year-to-date
statement for any account will be provided to a Service Organization upon
request made to Goldman Sachs.
Service Organizations will be responsible for providing services similar to
those described above to their customers who are the beneficial owners of such
Shares. For example, Service Organizations are responsible for providing each
customer exercising investment discretion with monthly statements with respect
to such customer's account in lieu of an immediate confirmation of each
transaction.
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PURCHASE OF SERVICE SHARES
Customers of Service Organizations may invest in Service Shares only through
their Service Organizations. Service Shares may be purchased on any Business
Day by a Service Organization through Goldman Sachs at the net asset value per
share next determined after receipt of an order. No sales load will be
charged. If, by the close of regular trading on the New York Stock Exchange
(normally 3:00 p.m. Chicago time, 4:00 p.m. New York time), an order is
received from a Service Organization by Goldman Sachs, the price per share
will be the net asset value per share computed on the day the purchase order
is received. See "Net Asset Value." Purchases of Service Shares of the Funds
must be settled within three (3) Business Days of the receipt of a complete
purchase order. Payment of the proceeds of redemption of shares purchased by
check may be delayed for a period of time as described under "Redemption of
Service Shares."
The Service Organizations are responsible for the timely transmittal of
purchase orders to Goldman Sachs and payments to Northern or State Street. In
order to facilitate timely transmittal, the Service Organizations have
established times by which purchase orders and payments must be received by
them.
PURCHASE PROCEDURES APPLICABLE TO EACH FUND OTHER THAN THE GLOBAL INCOME FUND
Purchases of Service Shares by a Service Organization may be made by placing
an order with Goldman Sachs at 800-621-2550 and either wiring federal funds to
the Northern Trust Company ("Northern") as subcustodian for State Street Bank
and Trust Company ("State Street") on the next Business Day or initiating an
ACH transfer to ensure receipt by Northern on the next Business Day. Purchases
may also be made by a Service Organization by check (except that the Trust
will not accept a check drawn on a foreign bank or a third-party check) or
Federal Reserve draft made payable to Goldman Sachs Fixed Income Funds--Name
of Fund and Class of shares and should be directed to Goldman Sachs Fixed
Income Funds--Name of Fund and Class of shares c/o GSAM Shareholder Services,
4900 Sears Tower, Chicago, Illinois 60606.
PURCHASE PROCEDURES APPLICABLE TO THE GLOBAL INCOME FUND
Purchases of Service Shares may be made by a Service Organization placing an
order with Goldman Sachs at 800-621-2550 and either wiring federal funds to
State Street or initiating an ACH transfer. Purchases may also be made by a
Service Organization by check (except that the Trust will not accept a check
drawn on a foreign bank or a third-party check) or Federal Reserve draft made
payable to Goldman Sachs Fixed Income Funds--Name of Fund and Class of shares
and should be directed to Goldman Sachs Fixed Income Funds--Name of Fund and
Class of shares c/o National Financial Data Services, Inc., P.O. Box 419711,
Kansas City, MO 64141-6711.
OTHER PURCHASE INFORMATION
The Funds do not have any minimum purchase or account requirements with
respect to Service Shares. A Service Organization may, however, impose a
minimum amount for initial and subsequent investments in Service Shares, and
may establish other requirements such as a minimum account balance. A Service
Organization may
45
<PAGE>
effect redemptions of noncomplying accounts, and may impose a charge for any
special services rendered to its customers. Customers should contact their
Service Organization for further information concerning such requirements and
charges.
Service Shares of the Global Income Fund will be issued and dividends will
begin to be paid with respect to dividends which accrue on or after the
purchase of Service Shares. For the other Funds, the following applies:
PURCHASE BY FEDERAL FUNDS WIRE OR ACH TRANSFER. If a purchase order is
received from a Service Organization by Goldman Sachs by 3:00 p.m. Chicago
time and payment is made by wire transfer or ACH transfer, shares will be
issued and dividends will begin to accrue on the purchased shares on the
later of (i) the Business Day after receipt by Goldman Sachs of a purchase
order or (ii) the day of receipt of a federal funds wire or an ACH transfer
by State Street.
PURCHASE BY CHECK OR FEDERAL RESERVE DRAFT. If a check or Federal Reserve
draft is received by Goldman Sachs by 3:00 p.m. Chicago time, shares will
be issued and dividends will begin to accrue on the purchased shares on the
Business Day after the date payment is received.
The Funds reserve the right to redeem Service Shares of any Service
Organization whose account balance is less than $50 as a result of earlier
redemptions. Such redemptions will not be implemented if the value of such
shareholder's account falls below the minimum account balance solely as a
result of market conditions. A Fund will give sixty (60) days' prior written
notice to Service Organizations whose Service Shares are being redeemed to
allow them to purchase sufficient additional Service Shares to avoid such
redemption.
The Funds and Goldman Sachs each reserves the right to reject any specific
purchase order (including exchanges) or to restrict purchases or exchanges by
a particular purchaser (or group of related purchasers). This may occur, for
example, when a purchaser or a group of purchasers' pattern of frequent
purchases, sales or exchanges of Service Shares of a Fund is evident, or if
purchases, sales or exchanges are, or a subsequent abrupt redemption might be,
of a size that would disrupt management of a Fund.
In the sole discretion of Goldman Sachs, a Fund may accept securities
instead of cash for the purchase of shares of the Fund. Such purchases will be
permitted only if the Investment Adviser determines that any securities
acquired in this manner are consistent with the Fund's investment objectives,
restrictions and policies and are desirable investments for the Fund.
EXCHANGE PRIVILEGE
Service Shares of the Funds may be exchanged by a Service Organization for
(i) Service Shares of any other mutual fund sponsored by Goldman Sachs and
designated as an eligible fund for this purpose and (ii) the corresponding
class of any Goldman Sachs Money Market Fund at the net asset value next
determined either by
46
<PAGE>
writing to Goldman Sachs, Attention: Goldman Sachs Fixed Income Funds--Name of
Fund and Class of Shares, c/o GSAM Shareholder Services, 4900 Sears Tower,
Chicago, Illinois 60606 or, if previously elected in the Fund's Account
Information Form, by telephone at 800-621-2550 (7:00 a.m. to 5:30 p.m. Chicago
time). A shareholder should obtain and read the prospectus relating to any
other fund and its shares and consider its investment objective, policies and
applicable fees before making an exchange. Service Shares acquired by
telephone exchange must be registered in the same name(s) and have the same
address as Service Shares of the Fund for which the exchange is being made.
In an effort to prevent unauthorized or fraudulent exchanges by telephone,
Goldman Sachs employs reasonable procedures as set forth under "Redemption of
Service Shares" to confirm that such instructions are genuine. In times of
drastic economic or market changes, the telephone exchange privilege may be
difficult to implement. For federal income tax purposes, an exchange is
treated as a redemption of the Service Shares surrendered in the exchange, on
which an investor may be subject to tax, followed by a purchase of Service
Shares, or the corresponding class of any Goldman Sachs Money Market Fund
received in the exchange. Shareholders should consult their own tax advisers
concerning the tax consequences of an exchange. Exchanges are available only
in states where exchanges may legally be made. The exchange privilege may be
modified or withdrawn at any time on sixty (60) days' written notice to
recordholders of Service Shares and is subject to certain limitations. See
"Purchase of Service Shares."
REDEMPTION OF SERVICE SHARES
The Funds will redeem their Service Shares upon request of the recordholder
of such Shares on any Business Day at the net asset value next determined
after the receipt by the Transfer Agent of such request in proper form. See
"Net Asset Value." If Service Shares to be redeemed were recently purchased by
check, a Fund may delay transmittal of redemption proceeds until such time as
it has assured itself that good funds have been collected for the purchase of
such Service Shares. This may take up to fifteen (15) days. Redemption
requests may be made by writing to or calling the Transfer Agent at the
address or telephone number set forth on the back cover page of this
Prospectus. A Service Organization may request redemptions by telephone if the
optional telephone redemption privilege is elected on the Account Information
Form. It may be difficult to implement redemptions by telephone in times of
drastic economic or market changes.
In an effort to prevent unauthorized or fraudulent redemption or exchange
requests by telephone, Goldman Sachs employs reasonable procedures specified
by the Trust to confirm that such instructions are genuine. Among other
things, any redemption request that requires money to go to an account or
address other than that designated on the Account Information Form must be in
writing and signed by an authorized person designated on the Account
Information Form. Any such written request is also confirmed by telephone with
both the requesting party and the designated bank account to verify
instructions. Exchanges among accounts with different names, addresses and
social security or other taxpayer identification numbers must be in writing
and signed by an authorized person designated on the Account Information Form.
Other procedures may be implemented from time to time. If reasonable
procedures are not implemented, the Trust may be liable for any loss due to
unauthorized or fraudulent transactions. In all other cases, neither the
Funds, the Trust nor Goldman Sachs will be responsible for the authenticity of
redemption or exchange instructions received by telephone. If Goldman Sachs
receives a redemption request by 3:00 p.m. Chicago time, the Service Shares of
each Fund (other than Global Income Fund) to be redeemed earn dividends
declared on the day the request is received.
47
<PAGE>
The Funds will arrange for the proceeds of redemptions effected by any means
to be wired to the recordholder of Service Shares or, if the recordholder
elects in writing, by check. Redemption proceeds paid by wire transfer will
normally be wired on the next Business Day in federal funds (for a total one-
day delay), but may be paid up to three (3) days after receipt of a properly
executed redemption request. Wiring of redemption proceeds may be delayed one
additional Business Day if the Federal Reserve Bank is closed on the day
redemption proceeds would ordinarily be wired. Redemption proceeds paid by
check will normally be mailed to the address of record within three (3)
Business Days of receipt of a properly executed redemption request. Once wire
transfer instructions have been given by Goldman Sachs, neither the Funds, the
Trust nor Goldman Sachs assumes any further responsibility for the performance
of intermediaries or the customer's Service Organization in the transfer
process. If a problem with such performance arises, the customer should deal
directly with such intermediaries or Service Organizations.
Additional documentation regarding a redemption by any means may be required
to effect a redemption when deemed appropriate by the Transfer Agent. The
request for such redemption will not be considered to have been received in
proper form until such additional documentation has been submitted to the
Transfer Agent by the recordholder of Service Shares.
Service Organizations are responsible for the timely transmittal of
redemption requests by their customers to the Transfer Agent. In order to
facilitate timely transmittal of redemption requests, Service Organizations
have established times by which redemption requests must be received by them.
Additional documentation may be required when deemed appropriate by a Service
Organization.
----------------
48
<PAGE>
APPENDIX
GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON ACCOUNT INFORMATION FORM
You are required by law to provide a Fund with your correct Taxpayer
Identification Number (TIN), regardless of whether you file tax returns.
Failure to do so may subject you to penalties. Failure to provide your correct
TIN and to sign your name in the Certification section of the Account
Information Form could result in withholding of 31% by a Fund for the federal
backup withholding tax on distributions, redemptions, exchanges and other
payments relating to your account.
Any tax withheld may be credited against taxes owed on your federal income
tax return.
If you do not have a TIN, you should apply for one immediately by contacting
your local office of the Social Security Administration or the Internal
Revenue Service (IRS). Backup withholding could apply to payments relating to
your account while you are awaiting receipt of a TIN.
Special rules apply for certain entities. For example, for an account
established under a Uniform Gifts or Transfers to Minors Act, the TIN of the
minor should be furnished.
If you have been notified by the IRS that you are subject to backup
withholding because you failed to report your interest and/or dividend income
on your tax return and you have not been notified by the IRS that such
withholding should cease, you must cross out item (2) in the Certification
section of the Account Information Form.
If you are an exempt recipient, you should furnish your TIN and certify your
exemption by signing the Certification section and writing "exempt" after your
signature. Exempt recipients include: corporations, tax-exempt pension plans
and IRA's, governmental agencies, financial institutions, registered
securities and commodities dealers and others.
If you are a nonresident alien or foreign entity, you must provide a
completed Form W-8 to the Fund in order to avoid backup withholding on certain
payments. Other payments to you may be subject to nonresident alien
withholding of up to 30%.
For further information regarding backup and nonresident alien withholding,
see Sections 3406, 1441 and 1442 of the Internal Revenue Code and consult your
tax adviser.
A-1
<PAGE>
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GOLDMAN SACHS ASSET
MANAGEMENT
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS FUNDS
MANAGEMENT, L.P.
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS ASSET
MANAGEMENT INTERNATIONAL
133 PETERBOROUGH COURT
LONDON, ENGLAND EC4A 2BB
GOLDMAN, SACHS & CO.
DISTRIBUTOR
85 BROAD STREET
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
TRANSFER AGENT
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN
1776 HERITAGE DRIVE
NORTH QUINCY, MASSACHUSETTS 02171
TOLL FREE (IN U.S.) . . . . . . . . 800-621-2550
FIPROSVC
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GOLDMAN SACHS
FIXED INCOME FUNDS
- --------------------------------------------------------------------------------
PROSPECTUS
SERVICE SHARES
LOGO GOLDMAN
SACHS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- ------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUBJECT TO COMPLETION--JUNE 13, 1997
GOLDMAN SACHS FIXED INCOME FUNDS
, 1997 CLASS A, B AND C SHARES
GOLDMAN SACHS ADJUSTABLE RATE GOLDMAN SACHS MUNICIPAL INCOME FUND
GOVERNMENT FUND
Seeks a high level of current income
Seeks a high level of current that is exempt from regular federal in-
income, consistent with low come tax, consistent with preservation
volatility of principal. The of capital. The Fund invests primarily
Fund invests primarily in in municipal securities.
adjustable rate mortgage
pass-through securities and
other mortgage securities
with periodic interest rate
resets, which are issued or
guaranteed by the U.S.
Government, its agencies,
instrumentalities or
sponsored enterprises.
GOLDMAN SACHS CORE FIXED INCOME FUND
Seeks a total return consisting of capi-
tal appreciation and income that exceeds
the total return of the Lehman Brothers
Aggregate Bond Index. The Fund invests
primarily in fixed-income securities,
including securities issued or
guaranteed by the U.S. government, its
agencies, instrumentalities or sponsored
enterprises, corporate securities, mort-
gage-backed securities and asset-backed
securities.
GOLDMAN SACHS SHORT DURATION
GOVERNMENT FUND
Seeks a high level of current
income and secondarily, in
seeking current income, may
also consider the potential
for capital appreciation. The
Fund invests primarily in
securities issued or
guaranteed by the U.S.
government, its agencies,
instrumentalities or
sponsored enterprises.
GOLDMAN SACHS GLOBAL INCOME FUND
GOLDMAN SACHS SHORT DURATION Seeks a high total return, emphasizing
TAX-FREE FUND current income and, to a lesser extent,
providing opportunities for capital ap-
Seeks a high level of current preciation. The Fund invests primarily
income, consistent with in a portfolio of high quality fixed-in-
relatively low volatility of come securities of U.S. and foreign is-
principal, that is exempt suers and foreign currencies.
from regular federal income
tax. The Fund invests
primarily in municipal
securities.
GOLDMAN SACHS HIGH YIELD FUND
GOLDMAN SACHS GOVERNMENT
INCOME FUND Seeks a high level of current income and
secondarily, capital appreciation. The
Seeks a high level of current Fund invests primarily in fixed income
income, consistent with securities rated below investment grade.
safety of principal. The Fund
invests primarily in
securities, including
mortgage-backed securities,
issued or guaranteed by the
U.S. Government, its
agencies, instrumentalities
or sponsored enterprises.
Goldman Sachs Funds Management, L.P. ("GSFM"), New York, New York, an
affiliate of Goldman, Sachs & Co. ("Goldman Sachs"), serves as investment
adviser to the Adjustable Rate Government and Short Duration Government Funds.
Goldman Sachs Asset Management ("GSAM"), New York, New York, a separate
operating division of Goldman Sachs, serves as investment adviser to the Short
Duration Tax-Free, Government Income, Municipal Income, Core Fixed Income and
High Yield Funds. Goldman Sachs Asset Management International ("GSAMI"),
London, England, an affiliate of Goldman Sachs, serves as investment adviser to
the Global Income Fund. GSAM, GSFM and GSAMI are each referred to in this
Prospectus as the "Investment Adviser." Goldman Sachs serves as each Fund's
distributor and transfer agent.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN A FUND INVOLVES INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
(continued on next page)
<PAGE>
(cover continued)
THE ADJUSTABLE RATE GOVERNMENT, SHORT DURATION GOVERNMENT AND GOVERNMENT
INCOME FUNDS' NET ASSET VALUES AND YIELDS ARE NOT GUARANTEED BY THE U.S.
GOVERNMENT OR BY ITS AGENCIES, INSTRUMENTALITIES OR SPONSORED ENTERPRISES.
THE CORE FIXED INCOME, GLOBAL INCOME AND HIGH YIELD FUNDS MAY INVEST IN
SECURITIES OF FOREIGN ISSUERS AND FOREIGN CURRENCIES THAT ENTAIL CERTAIN RISKS
NOT CUSTOMARILY ASSOCIATED WITH INVESTING IN U.S. DOLLAR-DENOMINATED FIXED-
INCOME SECURITIES. IN PARTICULAR, THE SECURITIES MARKETS OF EMERGING MARKET
COUNTRIES ARE LESS LIQUID, ARE SUBJECT TO GREATER PRICE VOLATILITY, HAVE
SMALLER MARKET CAPITALIZATIONS, HAVE LESS GOVERNMENT REGULATION AND ARE NOT
SUBJECT TO AS EXTENSIVE AND FREQUENT ACCOUNTING, FINANCIAL AND OTHER REPORTING
REQUIREMENTS AS THE SECURITIES MARKETS OF MORE DEVELOPED COUNTRIES.
THE HIGH YIELD FUND INVESTS PRIMARILY IN HIGH YIELD, FIXED INCOME SECURITIES
RATED BELOW INVESTMENT GRADE THAT ARE CONSIDERED SPECULATIVE AND GENERALLY
INVOLVE GREATER PRICE VOLATILITY AND GREATER RISK OF LOSS OF PRINCIPAL AND
INTEREST THAN INVESTMENTS IN HIGHER RATED FIXED INCOME SECURITIES.
INVESTORS SHOULD CONSIDER THE RISKS ASSOCIATED WITH INVESTMENT IN A FUND
INVESTING IN FOREIGN AND/OR HIGH YIELD SECURITIES. THE FUNDS MAY NOT BE
SUITABLE FOR ALL INVESTORS. SEE "DESCRIPTION OF SECURITIES" AND "RISK
FACTORS."
This Prospectus provides information about Goldman Sachs Trust (the "Trust")
and the Funds that a prospective investor should understand before investing.
This Prospectus should be retained for future reference. A Statement of
Additional Information (the "Additional Statement"), dated , 1997,
containing further information about the Trust and the Funds which may be of
interest to investors, has been filed with the Securities and Exchange
Commission ("SEC"), is incorporated herein by reference in its entirety, and
may be obtained without charge from Goldman Sachs by calling the telephone
number, or writing to one of the addresses, listed on the back cover of this
Prospectus. The SEC maintains a Web site (http://www.sec.gov) that contains
the Additional Statement and other information regarding the Trust.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Highlights.................... 1
Fees and Expenses.................. 7
Financial Highlights............... 11
Investment Objectives and Policies. 14
Description of Securities.......... 21
Risk Factors....................... 28
Investment Techniques.............. 31
Investment Restrictions............ 35
Portfolio Turnover................. 35
Management......................... 36
Reports to Shareholders............ 40
How to Invest...................... 40
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Services Available to Shareholders. 47
Distribution and Authorized Dealer
Service Plans..................... 50
How to Sell Shares of the Funds.... 51
Dividends.......................... 53
Net Asset Value.................... 54
Performance Information............ 54
Shares of the Trust................ 55
Taxation........................... 56
Additional Information............. 57
Appendix........................... 58
Account Application
</TABLE>
<PAGE>
FUND HIGHLIGHTS
The following is intended to highlight certain information contained in
this Prospectus and is qualified in its entirety by the more detailed
information contained herein.
WHAT IS THE GOLDMAN SACHS TRUST?
The Goldman Sachs Trust is an open-end management investment company that
offers its shares in several investment funds (mutual funds). Each Fund pools
the monies of investors by selling its shares to the public and investing
these monies in a portfolio of securities designed to achieve that Fund's
stated investment objectives.
WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS?
Each Fund has distinct investment objectives and policies. There can be no
assurance that a Fund's objectives will be achieved. For a complete
description of each Fund's investment objectives and policies, see
"Investment Objectives and Policies," "Description of Securities" and
"Investment Techniques."
1
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
INVESTMENT INTEREST RATE
FUND NAME OBJECTIVES DURATION SENSITIVITY INVESTMENT SECTOR CREDIT QUALITY
- ------------- ------------------- ------------------ ------------- -------------------- ---------------
<S> <C> <C> <C> <C> <C>
ADJUSTABLE A high level of Target = 6-month 9-month note At least 65% of U.S. Government
RATE current income, to 1-year total assets in Securities
GOVERNMENT consistent with U.S. Treasury securities issued or
FUND low volatility Security guaranteed by the
of principal. Maximum = 2 years U.S. government,
its agencies,
instrumentalities
or sponsored
enterprises
("U.S. Government
Securities'')
that are adjustable
rate mortgage
pass-through
securities and
other mortgage
securities with
periodic interest
rate resets.
SHORT DURATION A high level of Target = 2-year 2-year bond At least 65% of U.S. Government
GOVERNMENT current income, U.S. Treasury total assets in Securities
FUND and secondarily, Security plus U.S. Government
in seeking current or minus .5 years Securities
income, may Maximum = 3 years and repurchase
also consider the agreements
potential for collateralized
capital appreciation. by such securities.
SHORT DURATION A high level of Target = Lehman 3-year bond At least 80% of Minimum = BBB/Baa
TAX-FREE current income, Brothers net assets in
FUND consistent with 3-year Municipal municipal securities.
low volatility Bond Index
of principal, plus or minus
that is exempt .5 years
from regular Maximum = 4 years
federal
income tax.
GOVERNMENT A high level of Target = Lehman 5-year bond At least 65% of U.S. Government
INCOME current income, Brothers Mutual assets in U.S. Securities and
FUND consistent with Fund Government/ Government non-U.S.
safety of Mortgage Index Securities, including Government
principal. plus or minus mortgage-backed Securities rated
1 year U.S. Government AAA/Aaa
Securities.
Maximum =
6 years
<CAPTION>
FUND NAME OTHER INVESTMENTS BENCHMARK
- --------- ----------------- -----------------
<S> <C> <C>
ADJUSTABLE Fixed-rate 6-month and
RATE mortgage 1-Year U.S.
GOVERNMENT pass-through Treasury Security
FUND securities and
repurchase
agreements
collateralized by
U.S. Government
Securities.
SHORT DURATION Mortgage pass- 2-Year U.S.
GOVERNMENT through Treasury Security
FUND securities and
other securities
representing an
interest in or
collateralized
by mortgage loans.
SHORT DURATION U.S. Government Lehman Brothers
TAX-FREE Securities 3-Year Municipal
FUND and repurchase Bond Index
agreements
collateralized
by such securities.
GOVERNMENT Non-government Lehman Brothers
INCOME mortgage pass- Mutual Fund
FUND through securities, Government/
asset-backed Mortgage Index
securities,
corporate
fixed income
securities and
repurchase
agreements
collateralized by
U.S. Government
Securities.
</TABLE>
2
<PAGE>
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
APPROXIMATE
INTEREST
INVESTMENT RATE
FUND NAME OBJECTIVES DURATION SENSITIVITY INVESTMENT SECTOR CREDIT QUALITY OTHER INVESTMENTS
<S> <C> <C> <C> <C> <C> <C>
MUNICIPAL A high level of Target = Lehman 15-year bond At least 80% of Minimum = U.S. Government
INCOME current income Brothers 15-year net assets in BBB/Baa Securities and
FUND that is exempt Municipal Bond municipal securities. Average = AA/Aa repurchase
from regular Index plus agreements
federal income or minus 1 year collateralized by
tax, consistent Maximum = such securities.
with preservation 12 years
of capital.
CORE FIXED Total return Target = Lehman 5-year bond At least 65% of Minimum = BBB/Baa Foreign fixed-
INCOME FUND consisting of Brothers assets in fixed- Minimum for income,
capital Aggregate Bond income securities, non-dollar municipal and
appreciation and Index plus or including securities = AA/Aa convertible
income that minus 1 year U.S. Government securities,
exceeds the total Maximum = 6 years Securities, foreign currencies
return of the corporate, and repurchase
Lehman Brothers mortgage-backed agreements
Aggregate Bond and asset-backed collateralized
Index. securities. by U.S.
Government
Securities.
GLOBAL A high total return, Target = J.P. 6-year bond Securities of U.S. Minimum = Mortgage and asset
INCOME emphasizing Morgan Global and foreign AA/Aa or A if backed securities,
FUND current Government governments and sovereign issuer foreign currencies
income, and, to Bond Index corporations. At least 50% = and repurchase
a lesser extent, (hedged) plus AAA/Aaa agreements
providing or minus 2.5 years collateralized by
opportunities Maximum = U.S. Government
for capital 7.5 years Securities or
appreciation. certain foreign
government
securities.
HIGH YIELD A high level of Target = Lehman 6-year bond At least 65% of At least 65% = Mortgage-backed
FUND current income Brothers High assets in fixed- BB/Ba or below and asset-backed
and, secondarily, Yield Bond Index income securities securities, U.S.
capital appreciation. plus or minus rated below Government
2.5 years investment grade, Securities,
Maximum = including U.S. investment grade
7.5 years and non-U.S. dollar corporate fixed-
corporate debt, income securities,
foreign government structured
securities, securities,
convertible foreign currencies
securities and repurchase
and preferred stock. agreements
collateralized
U.S. Government
Securities.
<CAPTION>
FUND NAME BENCHMARK
<S> <C>
MUNICIPAL Lehman Brothers
INCOME 15- year
FUND Municipal
Bond Index
CORE FIXED Lehman Brothers
INCOME FUND Aggregate Bond
Index
GLOBAL J.P. Morgan
INCOME Global
FUND Government Bond
Index (hedged)
HIGH YIELD Lehman Brothers
FUND High Yield
Bond Index
</TABLE>
3
<PAGE>
WHAT ARE THE RISK FACTORS AND SPECIAL CHARACTERISTICS THAT I SHOULD CONSIDER
BEFORE INVESTING?
Each Fund's share price will fluctuate with market, economic and, with
respect to the Core Fixed Income, Global Income and High Yield Funds,
foreign exchange conditions, so that an investment in any of the Funds may
be worth more or less when redeemed than when purchased. None of the Funds
should be relied upon as a complete investment program. There can be no
assurance that a Fund's investment objectives will be achieved. See "Risk
Factors."
Interest Rate Risk. When interest rates decline, the market value of
fixed-income securities tends to increase. Conversely, when interest rates
increase, the market value of fixed-income securities tends to decline.
Volatility of a security's market value will differ depending upon the
security's duration, the issuer and the type of instrument.
Default Risk/Credit Risk. Investments in fixed-income securities are
subject to the risk that the issuer could default on its obligations and a
Fund could sustain losses on such investments. A default could impact both
interest and principal payments.
Call Risk and Extension Risk. Fixed-income securities may be subject to
both call risk and extension risk. Call risk (i.e., where the issuer
exercises its right to pay principal on an obligation earlier than
scheduled) causes cash flow to be returned earlier than expected. This
typically results when interest rates have declined and a Fund will suffer
from having to reinvest in lower yielding securities. Extension risk (i.e.,
where the issuer exercises its right to pay principal on an obligation later
than scheduled) causes cash flows to be returned later than expected. This
typically results when interest rates have increased and a Fund will suffer
from the inability to invest in higher yielding securities. The investment
characteristics of Mortgage-Backed Securities (including adjustable rate
mortgage securities) and Asset-Backed Securities differ from those of
traditional fixed-income securities because they generally have both call
risk (also known as prepayment risk) and extension risk.
Tax Risk of Municipal Securities. Due to Municipal Securities' tax-exempt
status, their yields and market values may be more adversely impacted by
changes in tax rates and policies than taxable fixed-income securities.
Risks of investing in non-investment grade fixed-income securities. Non-
investment grade fixed-income securities (commonly referred to as "junk
bonds") are subject to greater volatility and risk of loss and are less
liquid than securities which are perceived to be of higher credit quality.
Such securities, also referred to as high yield securities, are considered
to be speculative by traditional investment standards. High yield securities
are subject to increased risk of an issuer's inability to meet principal and
interest payments. The High Yield Fund may invest in securities which are in
default at the time of investment. The market for non-investment grade
securities tends to be concentrated in a limited number of market makers,
which may affect liquidity. In addition, the market price of such securities
tends to reflect individual corporate developments to a greater extent than
that of higher rated securities which react primarily to the general level
of interest rates.
Foreign Risks. Investments in securities of foreign issuers and currencies
involve risks that are different from those associated with investments in
domestic securities. The risks associated with foreign investments and
currencies include changes in relative currency exchange rates, political
and economic developments, the imposition of exchange controls, confiscation
and other governmental restrictions. In addition, the securities markets of
foreign countries are generally less liquid and subject to greater price
volatility. To the extent that the Core Fixed Income, Global Income and High
Yield Funds invest in emerging markets and countries, these risks may be
heightened.
4
<PAGE>
Other. A Fund's use of certain investment techniques, including
derivatives, forward contracts, options, futures and swap transactions, will
subject the Fund to greater risk than funds that do not employ such
techniques.
Non-Diversification. Global Income Fund is a "non-diversified" fund as
defined under the Investment Company Act of 1940, as amended (the "Act"),
and is, therefore, subject only to certain federal tax diversification
requirements (to which the other Funds are also subject), in addition to the
policies adopted by the Investment Adviser. To the extent that the Fund is
not diversified under the Act, it will be more susceptible to adverse
developments affecting any single issuer of portfolio securities. See
"Investment Restrictions."
WHO MANAGES THE FUNDS?
Goldman Sachs Funds Management, L.P. serves as Investment Adviser to the
Adjustable Rate Government and Short Duration Government Funds. Goldman
Sachs Asset Management serves as Investment Adviser to the Short Duration
Tax-Free, Core Fixed Income, Government Income, Municipal Income and High
Yield Funds. Goldman Sachs Asset Management International serves as
Investment Adviser to the Global Income Fund. As of June 30, 1997, the
Investment Advisers, together with their affiliates, acted as investment
adviser, administrator or distributor for assets in excess of $ billion.
WHO DISTRIBUTES THE FUNDS' SHARES?
Goldman Sachs acts as distributor of each Fund's shares.
WHAT IS THE MINIMUM INVESTMENT?
<TABLE>
<CAPTION>
MINIMUM
----------------------------
INITIAL PURCHASE ADDITIONAL
TYPE OF PURCHASE AMOUNT INVESTMENTS
---------------- ---------------- -----------
<S> <C> <C>
Regular Purchases............................. $1,000 $50
Tax-Sheltered Retirement Plans and UGMA/UTMA
purchases.................................... $ 250 $50
Automatic Investment Plan..................... $ 50 $50
</TABLE>
For further information, see "How to Invest--How to Buy Shares of the Funds"
on page 41.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Funds through Goldman Sachs and certain
investment dealers, including members of the National Association of
Securities Dealers, Inc. (the "NASD") and certain other financial service
firms that have sales agreements with Goldman Sachs ("Authorized Dealers").
See "How to Invest" on page 40.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Funds (other than the Adjustable Rate Government Fund which does not
offer Class B or Class C shares) offer three classes of shares through this
Prospectus. These shares may be purchased at the investor's choice, at a
price equal to their next determined net asset value ("NAV") (i) plus an
initial sales charge imposed at the time of purchase ("Class A shares"),
(ii) with a contingent deferred sales charge imposed on redemptions within
six years of purchase ("Class B shares") or (iii) without any initial or
contingent deferred sales charge, as long as shares are held for one year or
more ("Class C shares"). Except with respect to the Adjustable Rate
Government Fund, direct purchases of $1 million or more of Class A shares
will be sold without an initial sales charge and will be subject to a
contingent deferred sales charge at the time of certain redemptions.
5
<PAGE>
<TABLE>
<CAPTION>
ADJUSTABLE RATE MAXIMUM FRONT MAXIMUM CONTINGENT
GOVERNMENT FUND END SALES CHARGE DEFERRED SALES CHARGE
--------------- ---------------- ---------------------
<S> <C> <C>
Class
A... 1.5% N/A
<CAPTION>
SHORT DURATION
GOVERNMENT FUND
SHORT DURATION
TAX-FREE FUND
-----------------
<S> <C> <C>
Class
A... 3.0% (See above)
Class
B... N/A 4% declining to 0% after six years
Class
C... N/A 1% if shares are redeemed within 12 months of purchase
<CAPTION>
GOVERNMENT INCOME FUND
MUNICIPAL INCOME FUND
CORE FIXED INCOME FUND
GLOBAL INCOME FUND
HIGH YIELD FUND
----------------------
<S> <C> <C>
Class
A... 4.5% (See above)
Class
B... N/A 5% declining to 0% after six years
Class
C... N/A 1% if shares are redeemed within 12 months of purchase
</TABLE>
Over time, the deferred sales charge and distribution fees attributable to
Class B or Class C shares will exceed the initial sales charge and
distribution fees attributable to Class A shares. Class B shares convert to
Class A shares, which are subject to lower distribution fees, eight years
after initial purchase. Class C shares, which are subject to the same
distribution fees as Class B shares, do not convert to Class A shares and
are subject to the higher distribution fees indefinitely. See "How to
Invest--Alternative Purchase Arrangements" on page 40.
HOW DO I SELL MY SHARES?
You may redeem shares upon request on any Business Day, as defined under
"Additional Information," at the net asset value next determined after
receipt of such request in proper form, subject to any applicable contingent
deferred sales charge. See "How to Sell Shares of the Funds."
HOW DO I RECEIVE DIVIDENDS AND DISTRIBUTIONS?
<TABLE>
<CAPTION>
INVESTMENT INCOME
DIVIDENDS
------------------ CAPITAL GAINS
FUND DECLARED PAID DISTRIBUTIONS
---- ------------------ -------------
<S> <C> <C> <C>
Adjustable Rate Government................... Daily Monthly Annually
Short Duration Government.................... Daily Monthly Annually
Short Duration Tax-Free...................... Daily Monthly Annually
Government Income............................ Daily Monthly Annually
Municipal Income............................. Daily Monthly Annually
Core Fixed Income............................ Daily Monthly Annually
Global Income................................ Monthly Monthly Annually
High Yield................................... Daily Monthly Annually
</TABLE>
You may receive dividends in additional shares of the same class of the
Fund in which you have invested or you may elect to receive cash, shares of
the same class of other mutual funds sponsored by Goldman Sachs (the
"Goldman Sachs Funds") or ILA Service Units of the Prime Obligations
Portfolio or the Tax-Exempt Diversified Portfolio, if you hold Class A
shares of a Fund, or ILA Class B or Class C Units of the Prime Obligations
Portfolio, if you hold Class B or Class C shares of a Fund (the "ILA
Portfolios"). For further information concerning dividends, see "Dividends."
6
<PAGE>
FEES AND EXPENSES
<TABLE>
<CAPTION>
ADJUSTABLE RATE SHORT DURATION SHORT DURATION GOVERNMENT
GOVERNMENT GOVERNMENT TAX-FREE INCOME
FUND/5/ FUND/5/ FUND/5/ FUND
--------------- --------------------------- --------------------------- ---------------------------
CLASS A CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
--------------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES:
Maximum Sales
Charge Imposed on
Purchases......... 1.5%/1/ 3.0%/1/ none none 3.0%/1/ none none 4.5%/1/ none none
Maximum Sales
Charge Imposed on
Reinvested
Dividends......... none none none none none none none none none none
Maximum Deferred
Sales Charge...... none/1/ none/1/ 4.0%/2/ 1.0%/3/ none/1/ 4.0%/2/ 1.0%/3/ none/1/ 5.0%/2/ 1.0%/3/
Redemption
Fees/4/........... none none none none none none none none none none
Exchange Fees/4/.. none none none none none none none none none none
ANNUAL FUND
OPERATING EXPENSES:
(as a percentage
of average daily
net assets)
Management Fees
(after applicable
limitations)/6/... 0.40% 0.40% 0.40% 0.40% 0.40% 0.40% 0.40% 0.25% 0.25% 0.25%
Distribution
(Rule 12b-1) Fees
(after applicable
limitations)/7/... 0.00% 0.00% 0.60% [0.60]% 0.00% 0.60% [0.60]% 0.00% 0.75% 0.75%
Other Expenses:
Authorized
Dealer Service
Fees............ 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses
(after
applicable
limitations)/8/. 0.11% 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% 0.00% 0.00% 0.00%
---- ---- ---- ----- ---- ---- ----- ---- ---- ----
TOTAL FUND
OPERATING
EXPENSES (AFTER
FEE AND EXPENSE
LIMITATIONS)/9/... 0.76% 0.70% 1.30% 1.30% 0.70% 1.30% 1.30% 0.50% 1.25% 1.25%
==== ==== ==== ===== ==== ==== ===== ==== ==== ====
<CAPTION>
MUNICIPAL CORE FIXED GLOBAL
INCOME INCOME INCOME
FUND FUND/5/ FUND
----------------------------- ----------------------------- -----------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES:
Maximum Sales
Charge Imposed on
Purchases......... 4.5%/1/ none none 4.5%/1/ none none 4.5%/1/ none none
Maximum Sales
Charge Imposed on
Reinvested
Dividends......... none none none none none none none none none
Maximum Deferred
Sales Charge...... none/1/ 5.0%/2/ 1.0%/3/ none/1/ 5.0%/2/ 1.0%/3/ none/1/ 5.0%/2/ 1.0%/3/
Redemption
Fees/4/........... none none none none none none none none none
Exchange Fees/4/.. none none none none none none none none none
ANNUAL FUND
OPERATING EXPENSES:
(as a percentage
of average daily
net assets)
Management Fees
(after applicable
limitations)/6/... 0.55% 0.55% 0.55% 0.40% 0.40% 0.40% 0.59% 0.59% 0.59%
Distribution
(Rule 12b-1) Fees
(after applicable
limitations)/7/... 0.00% 0.75% 0.75% 0.00% 0.75% 0.75% 0.21% 0.75% 0.75%
Other Expenses:
Authorized
Dealer Service
Fees............ 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses
(after
applicable
limitations)/8/. 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% 0.11% 0.11% 0.11%
--------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL FUND
OPERATING
EXPENSES (AFTER
FEE AND EXPENSE
LIMITATIONS)/9/... 0.85% 1.60% 1.60% 0.70% 1.45% 1.45% 1.16% 1.70% 1.70%
========= ========= ========= ========= ========= ========= ========= ========= =========
<CAPTION>
HIGH
YIELD
FUND/5/
-----------------------------
CLASS A CLASS B CLASS C
--------- --------- ---------
<C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES:
Maximum Sales
Charge Imposed on
Purchases......... 4.5%/1/ none none
Maximum Sales
Charge Imposed on
Reinvested
Dividends......... none none none
Maximum Deferred
Sales Charge...... none/1/ 5.0%/2/ 1.0%/3/
Redemption
Fees/4/........... none none none
Exchange Fees/4/.. none none none
ANNUAL FUND
OPERATING EXPENSES:
(as a percentage
of average daily
net assets)
Management Fees
(after applicable
limitations)/6/... 0.65% 0.65% 0.65%
Distribution
(Rule 12b-1) Fees
(after applicable
limitations)/7/... 0.00% 0.75% 0.75%
Other Expenses:
Authorized
Dealer Service
Fees............ 0.25% 0.25% 0.25%
Other Expenses
(after
applicable
limitations)/8/. 0.20% 0.20% 0.20%
--------- --------- ---------
TOTAL FUND
OPERATING
EXPENSES (AFTER
FEE AND EXPENSE
LIMITATIONS)/9/... 1.10% 1.85% 1.85%
========= ========= =========
</TABLE>
- ----------
/1/ As a percentage of the offering price. No sales charge is imposed on
purchases of Class A shares by certain classes of investors. Except with
respect to direct purchases of the Adjustable Rate Government Fund, a
contingent deferred sales charge of 1.00% is imposed on certain redemptions
of Class A shares sold without an initial sales charge as part of an
investment of $1 million or more. See "How to Invest--Offering Price."
/2/ With the exception of the Short Duration Government Fund and the Short
Duration Tax-Free Fund, a contingent deferred sales charge is imposed upon
shares redeemed within six years of purchase at a rate of 5% in the first
year, declining to 1% in the sixth year, and eliminated thereafter. With
respect to Short Duration Government Fund and Short Duration Tax-Free Fund,
a contingent deferred sales charge is imposed on shares redeemed within five
years of purchase at a rate of 4.0% in the first year, declining to 1% in
the fifth year. See "How to Invest--Offering Price--Class B Shares."
/3/ A contingent deferred sales charge of 1.00% is imposed on shares redeemed
within 12 months of purchase. See "How to Invest--Offering Price--Class C
Shares."
/4/ A transaction fee of $7.50 may be charged for redemption proceeds paid by
wire. In addition to free reinvestments of dividends and distributions in
shares of other Goldman Sachs Funds or units of the ILA Portfolios and free
automatic exchanges pursuant to the Automatic Exchange Program, six free
exchanges are permitted in each twelve month period. A fee of $12.50 may be
charged for each subsequent exchange during such period. See "How to
Invest--Exchange Privilege."
/5/ Based on estimated amounts for the current fiscal year for the Adjustable
Rate Government, Short Duration Government, Short Duration Tax-Free, Core
Fixed Income and High Yield Funds.
7
<PAGE>
/6/ The Investment Advisers have voluntarily agreed that a portion of the
management fee would not be imposed on the Short Duration Government,
Government Income, Global Income and High Yield Funds equal to .10%, .40%,
.31% and .05%, respectively. Without such limitations, management fees would
be .50%, .65%, .90% and .70% of each Fund's average daily net assets
respectively.
/7/ Goldman Sachs voluntarily has agreed not to impose the entire distribution
fee attributable to Class A shares of each Fund, except Global Income Fund
where Goldman Sachs voluntarily has agreed not to impose .04% of the
distribution fee. Goldman Sachs has also voluntarily agreed not to impose
.15% of the distribution fee attributable to Class B [and Class C] shares of
the Short Duration Government and Short Duration Tax-Free Funds.
Distribution fees for Class A, Class B [and Class C] shares would otherwise
be payable at the rate of .25%, .75% [ and .75%], respectively, of average
daily net assets.
/8/ The Investment Advisers voluntarily have agreed to reduce or limit certain
other expenses (excluding management, distribution and authorized dealer
service fees, taxes, interest and brokerage fees and litigation,
indemnification and other extraordinary expenses (and transfer agency fees
in the case of the Global Income and High Yield Funds)) to the extent such
expenses exceed .05%, .05%, .00%, .05%, .05%, .06% and .01% of the average
daily net assets of the Short Duration Government, Short Duration Tax-Free,
Government Income, Municipal Income, Core Fixed Income, Global Income and
High Yield Funds, respectively.
/9/ Without the limitations described above, "Other Expenses" and "Total
Operating Expenses" of the Funds would have been as set forth below.
Information for the Class A and Class B shares of the Government Income,
Municipal Income and Global Income Funds is shown for the fiscal year ended
October 31, 1996. Information for the Class A and Class B shares of the
Adjustable Rate Government, Short Duration Government, Short Duration Tax-
Free, Core Fixed Income and High Yield Funds and Class C shares of each Fund
are estimated for the current fiscal year:
<TABLE>
<CAPTION>
TOTAL
OTHER OPERATING
EXPENSES EXPENSES
-------- ---------
<S> <C> <C>
Adjustable Rate Government
Class A................................................... .11% 1.01%
Short Duration Government
Class A................................................... .21% 1.21%
Class B................................................... .21% 1.71%
Class C................................................... .21% 1.71%
Short Duration Tax-Free
Class A................................................... .61% 1.51%
Class B................................................... .61% 2.01%
Class C................................................... .61% 2.01%
Government Income
Class A................................................... .74% 1.89%
Class B................................................... .74% 2.39%
Class C................................................... .74% 2.39%
Municipal Income
Class A................................................... .50% 1.55%
Class B................................................... .50% 2.05%
Class C................................................... .50% 2.05%
Core Fixed Income
Class A................................................... .43% 1.33%
Class B................................................... .43% 1.83%
Class C................................................... .43% 1.83%
Global Income
Class A................................................... .24% 1.64%
Class B................................................... .24% 2.14%
Class C................................................... .24% 2.14%
High Yield
Class A................................................... .75% 1.95%
Class B................................................... .75% 2.45%
Class C................................................... .75% 2.45%
</TABLE>
8
<PAGE>
EXAMPLE
You would pay the following expenses on a hypothetical $1,000 investment
(including the maximum sales charge) assuming (i) a 5% annual return and (ii)
redemption at the end of each time period.
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Adjustable Rate Government Fund
Class A Shares.............................. $23 $39 $57 $108
Short Duration Government Fund
Class A Shares............................... 37 52 68 114
Class B Shares
--Assuming complete redemption at end of pe-
riod....................................... 53 61 81 136
--Assuming no redemption.................... 13 41 71 136
Class C Shares
--Assuming complete redemption at end of pe-
riod....................................... 23 41 71 157
--Assuming no redemption.................... 13 41 71 157
Short Duration Tax-Free Fund
Class A Shares............................... 37 52 68 114
Class B Shares
--Assuming complete redemption at end of pe-
riod....................................... 53 61 81 136
--Assuming no redemption.................... 13 41 71 136
Class C Shares
--Assuming complete redemption at end of pe-
riod....................................... 23 41 71 157
--Assuming no redemption.................... 13 41 71 157
Government Income Fund
Class A Shares............................... 50 60 72 105
Class B Shares
--Assuming complete redemption at end of pe-
riod....................................... 63 70 89 126
--Assuming no redemption.................... 13 40 69 126
Class C Shares
--Assuming complete redemption at end of pe-
riod....................................... 23 40 69 151
--Assuming no redemption.................... 13 40 69 151
Municipal Income Fund
Class A Shares............................... 53 71 90 145
Class B Shares
--Assuming complete redemption at end of pe-
riod....................................... 66 80 107 165
--Assuming no redemption.................... 16 50 87 165
Class C Shares
--Assuming complete redemption at end of pe-
riod....................................... 26 50 87 190
--Assuming no redemption.................... 16 50 87 190
Core Fixed Income Fund
Class A Shares............................... 52 66 82 128
Class B Shares
--Assuming complete redemption at end of pe-
riod....................................... 65 76 99 149
--Assuming no redemption.................... 15 46 79 149
Class C Shares
--Assuming complete redemption at end of pe-
riod....................................... 25 46 79 174
--Assuming no redemption.................... 15 46 79 174
Global Income Fund
Class A Shares............................... 56 80 106 180
Class B Shares
--Assuming complete redemption at end of pe-
riod....................................... 67 84 112 179
--Assuming no redemption.................... 17 54 92 179
Class C Shares
--Assuming complete redemption at end of pe-
riod....................................... 27 54 92 201
--Assuming no redemption.................... 17 54 92 201
High Yield Fund
Class A Shares............................... 56 78 N/A N/A
Class B Shares
--Assuming complete redemption at end of pe-
riod....................................... 69 88 N/A N/A
--Assuming no redemption.................... 19 58 N/A N/A
Class C Shares
--Assuming complete redemption at end of pe-
riod....................................... 29 58 N/A N/A
--Assuming no redemption.................... 19 58 N/A N/A
</TABLE>
9
<PAGE>
The hypothetical example assumes that a contingent deferred sales charge
will not apply to redemptions of Class A shares within the first 18 months.
Class B shares convert to Class A shares eight years after purchase;
therefore, Class A expenses are used in the hypothetical example after year
eight.
The Investment Advisers and Goldman Sachs have no current intention of
modifying or discontinuing any of the limitations set forth above but may do
so in the future at their discretion. The information with respect to the
Adjustable Rate Government Fund set forth in the foregoing table and
hypothetical example relates only to its Class A shares (the Fund does not
offer Class B or Class C shares); such information with respect to the other
funds relates only to Class A, B and C shares. The Adjustable Rate Government,
Short Duration Government, Short Duration Tax-Free, Core Fixed Income, Global
Income and High Yield Funds, but not the other Funds, also offer Institutional
Shares and Service Shares and the Adjustable Rate Government, Short Duration
Government, Short Duration Tax-Free and Core Fixed Income Funds, but not the
other Funds, also offer Administration Shares. Institutional, Administration
and Service Shares are subject to different fees and expenses (which affect
performance), have different minimum investment requirements and are entitled
to different services than Class A, Class B and Class C shares. Information
regarding Institutional, Administration and Service Shares may be obtained
from your sales representative or from Goldman Sachs by calling the number on
the back cover of this Prospectus. Because of the Distribution Plans, long-
term shareholders may pay more than the economic equivalent of the maximum
front-end sales charges permitted by the NASD's rules regarding investment
companies.
In addition to the compensation itemized above, certain institutions that
sell Fund shares and/or their salespersons may receive certain compensation
for the sale and distribution of Class A, Class B and Class C shares of the
Funds or for services to the Funds. For additional information regarding such
compensation, see "Management" and "Services Available to Shareholders" in the
Prospectus and "Other Information Regarding Purchases, Redemptions, Exchanges
and Dividends" in the Additional Statement.
The purpose of the foregoing table is to assist investors in understanding
the various fees and expenses of a Fund that an investor will bear directly or
indirectly. The information on the fees and expenses included in the table and
the hypothetical example above are based on each Fund's fees and expenses
(actual or estimated) and should not be considered as representative of past
or future expenses. Actual fees and expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, a Fund's
actual performance will vary and may result in an actual return greater or
less than 5%. See "Management--Investment Advisers."
10
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
The following data with respect to a share (of the Class specified) of the
Funds outstanding for the period ended April 30, 1997 is unaudited. The
remaining data has been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report incorporated by reference into the
Additional Statement from the Annual Report to shareholders for the Funds for
the year ended October 31, 1996 (the "Annual Report"). This information should
be read in conjunction with the financial statements and related notes
incorporated by reference and attached to the Additional Statement. The Annual
Report also contains performance information and is available upon request and
without charge by calling the telephone number or writing to one of the
addresses on the back cover of this Prospectus. During the periods shown, the
Trust did not offer Class A and B shares of the Short Duration Government,
Short Duration Tax-Free, Core Fixed Income and High Yield Funds or Class C
shares of any Fund. Accordingly, there are no financial highlights for these
Funds or Classes.
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS
------------------------------------------------
NET
REALIZED NET
AND REALIZED
UNREALIZED AND
GAIN (LOSS) UNREALIZED
ON GAIN (LOSS) TOTAL
NET INVESTMENT, ON FOREIGN INCOME
ASSET NET OPTION CURRENCY (LOSS)
VALUE AT INVEST- AND RELATED FROM
BEGINNING MENT FUTURES TRANS- INVESTMENT
OF PERIOD INCOME TRANSACTIONS ACTIONS OPERATIONS
- -----------------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAU-
DITED)
- ------------------
Institutional
Shares..........
Administration
Shares..........
Class A Shares..
FOR THE YEAR ENDED OCTOBER 31,
- ------------------
1996-Institu-
tional Shares... $9.77 $0.5759(a) $0.0772(a) -- $0.6531
1996-Administra-
tion Shares..... 9.77 0.5489(a) 0.0797(a) -- 0.6286
1996-Class A
Shares.......... 9.77 0.5481(a) 0.0806(a) -- 0.6287
1995-Institu-
tional Shares... 9.74 0.5630(a) 0.0717(a) -- 0.6347
1995-Administra-
tion Shares..... 9.74 0.5366(a) 0.0737(a) -- 0.6103
1995-Class A
Shares(c)....... 9.79 0.2721(a) (0.0090)(a) -- 0.2631
1994-Institu-
tional Shares... 10.00 0.4341(a) (0.2455)(a) -- 0.1886
1994-Administra-
tion Shares..... 10.00 0.4211(a) (0.2572)(a) -- 0.1639
1993-Institu-
tional Shares... 10.04 0.4397 (0.0376)(d) -- 0.4021
1993-Administra-
tion Shares(e).. 10.02 0.2146 (0.0173)(d) -- 0.1973
1992-Institu-
tional Shares... 10.03 0.5599 (0.0029)(d) -- 0.5570
FOR THE PERIOD JULY 17, 1991(G) THROUGH OCTOBER 31,
- ------------------
1991-Institu-
tional Shares... 10.00 0.1531 0.0322(d) -- 0.1853
<CAPTION>
DISTRIBUTIONS TO SHAREHOLDERS
-------------------------------------------------------------------
IN EXCESS
FROM NET OF NET
REALIZED REALIZED
GAIN ON IN GAIN ON NET
FROM INVESTMENT, EXCESS INVESTMENT, INCREASE NET
NET OPTION OF NET OPTION FROM TOTAL (DECREASE) ASSET
INVEST- AND INVEST- AND PAID DISTRIBUTIONS IN NET VALUE AT
MENT FUTURES MENT FUTURES IN TO ASSET END OF TOTAL
INCOME TRANSACTIONS INCOME TRANSACTIONS CAPITAL SHAREHOLDERS VALUE PERIOD RETURN(K)
-------------------------------------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
-------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 31, 1997 (UNAU
DITED)
- ------------------
Institutional
Shares..........
Administration
Shares..........
Class A Shares..
FOR THE YEAR ENDED OCTOBER 31,
- ------------------
1996-Institu-
tional Shares... $(0.5725) -- $(0.0206) -- -- $(0.5931) $0.0600 $9.83 6.86%
1996-Administra-
tion Shares..... (0.5489) -- (0.0198) -- -- (0.5687) 0.0600 9.83 6.60
1996-Class A
Shares.......... (0.5489) -- (0.0198) -- -- (0.5687) 0.0600 9.83 6.60
1995-Institu-
tional Shares... (0.5759) -- (0.0287) -- -- (0.6046) 0.0301 9.77 6.75
1995-Administra-
tion Shares..... (0.5528) -- (0.0275) -- -- (0.5803) 0.0300 9.77 6.48
1995-Class A
Shares(c)....... (0.2697) -- (0.0134) -- -- (0.2831) (0.0200) 9.77 2.74(f)
1994-Institu-
tional Shares... (0.4486) -- -- -- -- (0.4486) (0.2600) 9.74 1.88
1994-Administra-
tion Shares..... (0.4239) -- -- -- -- (0.4239) (0.2600) 9.74 1.63
1993-Institu-
tional Shares... (0.4397) -- (0.0024) -- -- (0.4421) (0.0400) 10.00 4.13
1993-Administra-
tion Shares(e).. (0.2146) -- (0.0027) -- -- (0.2173) (0.0200) 10.00 2.01(f)
1992-Institu-
tional Shares... (0.5470) -- -- -- -- (0.5470) 0.0100 10.04 6.12
FOR THE PERIOD JULY 17, 1991(G) THROUGH OCTOBER 31,
- ------------------
1991-Institu-
tional Shares... (0.1553) -- -- -- -- (0.1553) 0.0300 10.03 2.14(f)
<CAPTION>
RATIOS ASSUMING
NO VOLUNTARY
WAIVER OF FEES OR
EXPENSE
LIMITATIONS
---------------------
RATIO OF
NET RATIO OF
INVEST- NET
MENT NET INVEST-
RATIO OF INCOME ASSETS MENT
NET (LOSS) TO AT END RATIO OF INCOME
EXPENSES AVERAGE PORTFOLIO OF EXPENSES (LOSS) TO
TO AVERAGE NET TURNOVER PERIOD TO AVERAGE AVERAGE
NET ASSETS ASSETS RATE(D) (IN 000S) NET ASSETS NET ASSETS
- -----------------------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAU-
DITED)
- ------------------
Institutional
Shares..........
Administration
Shares..........
Class A Shares..
FOR THE YEAR ENDED OCTOBER 31,
- ------------------
1996-Institu-
tional Shares... 0.45% 5.85% 52.36% $613,149 0.51% 5.79%
1996-Administra-
tion Shares..... 0.70 5.59 52.36 3,792 0.76 5.53
1996-Class A
Shares.......... 0.70 5.59 52.36 10,728 1.01 5.28
1995-Institu-
tional Shares... 0.46 5.77 24.12 657,358 0.53 5.70
1995-Administra-
tion Shares..... 0.71 5.50 24.12 3,572 0.78 5.43
1995-Class A
Shares(c)....... 0.69(b) 5.87(b) 24.12 15,203 1.01(b) 5.55(b)
1994-Institu-
tional Shares... 0.46 4.38 37.81 942,523 0.49 4.35
1994-Administra-
tion Shares..... 0.71 4.27 37.81 6,960 0.74 4.24
1993-Institu-
tional Shares... 0.45 4.36 103.74 2,760,871 0.48 4.33
1993-Administra-
tion Shares(e).. 0.70(b) 3.81(b) 103.74 5,326 0.73(b) 3.78(b)
1992-Institu-
tional Shares... 0.42 5.61 286.40 2,145,064 0.55 5.48
FOR THE PERIOD JULY 17, 1991(G) THROUGH OCTOBER 31,
- ------------------
1991-Institu-
tional Shares... 0.20(b) 7.31(b) 145.67(b) 239,642 1.02(b) 6.49(b)
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS
---------------------------------------------------
NET REALIZED
AND NET REALIZED
UNREALIZED AND
GAIN (LOSS) UNREALIZED TOTAL
ON GAIN (LOSS) INCOME
NET ASSET INVESTMENT, ON FOREIGN (LOSS)
VALUE AT NET OPTION AND CURRENCY FROM
BEGINNING INVESTMENT FUTURES RELATED INVESTMENT
OF PERIOD INCOME TRANSACTIONS TRANSACTIONS OPERATIONS
--------- ---------- ------------ ------------ ----------
SHORT DURATION GOVERNMENT FUND
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
- ---------------------------------------------------
Institutional
Shares..........
Administration
Shares..........
Service Shares..
FOR THE YEAR ENDED OCTOBER 31,
- ------------------------------
1996-Institutional
Shares ......... $ 9.82 $0.6290(a) $0.0136 (a) -- $0.6426
1996-Administra-
tion Shares(h).. 9.86 0.3837(a) 0.0003 (a) -- 0.3840
1996-Service
Shares(i)....... 9.72 0.3134(a) 0.1018 (a) -- 0.4152
1995-Institu-
tional Shares... 9.64 0.6652(a) 0.1666 (a) -- 0.8318
1995-Administra-
tion Shares..... 9.64 0.2384(a) (0.0433)(a) -- 0.1951
1994-Institu-
tional Shares... 10.14 0.5628(a) (0.4592)(a) -- 0.1036
1994-Administra-
tion Shares..... 10.14 0.5329(a) (0.4539)(a) -- 0.0790
1993-Institu-
tional Shares... 10.16 0.5627 (0.0135)(d) -- 0.5492
1993-Administra-
tion Shares(e).. 10.23 0.2725 (0.0900)(d) -- 0.1825
1992-Institu-
tional Shares... 10.22 0.6703 (0.0600)(d) -- 0.6103
1991-Institu-
tional Shares... 10.00 0.8020 0.2200 (d) -- 1.0220
1990-Institu-
tional Shares... 10.07 0.8300 (0.0700)(d) -- 0.7600
1989-Institu-
tional Shares... 10.10 0.8800 -- -- 0.8800
FOR THE PERIOD AUGUST 15, 1988(G) THROUGH OCTOBER 31,
- -----------------------------------------------------
1988-Institu-
tional Shares... 10.00 0.1800 0.1000 (d) -- 0.2800
SHORT DURATION TAX-FREE FUND
- ----------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
- ---------------------------------------------------
Institutional
Shares..........
Administration
Shares..........
Service Shares..
FOR THE YEAR ENDED OCTOBER 31,
- -------------------------------------
1996-Institu-
tional Shares... $ 9.94 $0.4192(a) $0.0200 (a) -- $0.4392
1996-Administra-
tion Shares..... 9.94 0.3944(a) 0.0200 (a) -- 0.4144
1996-Service
Shares.......... 9.95 0.3697(a) 0.0200 (a) -- 0.3897
1995-Institu-
tional Shares... 9.79 0.4235(a) 0.1500 (a) -- 0.5735
1995-Administra-
tion Shares..... 9.79 0.3989(a) 0.1500 (a) -- 0.5489
1995-Service
Shares.......... 9.79 0.3744(a) 0.1600 (a) -- 0.5344
1994-Institu-
tional Shares... 10.23 0.3787(a) (0.3575)(a) -- 0.0212
1994-Administra-
tion Shares..... 10.23 0.3537(a) (0.3575)(a) -- (0.0038)
1994-Service
Shares(j)....... 9.86 0.0475(a) (0.0700)(a) (0.0225)
1993-Institu-
tional Shares... 9.93 0.3834 0.3000(d) -- 0.6834
1993-Administra-
tion Shares(j).. 10.16 0.1555 0.0720(d) -- 0.2275
FOR THE PERIOD OCTOBER 1, 1992(G) THROUGH OCTOBER 31,
- -----------------------------------------------------
1992-Institu-
tional Shares... 10.00 0.0341 (0.0700)(d) -- (0.0359)
<CAPTION>
DISTRIBUTIONS TO SHAREHOLDERS
----------------------------------------------------------------------
FROM NET IN EXCESS OF
REALIZED NET REALIZED NET
GAIN ON GAIN ON INCREASE
INVESTMENT, IN EXCESS INVESTMENT, FROM TOTAL (DECREASE) NET ASSET
FROM NET OPTION AND OF NET OPTION AND PAID DISTRIBUTIONS IN NET VALUE AT
INVESTMENT FUTURES INVESTMENT FUTURES IN TO ASSET END OF
INCOME TRANSACTIONS INCOME TRANSACTIONS CAPITAL SHAREHOLDERS VALUE PERIOD
---------- ------------ ---------- ------------ -------- ------------- ---------- ---------
SHORT DURATION GOVERNMENT FUND
- ---------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS
- -------------------
Institutional
Shares..........
Administration
Shares..........
Service Shares..
FOR THE YEAR ENDED
- -------------------
1996-Institutional
Shares ......... $(0.6326) -- -- -- -- $(0.6326) $0.0100 $9.83
1996-Administra-
tion Shares(h).. (0.3940) -- -- -- -- (0.3940) (0.0100) 9.85
1996-Service
Shares(i)....... (0.3152) -- -- -- -- (0.3152) 0.1000 9.82
1995-Institu-
tional Shares... (0.6518) -- -- -- -- (0.6518) 0.1800 9.82
1995-Administra-
tion Shares..... (0.2051) -- -- -- -- (0.2051) (0.0100) 9.63(h)
1994-Institu-
tional Shares... (0.5598) (0.0438) -- -- -- (0.6036) (0.5000) 9.64
1994-Administra-
tion Shares..... (0.5352) (0.0438) -- -- -- (0.5790) (0.5000) 9.64
1993-Institu-
tional Shares... (0.5627) -- (0.0065) -- -- (0.5692) (0.0200) 10.14
1993-Administra-
tion Shares(e).. (0.2725) -- -- -- -- (0.2725) (0.0900) 10.14
1992-Institu-
tional Shares... (0.6703) -- -- -- -- (0.6703) (0.0600) 10.16
1991-Institu-
tional Shares... (0.8020) -- -- -- -- (0.8020) 0.2200 10.22
1990-Institu-
tional Shares... (0.8300) -- -- -- -- (0.8300) (0.0700) 10.00
1989-Institu-
tional Shares... (0.8800) -- -- -- (0.0300) (0.9100) (0.0300) 10.07
FOR THE PERIOD AUGU
- -------------------
1988-Institu-
tional Shares... (0.1800) -- -- -- -- (0.1800) 0.1000 10.10
SHORT DURATION TAX-FREE FUND
- --------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
- ---------------------------------------------------
Institutional
Shares..........
Administration
Shares..........
Service Shares..
FOR THE YEAR ENDED OCTOBER 31,
- -----------------------------
1996-Institu-
tional Shares... $(0.4192) -- -- -- -- $(0.4192) $0.0300 $9.96
1996-Administra-
tion Shares..... (0.3944) -- -- -- -- (0.3944) 0.0300 9.96
1996-Service
Shares.......... (0.3697) -- -- -- -- (0.3697) 0.0200 9.97
1995-Institu-
tional Shares... (0.4235) -- -- -- -- (0.4235) 0.1500 9.94
1995-Administra-
tion Shares..... (0.3989) -- -- -- -- (0.3989) 0.1500 9.94
1995-Service
Shares.......... (0.3744) -- -- -- -- (0.3744) 0.1600 9.95
1994-Institu-
tional Shares... (0.3787) (0.0825) -- -- -- (0.4612) (0.4400) 9.79
1994-Administra-
tion Shares..... (0.3537) (0.0825) -- -- -- (0.4362) (0.4400) 9.79
1994-Service
Shares(j)....... (0.0475) -- (0.0475) (0.0700) 9.79
1993-Institu-
tional Shares... (0.3834) -- -- -- -- (0.3834) 0.3000 10.23
1993-Administra-
tion Shares(j).. (0.1555) -- -- -- -- (0.1555) 0.0720 10.23
FOR THE PERIOD OCTOBER 1, 1992(G) THROUGH OCTOBER 31,
- -----------------------------------------------------
1992-Institu-
tional Shares... (0.0341) -- -- -- -- (0.0341) (0.0700) 9.93
<CAPTION>
RATIOS ASSUMING
NO VOLUNTARY WAIVER
OF FEES OR
EXPENSE LIMITATIONS
---------------------
RATIO OF RATIO OF
NET NET NET
RATIO OF INVESTMENT ASSETS INVESTMENT
NET INCOME AT END RATIO OF INCOME
EXPENSES (LOSS) PORTFOLIO OF EXPENSES (LOSS)
TOTAL TO AVERAGE TO AVERAGE TURNOVER PERIOD TO AVERAGE TO AVERAGE
RETURN(K) NET ASSETS NET ASSETS RATE(D) (IN 000'S) NET ASSETS NET ASSETS
--------- ---------- ---------- --------- ---------- ---------- ----------
SHORT DURATION GOVERNMENT FUND
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
- ---------------------------------------------------
Institutional Shares....
Administration Shares...
Service Shares..........
FOR THE YEAR ENDED OCTOBER 31,
- ------------------------------
1996-Institutional
Shares ................. 6.75% 0.45% 6.44% 115.45% $ 99,944 0.71% 6.18%
1996-Administration
Shares(h)............... 4.00(f) 0.70(b) 5.97(b) 115.45 252 0.96(b) 5.71(b)
1996-Service Shares(i).. 4.35(f) 0.95(b) 6.05(b) 115.45 1,822 1.21(b) 5.79(b)
1995-Institutional
Shares.................. 8.97 0.45 6.87 292.56 103,760 0.72 6.60
1995-Administration
Shares.................. 2.10 0.70(b) 7.91(b) 292.56 -- 0.90(b) 7.71(b)
1994-Institutional
Shares.................. 0.99 0.45 5.69 289.79 193,095 0.59 5.55
1994-Administration
Shares.................. 0.73 0.70 5.38 289.79 730 0.84 5.24
1993-Institutional
Shares.................. 5.55 0.45 5.46 411.66 359,708 0.64 5.31
1993-Administration
Shares(e)............... 1.74 0.70(b) 4.84(b) 411.66 16,490 0.80(b) 4.74(b)
1992-Institutional
Shares.................. 6.24 0.45 6.60 216.07 277,927 0.69 6.36
1991-Institutional
Shares.................. 10.93 0.45 8.25 155.44 158,848 0.79 7.91
1990-Institutional
Shares.................. 8.23 0.45 8.62 173.21 68,995 0.95 8.12
1989-Institutional
Shares.................. 9.08 0.46 8.71 137.37 31,015 1.39 7.78
FOR THE PERIOD AUGUST 15, 1988(G) THROUGH OCTOBER 31,
- -----------------------------------------------------
1988-Institutional
Shares.................. 3.30(f) 0.55(b) 8.55(b) 167.00(b) 39,052 1.42(b) 7.68(b)
SHORT DURATION TAX-FREE FUND
- --------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
- ---------------------------------------------------
Institutional Shares....
Administration Shares...
Service Shares..........
FOR THE YEAR ENDED OCTOBER 31,
- ------------------------------------------
1996-Institutional
Shares.................. 4.50% 0.45% 4.21% 231.65% $34,814 1.01% 3.65%
1996-Administration
Shares.................. 4.24 0.70 3.96 231.65 48 1.26 3.40
1996-Service Shares..... 3.98 0.95 3.74 231.65 695 1.51 3.18
1995-Institutional
Shares.................. 5.98 0.45 4.31 259.52 58,389 0.77 3.99
1995-Administration
Shares.................. 5.76 0.70 4.14 259.52 46 1.02 3.82
1995-Service Shares..... 5.59 0.95 3.87 259.52 454 1.27 3.55
1994-Institutional
Shares.................. 0.17 0.45 3.74 354.00 83,704 0.61 3.58
1994-Administration
Shares.................. (0.11) 0.70 3.51 354.00 3,866 0.86 3.35
1994-Service Shares(j).. (0.32)(f) 0.95(b) 4.30(b) 354.00 440 1.11(b) 4.14(b)
1993-Institutional
Shares.................. 7.03 0.41 3.70 404.60 115,803 1.06 3.05
1993-Administration
Shares(j)............... 2.28(f) 0.70(b) 3.32(b) 404.60 911 1.07(b) 2.95(b)
FOR THE PERIOD OCTOBER 1, 1992(G) THROUGH OCTOBER 31,
- -----------------------------------------------------
1992-Institutional
Shares.................. (0.34)(f) 0.05(b) 4.58(b) 31.19(f) 14,601 2.68(b) 1.95(b)
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS(M)
-----------------------------------------------
NET REALIZED
AND NET REALIZED
UNREALIZED AND
GAIN (LOSS) UNREALIZED TOTAL
ON GAIN (LOSS) INCOME
NET ASSET INVESTMENT, ON FOREIGN (LOSS)
VALUE AT NET OPTION AND CURRENCY FROM
BEGINNING INVESTMENT FUTURES RELATED INVESTMENT
OF PERIOD INCOME TRANSACTIONS TRANSACTIONS OPERATIONS
--------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
GOVERNMENT INCOME FUND
- ----------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
- ---------------------------------------------------
Class A Shares..
Class B Shares..
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1996-Class A
shares.......... $14.47 $ 0.92 $ (0.11) -- $ 0.81
1996-Class B
shares(n)....... 14.11 0.41 0.26 -- 0.67
1995-Class A
shares.......... 13.47 0.94 1.00 -- 1.94
1994-Class A
shares.......... 14.90 0.85 (1.28) -- (0.43)
FOR THE PERIOD FEBRUARY 10, 1993(G) THROUGH OCTOBER 31,
- -------------------------------------------------------
1993-Class A
shares.......... 14.32 0.56 0.58 -- 1.14
<CAPTION>
CORE FIXED INCOME FUND
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
- ---------------------------------------------------
Institutional
Shares..........
Administration
Shares..........
Service Shares..
FOR THE YEAR ENDED OCTOBER 31,
- ------------------------------
1996-Institu-
tional Shares... $10.00 $0.6448 $(0.0704) -- $0.5744
1996-Administra-
tion Shares(1).. 9.91 0.4083 (0.0703) -- 0.3380
1996-Service
Shares(1)....... 9.77 0.3756 0.0898 -- 0.4654
1995-Institu-
tional Shares... 9.24 0.6423 0.7610 -- 1.4033
FOR THE PERIOD JANUARY 5, 1994(G) THROUGH OCTOBER
31,
- -------------------------------------------------
1994-Institu-
tional Shares... 10.00 0.4648 (0.7617) -- (0.2969)
GLOBAL INCOME FUND
- ----------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 1997
- ---------------------------------------
Class A Shares..
Class B Shares..
Institutional
Shares..........
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1996-Class A
shares.......... $14.45 $0.71 $0.62 $0.18 $1.51
1996-Class B
shares(n)....... 14.03 0.34 0.41 0.11 0.86
1996-
Institutional
shares.......... 14.45 1.15 0.32 0.10 1.57
1995-Class A
shares.......... 13.43 0.89 0.92 0.15 1.96
1995-
Institutional
shares(o)....... 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(G) THROUGH OCTOBER 31,
- ----------------------------------------------------
1991-Class A
shares.......... 14.55 0.25 0.23 (0.19) 0.29
MUNICIPAL INCOME FUND
- ----------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
- ---------------------------------------------------
Class A Shares..
Class B Shares..
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1996-Class A
shares.......... $14.17 $ 0.65 $0.20 -- $ 0.85
1996-Class B
shares(n)....... 14.03 0.27 0.34 -- 0.61
1995-Class A
shares.......... 13.08 0.67 1.09 -- 1.76
1994-Class A
shares.......... 14.64 0.73 (1.51) -- (0.78)
FOR THE PERIOD JULY 20, 1993(G) THROUGH OCTOBER 31,
- ---------------------------------------------------
1993-Class A
shares.......... 14.32 0.22 0.32 -- 0.54
<CAPTION>
DISTRIBUTIONS TO SHAREHOLDERS
-----------------------------------------------------------------------
FROM NET IN EXCESS OF
REALIZED NET REALIZED NET
GAIN ON GAIN ON INCREASE
INVESTMENT, IN EXCESS INVESTMENT, FROM TOTAL (DECREASE) NET ASSET
FROM NET OPTION AND OF NET OPTION AND PAID DISTRIBUTIONS IN NET VALUE AT
INVESTMENT FUTURES INVESTMENT FUTURES IN TO ASSET END OF TOTAL
INCOME TRANSACTIONS INCOME TRANSACTIONS CAPITAL SHAREHOLDERS VALUE PERIOD RETURN(K)
---------- ------------ ---------- ------------ -------- ------------- ---------- --------- ---------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
GOVERNMENT INCOME FUND
------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
- ---------------------------------------------------
Class A Shares..
Class B Shares..
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1996-Class A
shares.......... $(0.92) -- -- -- -- $ (0.92) $ (0.11) $14.36 5.80%
1996-Class B
shares(n)....... (0.41) -- -- -- -- (0.41) 0.26 14.37 4.85(f)
1995-Class A
shares.......... (0.94) -- -- -- -- (0.94) 1.00 14.47 14.90
1994-Class A
shares.......... (0.85) (0.12) (0.02) (0.01) -- (1.00) (1.43) 13.47 (2.98)
FOR THE PERIOD FEBRUARY 10, 1993(G) THROUGH OCTOBER 31,
- -------------------------------------------------------
1993-Class A
shares.......... (0.56) -- -- -- -- (0.56) 0.58 14.90 8.03(f)
<CAPTION>
CORE FIXED INCOME FUND
- ----------------- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
- ---------------------------------------------------
Institutional
Shares..........
Administration
Shares..........
Service Shares..
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1996-Institu-
tional Shares... $(0.6438) $(0.0806) -- -- -- $(0.7244) $(0.1500) $9.85 5.98%
1996-Administra-
tion Shares(1).. (0.4080) -- -- -- -- (0.4080) (0.0700) 9.84 3.56(f)
1996-Service
Shares(1)....... (0.3754) -- -- -- -- (0.3754) 0.0900 9.86 4.90(f)
1995-Institu-
tional Shares... (0.6433) -- -- -- -- (0.6433) 0.7600 10.00 15.72
FOR THE PERIOD JANUARY 5, 1994(G) THROUGH OCTOBER
31,
- -----------------
1994-Institu-
tional Shares... (0.4648) -- -- -- -- (0.4648) (0.7617) 9.24 (3.00)
GLOBAL INCOME FUND
- -----------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
- ---------------------------------------------------
Class A Shares..
Class B Shares..
Institutional
Shares..........
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1996-Class A
shares.......... $(1.43) -- -- -- -- $ (1.43) $ 0.08 $14.53 11.05%
1996-Class B
shares(n)....... (0.36) -- -- -- -- (0.36) 0.50 14.53 6.24(f)
1996-
Institutional
shares.......... (1.50) -- -- -- -- (1.50) 0.07 14.52 11.55
1995-Class A
shares.......... (0.94) -- -- -- -- (0.94) 1.02 14.45 15.08
1995-
Institutional
shares(o)....... (0.26) -- -- -- -- (0.26) 0.36 14.45 4.42(f)
1994-Class A
shares.......... (0.22) (0.16) -- -- (0.61) (0.99) (1.64) 13.43 (4.49)
1993-Class A
shares.......... (0.85) (0.27) -- -- -- (1.12) 0.38 15.07 10.75
1992-Class A
shares.......... (1.14) -- -- -- -- (1.14) 0.09 14.69 8.77
FOR THE PERIOD AUGUST 2, 1991(G) THROUGH OCTOBER 31,
- ----------------------------------------------------
1991-Class A
shares.......... (0.24) -- -- -- -- (0.24) 0.05 14.60 2.00
MUNICIPAL INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
- ---------------------------------------------------
Class A Shares..
Class B Shares..
FOR THE YEARS ENDED OCTOBER 31,
- ------------------------------
1996-Class A
shares.......... $ (0.65) -- -- -- -- $ (0.65) $ 0.20 $14.37 6.13%
1996-Class B
shares(n)....... (0.27) -- -- -- -- (0.27) 0.34 14.37 4.40(f)
1995-Class A
shares.......... (0.67) -- -- -- -- (0.67) 1.09 14.17 13.79
1994-Class A
shares.......... (0.73) (0.05) -- -- -- (0.78) (1.56) 13.08 (5.51)
FOR THE PERIOD JULY 20, 1993(G) THROUGH OCTOBER 31,
- --------------------------------------------------
1993-Class A
shares.......... (0.22) -- -- -- -- (0.22) 0.32 14.64 3.73(f)
<CAPTION>
RATIOS ASSUMING
NO VOLUNTARY WAIVER
OF FEES OR
EXPENSE LIMITATIONS
---------------------
RATIO OF RATIO OF
NET NET NET
RATIO OF INVESTMENT ASSETS INVESTMENT
NET INCOME AT END RATIO OF INCOME
EXPENSES (LOSS) PORTFOLIO OF EXPENSES (LOSS)
TO AVERAGE TO AVERAGE TURNOVER PERIOD TO AVERAGE TO AVERAGE
NET ASSETS NET ASSETS RATE(D) (IN 000'S) NET ASSETS NET ASSETS
---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
GOVERNMENT INCOME FUND
- ------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
- ---------------------------------------------------
Class A Shares..
Class B Shares..
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1996-Class A
shares.......... 0.50% 6.42% 485.09% $30,603 1.89% 5.03%
1996-Class B
shares(n)....... 1.25(b) 5.65(b) 485.09 234 2.39(b) 4.51(b)
1995-Class A
shares.......... 0.47 6.67 449.53 29,503 2.34 4.80
1994-Class A
shares.......... 0.11 6.06 654.90 14,452 2.86 3.31
FOR THE PERIOD FEBRUARY 10, 1993(G) THROUGH OCTOBER 31,
- -------------------------------------------------------
1993-Class A
shares.......... 0.00(b) 4.87(b) 725.41(f) 12,860 4.00(b) 0.87(b)
<CAPTION>
CORE FIXED INCOME FUND
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
- ---------------------------------------------------
Institutional
Shares..........
Administration
Shares..........
Service Shares..
FOR THE YEAR ENDED OCTOBER 31,
- ------------------------------
1996-Institu-
tional Shares... 0.45% 6.51% 414.20% $72,061 0.83% 6.13%
1996-Administra-
tion Shares(1).. 0.70(b) 6.41(b) 414.20 702 1.08(b) 6.03(b)
1996-Service
Shares(1)....... 0.95(b) 6.37(b) 414.20 381 1.33(b) 5.99(b)
1995-Institu-
tional Shares... 0.45 6.56 383.26 55,502 0.96 6.05
FOR THE PERIOD JANUARY 5, 1994(G) THROUGH OCTO-
BER 31,
- -----------------------------------------------
1994-Institu-
tional Shares... 0.45(b) 6.48(b) 288.25 24,508 1.46(b) 5.47(b)
GLOBAL INCOME FUND
- -----------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 1997
- ---------------------------------------
Class A Shares..
Class B Shares..
Institutional
Shares..........
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1996-Class A
shares.......... 1.16% 5.81 232.15 $198,665 1.64 5.33
1996-Class B
shares(n)....... 1.70(b) 5.16(b) 232.15 256 2.14(b) 4.72(b)
1996-
Institutional
shares.......... 0.65 6.35 232.15 54,254 1.11 5.89
1995-Class A
shares.......... 1.29 6.23 265.86 245,835 1.58 5.94
1995-
Institutional
shares(o)....... 0.65(b) 6.01(b) 265.86 31,619 1.08(b) 5.58(b)
1994-Class A
shares.......... 1.28 5.73 343.74 396,584 1.53 5.48
1993-Class A
shares.......... 1.30 5.78 313.88 675,662 1.55 5.53
1992-Class A
shares.......... 1.37 7.85 270.75 588,893 1.62 7.60
FOR THE PERIOD AUGUST 2, 1991(G) THROUGH OCTOBER 31,
- ----------------------------------------------------
1991-Class A
shares.......... 0.38(f) 1.72(f) 34.22(f) 388,744 0.44(f) 1.66(f)
MUNICIPAL INCOME FUND
- -----------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
- ---------------------------------------------------
Class A Shares..
Class B Shares..
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1996-Class A
shares.......... 0.85% 4.58% 344.13% $52,267 1.55% 3.88%
1996-Class B
shares(n)....... 1.60(b) 3.55(b) 344.13 255 2.05(b) 3.10(b)
1995-Class A
shares.......... 0.76 4.93 335.55 53,797 1.49 4.20
1994-Class A
shares.......... 0.45 5.28 357.54 47,373 1.55 4.18
FOR THE PERIOD JULY 20, 1993(G) THROUGH OCTOBER 31,
- ---------------------------------------------------
1993-Class A
shares.......... 0.00(b) 5.15(b) 99.99(f) 30,166 2.42(b) 2.73(b)
- ------------------------------------------------------------------------------------
</TABLE>
(a) Calculated based on (j) Administration and
the average shares service share
outstanding activity commenced
methodology. on May 20, 1993 and
(b) Annualized. September 20, 1994
(c) Class A share respectively.
activity commenced (k) Assumes investment
on May 15, 1995. at the net asset
(d) Includes the effect value at the
of mortgage dollar beginning of the
roll transactions period,
except for the reinvestment of all
Global Income and dividends and
Municipal Income distributions, a
Funds. complete redemption
(e) Administration of the investment
share activity at the net asset
commenced on April value at the end of
15, 1993. the period and no
(f) Not annualized. sales charges. For
(g) Commencement of Class A shares
operations. only, total return
(h) GS Short Duration would be reduced if
Government Fund a sales charge were
Administration taken into account.
shares were (l) Administration and
redeemed in full on Service share
February 23, 1995 activity commenced
and re-commenced on on February 28,
February 28, 1996 1996 and March 13,
at $9.86. 1996 respectively.
(i) Service share (m) Includes balancing
activity commenced effect of
on April 10, 1996. calculating per
share amounts,
except the Core
Fixed Income Fund.
(n) Class B shares
commenced
operations on May
1, 1996.
(o) Institutional
shares commenced
operations on June
1, 1995.
13
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and principal investment policies of each Fund are
described below. Other investment practices and management techniques, which
involve certain risks are described under "Description of Securities," "Risk
Factors" and "Investment Techniques." There can be no assurance that a Fund's
investment objectives will be achieved.
A Fund's duration approximates its price sensitivity to changes in interest
rates. Maturity measures the time until final payment is due; it takes no
account of the pattern of a security's cash flows over time. In computing
portfolio duration, a Fund will estimate the duration of obligations that are
subject to prepayment or redemption by the issuer taking into account the
influence of interest rates on prepayments and coupon flows. This method of
computing duration is known as "option-adjusted" duration. A Fund will not be
limited as to its maximum weighted average portfolio maturity or the maximum
stated maturity with respect to individual securities unless otherwise noted.
A Fund will deem a security to have met its minimum credit rating
requirement if the security receives the minimum required long-term rating (or
the equivalent short-term credit rating) at the time of purchase from at least
one rating organization (including, but not limited to, Standard & Poor's
Ratings Group ("S&P") and Moody's Investors Service, Inc. ("Moody's")) even
though it has been rated below the minimum rating by one or more other rating
organizations, or, if unrated by a rating organization, is determined by the
Investment Adviser to be of comparable quality. If a security satisfies a
Fund's minimum rating criteria at the time of purchase and is subsequently
downgraded below such rating, the Fund will not be required to dispose of such
security. If a downgrade occurs, the Investment Adviser will consider what
action, including the sale of such security, is in the best interest of a Fund
and its shareholders.
The Investment 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.
ADJUSTABLE RATE GOVERNMENT FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income, consistent with low volatility of principal.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be in a range approximately equal to that of a six-month to one-
year U.S. Treasury security. In addition, under normal interest rate
conditions, the Fund's maximum duration will not exceed two years. The
approximate interest rate sensitivity of the Fund is comparable to a nine-
month note.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
65% of its total assets in U.S. Government Securities that are adjustable rate
mortgage pass-through securities and other U.S. Government Securities. The
remainder of the Fund's assets (up to 35%) may be invested in other U.S.
Government Securities, including mortgage pass-through securities, other
securities representing an interest in or collateralized by adjustable rate
and fixed rate mortgage loans ("Mortgage-Backed Securities") and repurchase
agreements collateralized by U.S. Government Securities. Substantially all of
the Fund's assets will be invested in U.S. Government Securities. 100% of the
Fund's portfolio will be invested in U.S. dollar-denominated securities.
14
<PAGE>
CREDIT QUALITY. The Fund invests in U.S. Government Securities and
repurchase agreements collateralized by such securities.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), mortgage and
interest rate swaps and interest rate floors, caps and collars. The Fund may
also employ other investment techniques to seek to enhance returns, such as
lending portfolio securities and entering into mortgage dollar rolls,
repurchase agreements and other investment practices described under
"Investment Techniques."
SHORT DURATION GOVERNMENT FUND
OBJECTIVE. The Fund's investment objective is to provide a high level of
current income. Secondarily, the Fund may, in seeking current income, also
consider the potential for capital appreciation.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the 2-year U.S. Treasury
security, plus or minus .5 years. In addition, under normal interest rate
conditions, the Fund's maximum duration will not exceed three years. The
approximate interest rate sensitivity of the Fund is comparable to a two-year
bond.
INVESTMENT SECTOR. The Fund invests, under normal market conditions, at
least 65% of its total assets in U.S. Government Securities and in repurchase
agreements collateralized by such securities. Substantially all of the Fund's
assets will be invested in U.S. Government Securities. 100% of the Fund's
portfolio will be invested in U.S. dollar-denominated securities.
CREDIT QUALITY. The Fund invests in U.S. Government Securities and
repurchase agreements collateralized by such securities.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), mortgage and
interest rate swaps and interest rate floors, caps and collars. The Fund may
also employ other investment techniques to seek to enhance returns, such as
lending portfolio securities and entering into mortgage dollar rolls,
repurchase agreements and other investment practices described under
"Investment Techniques."
SHORT DURATION TAX-FREE FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income, consistent with relatively low volatility of
principal, that is exempt from regular federal income tax.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers
three-year Municipal Bond Index, plus or minus .5 years. In addition, under
normal interest rate conditions, the Fund's maximum duration will not exceed
four years. The approximate interest rate sensitivity of the Fund is
comparable to a three-year bond.
INVESTMENT SECTOR. The Fund invests, under normal conditions, at least 80%
of its net assets in fixed- income securities issued by or on behalf of
states, territories and possessions of the United States (including the
15
<PAGE>
District of Columbia) and the political subdivisions, agencies and
instrumentalities thereof ("Municipal Securities"), the interest on which is
exempt from regular federal income tax (i.e., excluded from gross income for
federal income tax purposes) and is not a tax preference item under the
federal alternative minimum tax. Under normal circumstances, the Fund's
investments in private activity bonds and taxable investments will not exceed,
in the aggregate, 20% of the Fund's net assets. The interest from certain
private activity bonds (including the Fund's distributions of such interest)
may be a preference item for purposes of the federal alternative minimum tax.
100% of the Fund's portfolio will be invested in U.S. dollar-denominated
securities.
CREDIT QUALITY. The Municipal Securities in which the Fund invests will be
rated, at the time of investment, at least BBB by S&P or Baa by Moody's.
Municipal Securities rated BBB or Baa are considered medium-grade obligations
with speculative characteristics and adverse economic conditions or changing
circumstances may weaken their issuers' capability to pay interest and repay
principal. The credit rating assigned to Municipal Securities by these rating
organizations or by the Investment Adviser may reflect the existence of
guarantees, letters of credit or other credit enhancement features available
to the issuers or holders of such Municipal Securities.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), interest rate
swaps, floors, caps and collars. The Fund may also employ other investment
techniques to seek to enhance returns, such as lending portfolio securities
and entering into repurchase agreements and other investment practices
described under "Investment Techniques."
While the Fund, under normal market conditions, invests substantially all of
its assets in Municipal Securities, the recognition of certain accrued market
discount income (if the Fund acquires Municipal Securities or other
obligations at a market discount), income from investments other than
Municipal Securities and any capital gains generated from the disposition of
investments, will result in taxable income. In addition to federal income tax,
shareholders may be subject to state, local or foreign taxes on distributions
of such income received from the Fund. See "Description of Securities."
GOVERNMENT INCOME FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income, consistent with safety of principal.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers
Mutual Fund Government/Mortgage Index, plus or minus one year. In addition,
under normal interest rate conditions, the Fund's maximum duration will not
exceed six years. The approximate interest rate sensitivity of the Fund is
comparable to a five-year bond.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
65% of its total assets in U.S. Government Securities and in repurchase
agreements collateralized by such securities. The remainder of the Fund's
assets may be invested in non-government securities such as privately issued
Mortgage-Backed Securities, Asset-Backed Securities and corporate securities.
100% of the Fund's portfolio will be invested in U.S. dollar-denominated
securities.
CREDIT QUALITY. The Fund's non-U.S. Government Securities will be rated, at
the time of investment, AAA by S&P or Aaa by Moody's.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of
16
<PAGE>
financial futures contracts, option contracts (including options on futures),
mortgage and interest rate swaps and interest rate floors, caps and collars.
The Fund may also employ other investment techniques to seek to enhance
returns, such as lending portfolio securities and entering into mortgage
dollar rolls, repurchase agreements and other investment practices described
under "Investment Techniques."
MUNICIPAL INCOME FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income that is exempt from regular federal income tax,
consistent with preservation of capital.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers
fifteen-year Municipal Bond Index, plus or minus one year. In addition, under
normal interest rate conditions, the Fund's maximum duration will not exceed
twelve years. The approximate interest rate sensitivity of the Fund is
comparable to a fifteen-year bond.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
80% of its net assets in Municipal Securities, the interest on which is exempt
from regular federal income tax (i.e., excluded from gross income for federal
income tax purposes). The Fund may invest up to 100% of its net assets in
private activity bonds, the interest from certain of which (including the
Fund's distributions of such interest) may be a preference item for purposes
of the federal alternative minimum tax. 100% of the Fund's portfolio will be
invested in U.S. dollar-denominated securities.
CREDIT QUALITY. Under normal market conditions, the weighted average credit
quality of the Fund's portfolio will be equivalent to that of securities rated
AA by S&P or Aa by Moody's. All securities purchased by the Fund will be
rated, at the time of investment, at least BBB by S&P or Baa by Moody's.
Fixed-income securities rated BBB or Baa are considered medium-grade
obligations with speculative characteristics, and adverse economic conditions
or changing circumstances may weaken their issuers' capability to pay interest
and repay principal. The credit rating assigned to Municipal Securities by
these rating organizations or by the Investment Adviser may reflect the
existence of guarantees, letters of credit or other credit enhancement
features available to the issuers or holders of such Municipal Securities.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), interest rate
swaps, interest rate floors, caps and collars. The Fund may also employ other
investment techniques to seek to enhance returns, such as lending portfolio
securities and entering into repurchase agreements and other investment
practices described under "Investment Techniques."
While the Fund, under normal market conditions, invests substantially all of
its assets in Municipal Securities, the recognition of certain accrued market
discount income (if the Fund acquires Municipal Securities or other
obligations at a market discount), income from investments other than
Municipal Securities and any capital gains generated from the disposition of
investments, will result in taxable income. In addition to federal income tax,
shareholders may be subject to state, local or foreign taxes on distributions
of such income received from the Fund. See "Description of Securities."
17
<PAGE>
CORE FIXED INCOME FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
total return consisting of capital appreciation and income that exceeds the
total return of the Lehman Brothers Aggregate Bond Index (the "Index").
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers
Aggregate Bond Index, plus or minus one year. In addition, under normal
interest rate conditions, the Fund's maximum duration will not exceed six
years. The approximate interest rate sensitivity of the Fund is comparable to
a five-year bond.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
65% of its total assets in fixed-income securities, including U.S. Government
Securities, corporate debt securities, Mortgage-Backed Securities, and Asset-
Backed Securities. The Fund may invest up to 25% of its total assets in
obligations of domestic and foreign issuers which are denominated in
currencies other than the U.S. dollar, 10% of which may be invested in issuers
in countries with emerging markets and economies. A number of investment
strategies will be used to achieve the Fund's investment objective, including
market sector selection, determination of yield curve exposure, and issuer
selection. In addition, the Investment Adviser will attempt to take advantage
of pricing inefficiencies in the fixed-income markets.
The Index currently includes U.S. Government Securities and fixed-rate,
publicly issued, U.S. dollar-denominated fixed-income securities rated at
least BBB or Baa or in their equivalent ratings category by S&P or Moody's.
The securities currently included in the Index have at least one year
remaining to maturity; have an outstanding principal amount of at least $100
million; and are issued by the following types of issuers, with each category
receiving a different weighting in the Index: U.S. Treasury; agencies,
authorities or instrumentalities of the U.S. government; issuers of Mortgage-
Backed Securities; utilities; industrial issuers; financial institutions;
foreign issuers; and issuers of Asset-Backed Securities. The Index is a
trademark of Lehman Brothers. Inclusion of a security in the Index does not
imply an opinion by Lehman Brothers as to its attractiveness or
appropriateness for investment. Although Lehman Brothers obtains factual
information used in connection with the Index from sources which it considers
reliable, Lehman Brothers claims no responsibility for the accuracy,
completeness or timeliness of such information and has no liability to any
person for any loss arising from results obtained from the use of the Index
data.
CREDIT QUALITY. All U.S. dollar-denominated fixed-income securities
purchased by the Fund will be rated, at the time of investment, at least BBB
by S&P or Baa by Moody's. The non-U.S. dollar-denominated fixed-income
securities in which the Fund may invest will be rated, at the time of
investment, at least AA by S&P or Aa by Moody's. Fixed-income securities rated
BBB or Baa are considered medium-grade obligations with speculative
characteristics, and adverse economic conditions or changing circumstances may
weaken their issuers' capability to pay interest and repay principal.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund, to seek to hedge its exposure to
foreign securities and to seek to enhance returns. These techniques include,
but are not limited to, the use of financial futures contracts, option
contracts (including options on futures), forward foreign currency exchange
contracts, currency options and futures, currency, mortgage and interest rate
swaps and interest rate floors, caps and collars. Currency and interest rate
management techniques involve risks different from those associated with
investing solely in U.S. dollar-denominated fixed-income securities of U.S.
issuers. It is expected that the Fund will use certain currency techniques to
seek to
18
<PAGE>
hedge against currency exchange rate fluctuations or to seek to increase total
return. The Fund may invest in custodial receipts, Municipal Securities and
convertible securities. The Fund may also employ other investment techniques
to seek to enhance returns, such as lending portfolio securities and entering
into mortgage dollar rolls, repurchase agreements and other investment
practices, described under "Investment Techniques."
GLOBAL INCOME FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high total return, emphasizing current income and, to a lesser extent,
providing opportunities for capital appreciation.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the J.P. Morgan Global
Government Bond Index (hedged), plus or minus 2.5 years. In addition, under
normal interest rate conditions, the Fund's maximum duration will not exceed
7.5 years. The approximate interest rate sensitivity of the Fund is comparable
to a six-year bond.
INVESTMENT SECTOR. The Fund invests primarily in a portfolio of high quality
fixed-income securities of U.S. and foreign issuers and enters into
transactions in foreign currencies. Under normal market conditions, the Fund
will (i) have at least 30% of its total assets, after considering the effect
of currency positions, denominated in U.S. dollars and (ii) invest in
securities of issuers in at least three countries. The Fund may also invest up
to 10% of its total assets in issuers in countries with emerging markets and
economies. The Fund seeks to meet its investment objective by pursuing
investment opportunities in foreign and domestic fixed-income securities
markets and by engaging in currency transactions to seek to enhance returns
and to seek to hedge its portfolio against currency exchange rate
fluctuations.
The fixed-income securities in which the Fund may invest include: (i) U.S.
Government Securities and custodial receipts therefor; (ii) securities issued
or guaranteed by a foreign government or any of its political subdivisions,
authorities, agencies, instrumentalities or by supranational entities (i.e.,
international organizations designated or supported by governmental entities
to promote economic reconstruction or development, such as the World Bank);
(iii) corporate debt securities; (iv) certificates of deposit and bankers'
acceptances issued or guaranteed by, or time deposits maintained at, U.S. and
foreign banks (and their branches wherever located) having total assets of
more than $1 billion; (v) commercial paper and (vi) Mortgage- and Asset-Backed
Securities.
CREDIT QUALITY. All securities purchased by the Fund will be rated, at the
time of investment, at least AA by S&P or Aa by Moody's. However, the Fund may
also invest in obligations of a sovereign issuer, denominated in the issuer's
own currency, rated at least A by S&P or Moody's. The Fund will invest at
least 50% of its total assets in securities rated, at the time of investment,
AAA by S&P or Aaa by Moody's.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund, to seek to hedge its exposure to
foreign currencies and to seek to enhance returns. These techniques include,
but are not limited to, the use of financial futures contracts, option
contracts (including options on futures), forward foreign currency exchange
contracts, currency options and futures, currency, mortgage and interest rate
swaps and interest rate floors, caps and collars. Currency and interest rate
management techniques involve risks different from those associated with
investing solely in U.S. dollar-denominated fixed-income securities of U.S.
issuers. It is expected that the Fund will use certain currency techniques to
seek to hedge against currency exchange rate fluctuations or to seek to
increase total return. While the Fund will have both long and short currency
positions, its net long and short foreign currency exposure will not exceed
the value
19
<PAGE>
of the Fund's total assets. To the extent that the Fund is fully invested in
foreign securities while also maintaining currency positions, it may be
exposed to greater combined risk. The Fund's net currency positions may expose
it to risks independent of its securities positions. The Fund may also employ
other investment techniques to seek to enhance returns, such as lending
portfolio securities and entering into mortgage dollar rolls, repurchase
agreements and other investment practices described under "Investment
Techniques."
The Fund may invest more than 25% of its total assets in the securities of
corporate and governmental issuers located in each of Canada, Germany, Japan,
and the United Kingdom as well as in the securities of U.S. issuers.
Concentration of the Fund's investments in such issuers will subject the Fund,
to a greater extent than if investment was more limited, to the risks of
adverse securities markets, exchange rates and social, political or economic
events which may occur in those countries. With respect to other countries,
not more than 25% of the Fund's total assets will be invested in the
securities of issuers in any other foreign country.
HIGH YIELD FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income. Secondarily, the Fund may, in seeking current
income, also consider the potential for capital appreciation.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers High
Yield Bond Index, plus or minus 2.5 years. In addition, under normal interest
rate conditions, the Fund's maximum duration will not exceed 7.5 years. The
approximate interest rate sensitivity of the Fund is comparable to a 6-year
bond.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
65% of its total assets in high yield, fixed income securities rated, at the
time of investment, below investment grade. Non-investment grade securities
are securities rated BB or below by S&P, Ba or below by Moody's, an equivalent
rating by another rating organization, or if unrated by a rating organization,
determined by the Investment Adviser to be of comparable quality. The Fund may
invest in all types of fixed income securities, including senior and
subordinated corporate debt obligations (such as bonds, debentures, notes and
commercial paper), convertible and non-convertible corporate debt obligations,
and preferred stock. The Fund may invest up to 25% of its total assets in
obligations of domestic and foreign issuers (including securities of issuers
located in countries with emerging markets and economies) which are
denominated in currencies other than the U.S. dollar. Under normal market
conditions, the Fund may invest up to 35% of its total assets in investment
grade fixed income securities, including U.S. Government Securities, Asset-
Backed and Mortgage-Backed Securities and corporate securities. The Fund may
also invest in common stocks, warrants, rights and other equity securities,
but will generally hold such equity investments only when debt or preferred
stock of the issuer of such equity securities is held by the Fund. A number of
investment strategies are used to seek to achieve the Fund's investment
objective, including market sector selection, determination of yield curve
exposure, and issuer selection. In addition, the Investment Adviser will
attempt to take advantage of pricing inefficiencies in the fixed-income
markets.
CREDIT QUALITY. The Fund invests primarily in high yield, fixed income
securities rated below investment grade. Non-investment grade securities
(commonly known as "junk bonds") tend to offer higher yields than higher rated
securities with similar maturities. Non-investment grade securities are,
however, considered speculative and generally involve greater price volatility
and greater risk of loss of principal and interest than higher rated
securities. See "Description of Securities." A description of the corporate
bond and preferred stock ratings is contained in Appendix B to the Additional
Statement.
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OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund, to seek to hedge its exposure to
foreign securities and to seek to enhance returns. These techniques include,
but are not limited to, the use of financial futures contracts, option
contracts (including options on futures), forward foreign currency exchange
contracts, currency options and futures, currency, mortgage and interest rate
swaps, and interest rate floors, caps and collars. Currency and interest rate
management techniques involve risks different from those associated with
investing solely in U.S. dollar-denominated fixed-income securities of U.S.
issuers. It is expected that the Fund will use certain currency techniques to
seek to hedge against currency exchange rate fluctuations or to seek to
increase total return. The Fund may also employ other investment techniques to
seek to enhance returns, such as lending portfolio securities, and entering
into repurchase agreements and other investment practices described under
"Investment Techniques."
DESCRIPTION OF SECURITIES
U.S. GOVERNMENT SECURITIES
Each Fund may invest in U.S. Government Securities. Generally, these
securities include U.S. Treasury obligations and obligations issued or
guaranteed by U.S. government agencies, instrumentalities or sponsored
enterprises which are supported by (a) the full faith and credit of the U.S.
Treasury (such as the Government National Mortgage Association ("Ginnie
Mae")), (b) the right of the issuer to borrow from the U.S. Treasury (such as
securities of the Student Loan Marketing Association), (c) the discretionary
authority of the U.S. government to purchase certain obligations of the issuer
(such as the Federal National Mortgage Association ("Fannie Mae") and Federal
Home Loan Mortgage Corporation ("Freddie Mac")), or (d) only the credit of the
issuer. No assurance can be given that the U.S. government will provide
financial support to U.S. government agencies, instrumentalities or sponsored
enterprises in the future.
U.S. Government Securities also include Treasury receipts, zero coupon bonds
and other stripped U.S. Government Securities, where the interest and
principal components of stripped U.S. Government Securities are traded
independently. The most widely recognized program is the Separate Trading of
Registered Interest and Principal of Securities Program.
MORTGAGE-BACKED SECURITIES
CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES. Mortgage-Backed Securities
represent direct or indirect participations in, or are collateralized by and
payable from, mortgage loans secured by real property. Mortgagors can
generally prepay interest or principal on their mortgage whenever they choose.
Therefore, Mortgage-Backed Securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of
principal prepayments on the underlying loans. This can result in
significantly greater price and yield volatility than is the case with
traditional fixed-income securities. During periods of declining interest
rates, prepayments can be expected to accelerate, and thus impair a Fund's
ability to reinvest the returns of principal at comparable yields. Conversely,
in a rising interest rate environment, a declining prepayment rate will extend
the average life of many Mortgage-Backed Securities and prevent a Fund from
taking advantage of such higher yields.
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FIXED RATE MORTGAGE LOANS. Generally, fixed-rate mortgage loans pay interest
at fixed annual rates and have original terms to maturity ranging from 5 to 40
years. Fixed rate mortgage loans typically 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.
ADJUSTABLE RATE MORTGAGE LOANS ("ARMS"). The Adjustable Rate Government Fund
will primarily, and the Short Duration Government, Government Income, Core
Fixed Income, Global Income and High Yield Funds may, invest in ARMs, which
are pass-through mortgage securities collateralized by mortgages with
adjustable rather than fixed coupon rates. ARMs generally provide for a fixed
initial mortgage interest rate for a set period. Thereafter, the interest
rates are subject to periodic adjustments based on changes to a designated
benchmark index.
ARMs allow a Fund to participate in increases in interest rates through
periodic increases in the securities' coupon rates. During periods of
declining interest rates, coupon rates may readjust downward resulting in
lower yields to a Fund. Therefore, the value of an ARM is unlikely to rise
during periods of declining interest rates to the same extent as fixed-rate
securities. Interest rate declines may result in accelerated prepayment of
mortgages with the result that proceeds from prepayments will be reinvested at
lower interest rates. During periods of rising interest rates, changes in the
coupon rate will lag behind changes in the market rate. ARMs are also
typically subject to maximum increases and decreases in the interest rate
adjustment which can be made on any one adjustment date, in any one year, or
during the life of the security. In the event of dramatic increases or
decreases in prevailing market interest rates, the value of a Fund's
investments in ARMs may fluctuate more substantially since these limits may
prevent the security from fully adjusting its interest rate to the prevailing
market rates.
U.S. GOVERNMENT GUARANTEED MORTGAGE-BACKED SECURITIES. Certain Mortgage-
Backed Securities are issued or guaranteed by the U.S. government, its
agencies, instrumentalities or sponsored enterprises. Such issuers include,
but are not limited to, Ginnie Mae, Fannie Mae and Freddie Mac. See "U.S.
Government Securities."
PRIVATELY ISSUED MORTGAGE-BACKED SECURITIES. The Government Income, Core
Fixed Income, Global Income and High Yield Funds may invest in Mortgage-Backed
Securities issued or sponsored by non-governmental entities. Privately issued
Mortgage-Backed Securities are generally backed by pools of conventional
(i.e., non-government guaranteed or insured) mortgage loans. Since such
Mortgage-Backed Securities normally are not guaranteed by an entity having the
credit standing of Ginnie Mae, Fannie Mae or Freddie Mac, in order to receive
a high quality rating from the rating organizations (i.e., S&P or Moody's),
they normally are structured with one or more types of "credit enhancement."
MULTIPLE CLASS MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE
OBLIGATIONS. The Adjustable Rate Government, Short Duration Government,
Government Income, Core Fixed Income, Global Income and High Yield Funds may
also invest in multiple class securities, including collateralized mortgage
obligations ("CMOs") and Real Estate Mortgage Investment Conduit ("REMIC")
pass-through or participation certificates. CMOs provide an investor with a
specified interest in the cash flow from a pool of underlying mortgages or of
other Mortgage-Backed Securities. CMOs are issued in multiple classes, each
with a specified fixed or floating interest rate and a final scheduled
distribution date. In most cases, payments of principal are applied to the CMO
classes in the order of their respective stated maturities, so that no
principal payments will be made on a CMO class until all other classes having
an earlier stated maturity date are paid in full. A REMIC is a CMO that
qualifies for special tax treatment under the Internal Revenue Code of 1986,
as amended (the "Code"), and invests in certain mortgages principally secured
by interests in real property and other permitted investments. The Funds do
not intend to purchase residual interests in REMICs.
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STRIPPED MORTGAGE-BACKED SECURITIES. The Adjustable Rate Government, Short
Duration Government, Government Income, Core Fixed Income, Global Income and
High Yield Funds may invest in Stripped Mortgage-Backed Securities ("SMBS"),
which are derivative multiple class Mortgage-Backed Securities. SMBS are
usually structured with two different classes; one that receives 100% of the
interest payments and the other that receives 100% of the principal payments
from a pool of mortgage loans. If the underlying mortgage loans experience
different than anticipated prepayments of principal, a Fund may fail to fully
recoup its initial investment in these securities. 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 loans 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.
ASSET-BACKED SECURITIES
The Government Income, Core Fixed Income, Global Income and High Yield Funds
may invest in Asset-Backed Securities. The principal and interest payments on
Asset-Backed Securities are collateralized by pools of assets such as auto
loans, credit card receivables, leases, installment contracts and personal
property. Such asset pools are securitized through the use of special purpose
trusts or corporations. Principal and interest payments may be credit enhanced
by a letter of credit, a pool insurance policy or a senior/subordinated
structure.
MUNICIPAL SECURITIES
GENERAL. Municipal Securities in which the Short Duration Tax-Free and
Municipal Income Funds and, to a limited extent, the Core Fixed Income and
High Yield Funds, invest consist of bonds, notes, commercial paper and other
instruments (including participation interests in such securities) issued by
or on behalf of states, territories and possessions of the United States
(including the District of Columbia) and their political subdivisions,
agencies or instrumentalities, the interest on which, in the opinion of bond
counsel for the issuers or counsel selected by the Investment Adviser, is
exempt from regular federal income tax (i.e., excluded from gross income for
federal income tax purposes but not necessarily exempt from federal
alternative minimum tax or from state or local taxes). Such securities may pay
fixed, variable or floating rates of interest. Municipal Securities are often
issued to obtain funds for various public purposes, including the construction
of a wide range of public facilities such as bridges, highways, housing,
hospitals, mass transportation, schools, streets and water and sewer works.
Other public purposes for which Municipal Securities may be issued include
refunding outstanding obligations, obtaining funds for general operating
expenses, and obtaining funds to lend to other public institutions and
facilities.
PRIVATE ACTIVITY BONDS. Municipal Securities also include "private activity
bonds" or industrial development bonds, which are issued by or on behalf of
public authorities to obtain funds for such projects as privately-operated
housing facilities, airport, mass transit or port facilities and sewage
disposal. In addition, proceeds of certain industrial development bonds are
used for constructing, equipping, repairing or improving privately operated
industrial or commercial facilities. The Short Duration Tax-Free and Municipal
Income Funds' distributions attributable to the interest income from private
activity bonds may subject certain investors to the federal alternative
minimum tax.
MUNICIPAL LEASES AND CERTIFICATES OF PARTICIPATION. 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. Certificates of
participation represent undivided interests in municipal leases, installment
purchase agreements or
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other instruments. The primary risk associated with municipal lease
obligations and certificates of participation is that the governmental lessee
will fail to appropriate funds to enable it to meet its payment obligations
under the lease. 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. To the extent that a Fund invests in unrated municipal
leases or participates in such leases, the Trustees will monitor on an ongoing
basis the credit quality rating and risk of cancellation of such unrated
leases. Certain municipal lease obligations and certificates of participation
may be deemed illiquid for the purpose of a Fund's limitation on investments
in illiquid securities.
PRE-REFUNDED MUNICIPAL SECURITIES. The interest and principal payments on
pre-refunded Municipal Securities are typically paid from the cash flow
generated from an escrow fund consisting of U.S. Government Securities. These
payments have been "pre-refunded" using the escrow fund.
INSURED SECURITIES. "Insured" Municipal Securities are those for which
scheduled payments of interest and principal are guaranteed by a private (non-
governmental) insurance company. The insurance entitles a Fund to receive only
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 net asset
value of a Fund's shares.
AUCTION RATE SECURITIES. Auction rate Municipal Securities permit the holder
to sell the securities in an auction at par value at specified intervals. The
dividend or interest is typically 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 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 the risk that an auction will fail due to insufficient
demand for the securities. A Fund will take the time remaining until the next
scheduled auction date into account for purposes of determining the
securities' duration.
CORPORATE DEBT OBLIGATIONS
The Government Income, Core Fixed Income, Global Income and High Yield Funds
may invest in corporate debt obligations. In addition to obligations of
corporations, corporate debt obligations include securities issued by banks
and other financial institutions. Corporate debt obligations are subject to
the risk of an issuer's inability to meet principal and interest payments on
the obligations.
CONVERTIBLE SECURITIES
The Core Fixed Income and High Yield Funds may invest in convertible
securities, including debt obligations, and for High Yield Fund preferred
stock, of an issuer convertible at a stated exchange rate into common stock of
the issuer. Convertible securities generally offer lower interest or dividend
yields than non-convertible securities of similar quality. 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. 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 market price 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 a Fund invests are subject to the same rating
criteria as its other investments in fixed-income securities.
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PREFERRED STOCK, WARRANTS AND RIGHTS
The High Yield Fund may invest in preferred stock, warrants and rights.
Preferred stocks are securities that represent an ownership interest providing
the holder with claims on the issuer's earnings and assets before common stock
owners but after bond owners. Unlike debt securities, the obligations of an
issuer of preferred stock, including dividend and other payment obligations,
may not typically be accelerated by the holders of such preferred stock on the
occurrence of an event of default (such as a covenant default or filing of a
bankruptcy petition) or other non-compliance by the issuer with the terms of
the preferred stock. Often, however, on the occurrence of any such event of
default or non-compliance by the issuer, preferred stockholders will be
entitled to gain representation on the issuer's board of directors or increase
their existing board representation. In addition, preferred stockholders may
be granted voting rights with respect to certain issues on the occurrence of
any event of default.
Warrants and other rights are options to buy a stated number of shares of
common stock at a specified price at any time during the life of the warrant.
The holders of warrants and rights have no voting rights, receive no dividends
and have no rights with respect to the assets of the issuer.
FOREIGN INVESTMENTS
FOREIGN SECURITIES. The Global Income Fund will, and the Core Fixed Income
and High Yield Funds may, invest in fixed-income securities of foreign issuers
denominated in any currency. However, the Core Fixed Income and High Yield
Funds will limit their investments in non-U.S. dollar-denominated fixed-income
securities to 25% of their total assets. This may offer potential benefits
that are not available from investing exclusively in U.S. dollar-denominated
domestic issues. Foreign countries may have economic policies or business
cycles different from those of the U.S. and markets for foreign fixed-income
securities do not necessarily move in a manner parallel to U.S. markets.
Investing in the securities of foreign issuers involves risks that are not
typically associated with investing in fixed-income securities of domestic
issuers quoted in U.S. dollars. Such investments may be affected by changes in
currency rates, changes in foreign or U.S. laws or restrictions applicable to
such investments and in exchange control regulations (e.g., currency
blockage). A decline in the exchange rate of the currency (i.e., weakening of
the currency against the U.S. dollar) in which a portfolio security is quoted
or denominated relative to the U.S. dollar would reduce the value of the
portfolio security. In addition, if the currency in which a Fund receives
dividends, interest or other payments declines in value against the U.S.
dollar before such income is distributed as dividends to shareholders or
converted to U.S. dollars, the Fund may have to sell portfolio securities to
obtain sufficient cash to pay such dividends. In addition, clearance and
settlement procedures may be different in foreign countries and, in certain
markets, such procedures have on occasion been unable to keep pace with the
volume of securities transactions, making it more difficult to conduct such
transactions.
The Core Fixed Income, Global Income and High Yield Funds may invest in an
issuer domiciled in one country yet issuing the security in the currency of
another country. The Funds may also invest in debt securities denominated in
the European Currency Unit ("ECU"), which is a "basket" consisting of
specified amounts in the currencies of certain of the twelve member states of
the European Community. The specific amounts of currencies comprising the ECU
may be adjusted by the Council of Ministers of the European Community from
time to time to reflect changes in relative values of the underlying
currencies. In addition, the Funds may invest in securities denominated in
other currency "baskets."
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to U.S.
issuers. There may be less publicly available information about a foreign
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issuer than about a U.S. issuer. In addition, there is generally less
government regulation of foreign markets, companies and securities dealers
than in the U.S. Foreign securities markets may have substantially less volume
than U.S. securities markets and securities of many foreign issuers may be
less liquid and more volatile than securities of comparable domestic issuers.
Furthermore, with respect to certain foreign countries, there is a possibility
of nationalization, expropriation or confiscatory taxation, imposition of
withholding or other taxes on dividend or interest payments (or, in some
cases, capital gains), limitations on the removal of funds or other assets of
a Fund, political or social instability or diplomatic developments which could
affect investments in those countries.
FOREIGN GOVERNMENT SECURITIES. The Core Fixed Income, Global Income and High
Yield Funds may invest in debt obligations of foreign governments and
governmental agencies, including those of emerging countries. Investment in
sovereign debt obligations involves special risks not present in debt
obligations of corporate issuers. The issuer of the debt or the governmental
authorities that control the repayment of the debt may be unable or unwilling
to repay principal or interest when due in accordance with the terms of such
debt, and a Fund may have limited recourse in the event of a default. Periods
of economic uncertainty may result in the volatility of market prices of
sovereign debt, and in turn a Fund's net asset value, to a greater extent than
the volatility inherent in debt obligations of U.S. issuers. A sovereign
debtor's willingness or ability to repay principal and pay interest in a
timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's
policy toward international lenders and the political constraints to which a
sovereign debtor may be subject.
EMERGING MARKETS. The Core Fixed Income and Global Income Funds may invest
up to 10% and the High Yield Fund may invest up to 25% of their total assets
in securities of issuers located in countries with emerging economies or
securities markets ("emerging markets"). Political and economic structures in
many emerging markets may be undergoing significant evolution and rapid
development, and emerging markets may lack the social, political and economic
stability characteristics of more developed countries. As a result, the risks
relating to investments in foreign securities described above, including the
possibility of nationalization, expropriation and confiscatory taxation, may
be heightened. In addition, unanticipated political and social developments
may affect the value of the Fund's investments in emerging markets and the
availability to the Fund of additional investments in such countries. The
small size and inexperience of the securities markets in certain emerging
markets and the limited volume of trading in securities in those countries may
make the Fund's investments in such countries less liquid and more volatile
than investments in countries with more developed securities markets (such as
the U.S., Japan and most Western European countries). See the Additional
Statement for further information regarding a Fund's investments in emerging
markets.
FOREIGN CURRENCY TRANSACTIONS. Because investment in foreign issuers by the
Core Fixed Income, Global Income and High Yield Funds will usually involve
currencies of foreign countries, and because the Funds may have currency
exposure independent of their securities positions, the value of the assets of
a Fund as measured in U.S. dollars will be affected by changes in foreign
currency exchange rates. A Fund may, to the extent it invests in foreign
securities, purchase or sell forward foreign currency exchange contracts for
hedging purposes and to seek to protect against anticipated changes in future
foreign currency exchange rates. A Fund also may enter into such contracts to
seek to increase total return when the Investment Adviser anticipates that the
foreign currency will appreciate or depreciate in value, but securities
denominated or quoted in that currency do not present attractive investment
opportunities and are not held in the Fund's portfolio. When entered into to
seek to increase total return, forward foreign currency exchange contracts are
considered speculative. The Funds may also engage in cross-hedging by using
forward contracts in a currency different from that in which the hedged
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security is denominated or quoted if the Investment Advisers determine that
there is a pattern of correlation between the two currencies. If a Fund enters
into a forward foreign currency exchange contract to buy foreign currency for
any purpose or sell foreign currency to seek to increase total return, the
Fund will be required to place cash or liquid assets in a segregated account
with the Fund's custodian in an amount equal to the value of the Fund's total
assets committed to the consummation of the forward contract. A Fund will
incur costs in connection with conversions between various currencies. A Fund
may hold foreign currency received in connection with investments in foreign
securities when, in the judgment of the Investment Adviser, it would be
beneficial to convert such currency into U.S. dollars at a later date, based
on anticipated changes in the relevant exchange rate.
Currency exchange rates may fluctuate significantly over short periods of
time causing, along with other factors, a Fund's net asset value to fluctuate.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments
in different countries, actual or anticipated changes in interest rates and
other complex factors, as seen from an international perspective. Currency
exchange rates also can be affected unpredictably by the intervention of U.S.
or foreign governments or central banks, or the failure to intervene, or by
currency controls or political developments in the U.S. or abroad. To the
extent that a substantial portion of a Fund's total assets, adjusted to
reflect the Fund's net position after giving effect to currency transactions,
is denominated or quoted in the currencies of foreign countries, the Fund will
be more susceptible to the risk of adverse economic and political developments
within those countries.
The market in forward foreign currency exchange contracts, currency swaps
and other privately negotiated currency instruments offers less protection
against defaults by the other party to such instruments than is available for
currency instruments traded on an exchange. Such contracts are subject to the
risk that the counterparty to the contract will default on its obligations.
Since these contracts are not guaranteed by an exchange or clearinghouse, a
default on a contract would deprive a Fund of unrealized profits, transaction
costs or the benefits of a currency hedge or force a Fund to cover its
purchase or sale commitments, if any, at the current market price. A Fund will
not enter into forward foreign currency exchange contracts, currency swaps or
other privately negotiated currency instruments 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 Investment Adviser.
The Core Fixed Income, Global Income and High Yield Fund's use of foreign
currency management techniques in emerging markets may be limited. Due to the
limited market for these instruments in emerging markets, the Investment
Adviser does not currently anticipate that a significant portion of the Fund's
currency exposure in emerging markets, if any, will be covered by such
instruments. For a discussion of such instruments and the risks associated
with their use, see "Investment Objective and Policies" in the Additional
Statement.
STRUCTURED SECURITIES
The Core Fixed Income, Global Income and High Yield Funds may invest in
structured securities. The value of the principal of and/or interest on such
securities is determined by reference to changes in the value of specific
currencies, interest rates, commodities, indices or other financial indicators
(the "Reference") or the relative change in two or more References. The
interest rate or the principal amount payable upon maturity or redemption may
be increased or decreased depending upon changes in the applicable Reference.
The terms of the structured securities may provide that in certain
circumstances no principal is due at maturity and, therefore, result in the
loss of a Fund's investment. Structured securities may be positively or
negatively indexed, so that appreciation of the Reference may produce an
increase or decrease in the interest rate or value of the security at
maturity. In
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addition, changes in the interest rates or the value of the security at
maturity may be a multiple of changes in the value of the Reference.
Consequently, structured securities may entail a greater degree of market risk
than other types of fixed-income securities. Structured securities may also be
more volatile, less liquid and more difficult to accurately price than less
complex securities.
ZERO COUPON, DEFERRED INTEREST, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS
Each Fund may invest in zero coupon, deferred interest and capital
appreciation bonds. These are securities issued at a discount from their face
value because interest payments are typically postponed until maturity. The
amount of the discount rate varies depending on factors including the time
remaining until maturity, prevailing interest rates, the security's liquidity
and the issuer's credit quality. These securities also may take the form of
debt securities that have been stripped of their interest payments. Each Fund
may also invest in pay-in-kind securities which are securities that have
interest payable by the delivery of additional securities. A portion of the
discount with respect to stripped tax-exempt securities or their coupons may
be taxable. The market prices of zero coupon, deferred interest, pay-in-kind
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. A Fund's investments in zero coupon,
deferred interest, pay-in-kind and capital appreciation bonds or stripped
securities may require the Fund to sell certain of its portfolio securities to
generate sufficient cash to satisfy certain income distribution requirements.
See "Taxation" in the Additional Statement.
RISK FACTORS
INTEREST RATE RISK. When interest rates decline, the market value of fixed
income securities tends to increase. Conversely, when interest rates increase,
the market value of fixed-income securities tends to decline. Volatility of a
security's market value will differ depending upon the security's duration,
the issuer and the type of instrument.
DEFAULT RISK/CREDIT RISK. Investments in fixed-income securities are subject
to the risk that the issuer could default on its obligations and a Fund could
sustain losses on such investments. A default could impact both interest and
principal payments.
CALL RISK AND EXTENSION RISK. Fixed-income securities may be subject to both
call risk and extension risk. Call risk (i.e., where the issuer exercises its
right to pay principal on an obligation earlier than scheduled) causes cash
flow to be returned earlier than expected. This typically results when
interest rates have declined and a Fund will suffer from having to reinvest in
lower yielding securities. Extension risk (i.e., where the issuer exercises
its right to pay principal on an obligation later than scheduled) causes cash
flows to be returned later than expected. This typically results when interest
rates have increased and a Fund will suffer from the inability to invest in
higher yielding securities. Certain types of U.S. Government, Asset-Backed,
corporate, foreign, Mortgage-Backed and Municipal Securities have call and/or
extension risk.
The investment characteristics of Mortgage-Backed Securities and Asset-
Backed Securities differ from those of traditional fixed-income securities
because they generally have both call risk (also known as prepayment risk) and
extension risk. Homeowners have the option to prepay their mortgage.
Therefore, the duration of a security backed by home mortgages can either
shorten (call risk) or lengthen (extension risk). Investors are
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exposed to the fluctuating principal and interest payments associated with
such securities. In general, if interest rates on new mortgage loans fall
sufficiently below the interest rates on existing outstanding mortgage loans,
the rate of prepayment would be expected to increase. Conversely, if mortgage
loan interest rates rise above the interest rates on existing outstanding
mortgage loans, the rate of prepayment would be expected to decrease.
ARMs also have the risk of prepayments, which will have a greater impact on
the Adjustable Rate Government Fund. The rate of principal prepayments with
respect to ARMs has fluctuated in recent years. As with fixed rate mortgage
loans, ARMs may be subject to a greater rate of principal repayments in a
declining interest rate environment. For example, if prevailing interest rates
fall significantly, ARMs could be subject to higher prepayment rates (than if
prevailing interest rates remain constant or increase) because the
availability of low fixed rate mortgages may encourage mortgagors to refinance
their ARMs to "lock-in" a fixed-rate mortgage. Conversely, if prevailing
interest rates rise significantly, ARMs may prepay slower. As with fixed-rate
mortgages, ARM prepayment rates vary in both stable and changing interest rate
environments. There are certain ARMs where the homeowner's payments do not
fully cover interest, so the principal balance increases over time. These
"negative amortizing" ARMs may be subject to greater default risk.
DERIVATIVE MORTGAGE-BACKED SECURITIES. Because derivative Mortgage-Backed
Securities (such as principal-only (POs), interest-only (IOs) or inverse
floating-rate securities) are more exposed to mortgage prepayments, they
generally involve a greater amount of risk. Small changes in prepayments can
significantly impact the cash flow and the market value of these securities.
The risk of faster than anticipated prepayments generally adversely affects
IOs, super floaters and premium priced Mortgage-Backed Securities. The risk of
slower than anticipated prepayments generally adversely affects POs, floating-
rate securities subject to interest rate caps, support tranches and discount
priced Mortgage-Backed Securities. In addition, particular derivative
securities may be leveraged such that their exposure (i.e., price sensitivity)
to interest rate and/or prepayment risk is magnified.
TAX RISK OF MUNICIPAL SECURITIES. Due to Municipal Securities' tax-exempt
status, their yields and market values may be more adversely impacted by
changes in tax rates and policies than taxable fixed-income securities.
Because interest income from Municipal Securities is not subject to regular
federal income taxation, the attractiveness of Municipal Securities in
relation to other investment alternatives is affected by changes in federal
income tax rates applicable to, or the continuing federal income tax-exempt
status of, such interest income. Any proposed or actual changes in such rates
or exempt status, therefore, can significantly affect the demand for and
supply, liquidity and marketability of Municipal Securities, which could in
turn affect a Fund's ability to acquire and dispose of Municipal Securities at
desirable yield and price levels.
RISKS OF INVESTING IN NON-INVESTMENT GRADE FIXED-INCOME SECURITIES. Non-
investment grade fixed- income securities are considered predominantly
speculative by traditional investment standards. In some cases, these
obligations may be highly speculative and have poor prospects for reaching
investment grade standing. Non-investment grade fixed-income securities and
unrated securities of comparable credit quality (commonly known as "junk
bonds") are subject to the increased risk of an issuer's inability to meet
principal and interest obligations. These securities, also referred to as high
yield securities, may be subject to greater price volatility due to such
factors as specific corporate developments, interest rate sensitivity,
negative perceptions of the junk bond markets generally and less secondary
market liquidity.
Non-investment grade fixed-income securities are often issued in connection
with a corporate reorganization or restructuring or as part of a merger,
acquisition, takeover or similar event. They are also issued by less
established companies seeking to expand. Such issuers are often highly
leveraged and generally less able than
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more established or less leveraged entities to make scheduled payments of
principal and interest in the event of adverse developments or business
conditions.
The market value of non-investment grade fixed-income securities tends to
reflect individual corporate developments to a greater extent than that of
higher rated securities which react primarily to fluctuations in the general
level of interest rates. As a result, a Fund's ability to achieve its
investment objectives may depend to a greater extent on the Investment
Adviser's judgment concerning the creditworthiness of issuers than funds which
invest in higher-rated securities. Issuers of non-investment grade fixed-
income securities may not be able to make use of more traditional methods of
financing and their ability to service debt obligations may be more adversely
affected than issuers of higher-rated securities by economic downturns,
specific corporate developments or the issuer's inability to meet specific
projected business forecasts. Negative publicity about the junk bond market
and investor perceptions regarding lower rated securities, whether or not
based on fundamental analysis, may depress the prices for such securities.
A holder's risk of loss from default is significantly greater for non-
investment grade fixed-income securities than is the case for holders of other
debt securities because such non-investment grade securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities. Investment by a Fund in defaulted securities poses
additional risk of loss should nonpayment of principal and interest continue
in respect of such securities. Even if such securities are held to maturity,
recovery by a Fund of its initial investment and any anticipated income or
appreciation is uncertain.
The secondary market for non-investment grade fixed-income securities is
concentrated in relatively few market makers and is dominated by institutional
investors, including mutual funds, insurance companies and other financial
institutions. Accordingly, the secondary market for such securities is not as
liquid as, and is more volatile than, the secondary market for higher-rated
securities. In addition, market trading volume for high yield fixed-income
securities is generally lower and the secondary market for such securities
could contract under adverse market or economic conditions, independent of any
specific adverse changes in the condition of a particular issuer. These
factors may have an adverse effect on the market price and a Fund's ability to
dispose of particular portfolio investments. A less liquid secondary market
also may make it more difficult for a Fund to obtain precise valuations of the
high yield securities in its portfolio.
Credit ratings issued by credit rating agencies are designed to evaluate the
safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities
and, therefore, may not fully reflect the true risks of an investment. In
addition, credit rating agencies may or may not make timely changes in a
rating to reflect changes in the economy or in the conditions of the issuer
that affect the market value of the security. Consequently, credit ratings are
used only as a preliminary indicator of investment quality. Investments in
non-investment grade and comparable unrated obligations will be more dependent
on the Investment Adviser's credit analysis than would be the case with
investments in investment-grade debt obligations. The Investment Adviser
employs its own credit research and analysis, which includes a study of
existing debt, capital structure, ability to service debt and to pay
dividends, the issuer's sensitivity to economic conditions, its operating
history and the current trend of earnings. The Investment Adviser continually
monitors the investments in a Fund's portfolio and evaluates whether to
dispose of or to retain non-investment grade and comparable unrated securities
whose credit ratings or credit quality may have changed.
OTHER RISKS. Floating rate derivative debt securities present more complex
types of interest rate risks. For example, range floaters are subject to the
risk that the coupon will be reduced below market rates if a designated
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interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to lower prices in the event of an
unfavorable change in the spread between two designated interest rates.
Asset-Backed Securities present certain credit risks that are not presented
by Mortgage-Backed Securities because Asset-Backed Securities generally do not
have the benefit of a security interest in collateral that is comparable to
mortgage assets. There is the possibility that, in some cases, recoveries on
repossessed collateral may not be available to support payments on these
securities.
FOREIGN RISKS. See "Foreign Securities" for a description of the risks of
investing in foreign securities and currencies.
INVESTMENT TECHNIQUES
MORTGAGE DOLLAR ROLLS. The Adjustable Rate Government, Short Duration
Government, Government Income, Core Fixed Income and Global Income 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 substantially similar (same type, coupon and
maturity) but not identical securities on a specified future date. During the
roll period, the Fund loses the right to receive principal and interest paid
on the securities sold. However, the 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 or fee income plus the interest earned
on the cash proceeds of the securities sold until the settlement date for 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 the Fund . Successful
use of mortgage dollar rolls depends upon the Investment Adviser's ability to
predict correctly interest rates and mortgage prepayments. There is no
assurance that mortgage dollar rolls can be successfully employed. The Fund
will hold and maintain in a segregated account until the settlement date cash
or liquid assets in an amount equal to the forward purchase price. For
financial reporting and tax purposes, each Fund treats 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.
OPTIONS ON SECURITIES AND SECURITIES INDICES. Each Fund may write (sell)
covered call and put options and purchase put and call options on any
securities in which it may invest or on any securities index composed of
securities in which it may invest. 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 use of options to seek to increase total return involves the
risk of loss if the Investment Adviser is incorrect in its expectation of
fluctuations in securities prices or interest rates. The successful use of
options for hedging purposes also depends in part on the ability of the
Investment Adviser to manage future price fluctuations and the degree of
correlation between the options and securities markets. If the Investment
Adviser is incorrect in its expectation of changes in securities prices or
determination of the correlation between the securities indices on which
options are written and purchased and the securities in a Fund's investment
portfolio, the investment performance of the Fund will be less favorable than
it would have been in the absence of such options transactions. The writing of
options could increase a Fund's portfolio turnover rate and, therefore,
associated brokerage commissions or spreads.
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OPTIONS ON FOREIGN CURRENCIES. The Core Fixed Income, Global Income and High
Yield Funds may, to the extent they invest in foreign securities, purchase and
sell (write) put and call options on foreign currencies for the purpose of
protecting against declines in the U.S. dollar value of foreign portfolio
securities and against increases in the U.S. dollar cost of foreign securities
to be acquired. In addition, the Core Fixed Income, Global Income and High
Yield Funds may use options on currency to cross-hedge, which involves writing
or purchasing options on one currency to hedge against changes in exchange
rates for a different currency, if there is a pattern of correlation between
the two currencies. As with other kinds of option transactions, however, the
writing of an option on foreign currency will constitute only a partial hedge,
up to the amount of the premium received. If an option that a Fund has written
is exercised, the Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against exchange rate fluctuations; however, in the event of exchange rate
movements adverse to a Fund's position, the Fund may forfeit the entire amount
of the premium plus related transaction costs. In addition to purchasing put
and call options for hedging purposes, a Fund may purchase call or put options
on currency to seek to increase total return when the Investment Adviser
anticipates that the currency will appreciate or depreciate in value, but the
securities quoted or denominated in that currency do not present attractive
investment opportunities and are not held in the Fund's portfolio. When
purchased or sold to seek to increase total return, options on currencies are
considered speculative. Options on foreign currencies to be written or
purchased by the Funds will be traded on U.S. and foreign exchanges or over-
the-counter.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. To seek to increase
total return or to hedge against changes in interest rates or securities
prices, or in the case of the Core Fixed Income, Global Income and High Yield
Funds, currency exchange rates, a 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 such contracts and options. The futures
contracts may be based on various securities (such as U.S. Government
Securities), foreign currencies, in the case of the Core Fixed Income, Global
Income and High Yield Funds, securities indices and other financial
instruments and indices. A Fund will engage in futures and related options
transactions only for bona fide hedging purposes as defined in regulations of
the Commodity Futures Trading Commission or to seek to increase total return
to the extent permitted by such regulations. A Fund may not purchase or sell
futures contracts or purchase or sell related options to seek to increase
total return, except for closing purchase or sale transactions, if immediately
thereafter the sum of the amount of initial margin deposits and premiums paid
on a Fund's outstanding positions in futures and related options entered into
for the purpose of seeking to increase total return would exceed 5% of the
market value of a Fund's net assets. These transactions 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
segregate and maintain cash or liquid assets with a value equal to the amount
of the Fund's obligations.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. See
"Investment Techniques--Futures Contracts and Options on Futures Contracts" in
the Additional Statement. Thus, while a Fund may benefit from the use of
futures and options on futures, unanticipated changes in interest rates,
securities prices or currency exchange rates may result in a poorer overall
performance than if the Fund had not entered into any futures contracts or
options transactions. Because perfect correlation between a futures position
and portfolio position that is intended to be protected is impossible to
achieve, the desired protection may not be obtained and a Fund may be exposed
to risk of loss. The loss incurred by a Fund in entering into futures
contracts and in writing call options on futures is potentially unlimited and
may exceed the amount of the premium received. Futures markets are highly
volatile and the use of futures may increase the volatility of a Fund's net
asset value. The profitability of a Fund's trading in futures to seek to
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increase total return depends upon the ability of the Investment Adviser to
correctly analyze the futures markets. In addition, because of the low margin
deposits normally required in futures trading, a relatively small price
movement in a futures contract may result in substantial losses to a Fund.
Further, futures contracts and options on futures may be illiquid, and
exchanges may limit fluctuations in futures contract prices during a single
day.
CURRENCY SWAPS. The Core Fixed Income, Global Income and High Yield Funds
may enter into currency swaps for hedging purposes or to seek to increase
total return. Currency swaps involve the exchange by a Fund with another party
of their respective rights to make or receive payments in specified
currencies. Currency swaps usually involve the delivery of a gross payment
stream in one designated currency in exchange for the gross payment stream in
another designated currency. Therefore, the entire payment stream under a
currency swap is subject to the risk that the other party to the swap will
default on its contractual delivery obligations. A Fund will not enter into
swap transactions unless the unsecured commercial paper, senior debt or
claims-paying ability of the other party thereto is rated either AA or A-1 or
better by S&P or Aa or P-1 or better by Moody's, or, if unrated by such rating
organizations, determined to be of comparable quality by the Investment
Adviser. The use of currency swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Investment Adviser is
incorrect in its forecasts of 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. The staff of the SEC currently take the
position that swaps are illiquid and thus subject to a Fund's limitation on
investments in illiquid securities.
RISKS OF DERIVATIVE TRANSACTIONS. A Fund's transactions, if any, in options,
futures, options on futures, swap transactions, interest rate caps, floors and
collars, structured securities, inverse floating-rate securities and currency
forward contracts involve certain risks, including a possible lack of
correlation between changes in the value of hedging instruments and the
portfolio assets being hedged, the potential illiquidity of the markets for
derivative instruments, the risks arising from the margin requirements and
related leverage factors associated with such transactions. The use of these
management techniques to seek to increase total return may be regarded as a
speculative practice and involves the risk of loss if the Investment Adviser
is incorrect in its expectation of fluctuations in securities prices, interest
rates or currency prices. A Fund's use of certain derivative transactions may
be limited by the requirements of the Code for qualification as a regulated
investment company.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. Each Fund may purchase when-
issued securities. When-issued transactions arise when securities are
purchased by a Fund with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous price and yield to
the Fund at the time of entering into the transaction. Each Fund may also
purchase securities on a forward commitment basis; that is, make contracts to
purchase securities for a fixed price at a future date beyond the customary
three-day settlement. A 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 assets 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. The purchase of securities on a when-
issued or forward commitment basis involves a risk of loss if the value of the
security to be purchased declines prior to the settlement date. Although a
Fund would generally purchase securities on a when-issued or forward
commitment basis with the intention of acquiring securities for its portfolio,
a Fund may dispose of when-issued securities or forward commitments prior to
settlement if the Investment Adviser deems it appropriate to do so.
ILLIQUID AND RESTRICTED SECURITIES. A Fund may not invest more than 15% of
its net assets in illiquid investments, which includes securities (both
foreign and domestic) that are not readily marketable, swap transactions,
certain SMBS, certain municipal leases and participation interests, repurchase
agreements maturing
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in more than seven days, time deposits with a notice or demand period of more
than seven days and certain restricted securities, unless it is determined,
based upon the continuing review of the trading markets for a specific
restricted security, that such restricted security is eligible for resale
under Rule 144A under the Securities Act of 1933 and, therefore, is liquid.
The Trustees have adopted guidelines and delegated to the Investment Adviser
the daily function of determining and monitoring the liquidity of portfolio
securities. The Trustees, however, retain oversight focusing on factors such
as valuation, liquidity and availability of information and are ultimately
responsible for each determination. Investing in restricted securities
eligible for resale pursuant to Rule 144A may decrease the liquidity 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 and illiquid securities normally reflect a
discount, which may be significant, from the market price of comparable
securities for which a liquid market exists.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements with
dealers in U.S. Government Securities and member banks of the Federal Reserve
System which furnish collateral at least equal in value or market price to the
amount of their repurchase obligation. The Core Fixed Income, Global Income
and High Yield Funds may also enter into repurchase agreements involving
certain foreign government securities. If the other party or "seller"
defaults, a Fund might suffer a loss to the extent that the proceeds from the
sale of the underlying securities and other collateral held by the Fund in
connection with the related repurchase agreement are less than the repurchase
price. In addition, in the event of bankruptcy of the seller or failure of the
seller to repurchase the securities as agreed, a Fund could suffer losses,
including loss of interest on or principal of the security and costs
associated with delay and enforcement of the repurchase agreement. The
Trustees have reviewed and approved certain counterparties whom they believe
to be creditworthy and have authorized the Funds to enter into repurchase
agreements with such counterparties. In addition, each Fund, together with
other registered investment companies having management agreements with the
Investment Adviser, 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.
TEMPORARY INVESTMENTS. Each Fund may, for temporary defensive purposes,
invest up to 100% of its total assets in (a) U. S. Government Securities or
(b) repurchase agreements collateralized by U.S. Government Securities. The
Short Duration Tax-Free and Municipal Income Funds may for temporary defensive
purposes depart from their stated investment objectives and invest more than
20% of their respective net assets in taxable investments. The High Yield Fund
may for temporary defensive purposes invest in investment grade securities.
MISCELLANEOUS TECHNIQUES
In addition to the techniques and investments described above, each Fund
may, with respect to no more than 5% of its net assets, engage in the
following techniques and investments: (i) portfolio securities lending, (ii)
mortgage swaps (other than Short Duration Tax-Free and Municipal Income Funds)
and interest rate swaps, caps, floors and collars, (iii) inverse floating rate
securities, (iv) yield curve options, (v) other investment companies, (vi)
custodial receipts and (vii) with respect to the Short Duration Tax-Free and
Municipal Income Funds, tender option bonds and standby commitments. For more
information see the Additional Statement.
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INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions that are described
in detail under "Investment Restrictions" in the Additional Statement.
Fundamental investment restrictions of a Fund cannot be changed without
approval of a majority of the outstanding shares of that Fund. Each Fund's
investment objectives and all policies not specifically designated as
fundamental are non-fundamental and may be changed without shareholder
approval. If there is a change in a Fund's investment objectives, shareholders
should consider whether that Fund still remains an appropriate investment in
light of their then current financial positions and needs.
The Short Duration Tax-Free and Municipal Income Funds' policies to invest,
under normal market conditions, at least 80% of their respective net assets in
Municipal Securities, the interest on which is exempt from regular federal
income tax, is fundamental and may not be changed without shareholder
approval. For more information on a Fund's investment restrictions, an
investor should obtain the Additional Statement.
NON-DIVERSIFICATION STATUS. Since the Global Income Fund is "non-
diversified" under the Act, it is subject only to certain federal tax
diversification requirements. Under federal tax laws, the Global Income Fund
may, with respect to 50% of its total assets, invest up to 25% of its total
assets in the securities of any issuer (except that this limitation does not
apply to U.S. Government Securities). With respect to the remaining 50% of the
Fund's total assets, (1) the Fund may not invest more than 5% of its total
assets in the securities of any one issuer (other than the U.S. Government),
and (2) the Fund may not acquire more than 10% of the outstanding voting
securities of any one issuer. These tests apply at the end of each quarter of
its taxable year and are subject to certain conditions and limitations under
the Code. Since the Global Income Fund is not diversified under the Act, it
will be more susceptible to adverse developments affecting any single issuer.
The Adjustable Rate Government, Short Duration Government, Short Duration Tax-
Free, Government Income, Municipal Income, Core Fixed Income and High Yield
Funds are, in addition to these tax diversification requirements, also subject
to the diversification requirements arising out of their diversified status
under the Act.
PORTFOLIO TURNOVER
Each Fund may engage in active short-term trading to benefit from yield
disparities among different issues of securities or among the markets for
fixed-income securities, or for other reasons. It is anticipated that the
portfolio turnover rate of each Fund will vary from year to year. It is
anticipated that the annual portfolio turnover rate for the High Yield Fund
will generally not exceed 150%. The portfolio turnover rate is computed by
dividing the lesser of the dollar amount of securities purchased or securities
sold (excluding all securities whose maturities at acquisition are one year or
less) by the average monthly value of such securities owned during the year. A
100% turnover rate would occur for example, if all of the securities held by a
Fund were sold and replaced within one year. The Investment Adviser will not
consider the portfolio turnover rate a limiting factor in making investment
decisions for a Fund consistent with the Fund's investment objectives and
portfolio management policies. A high rate of portfolio turnover results in
increased transaction costs to a Fund. The portfolio turnover rate includes
the effect of entering into mortgage dollar rolls. See "Financial Highlights"
for a statement of each Fund's historical portfolio turnover rates.
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MANAGEMENT
TRUSTEES AND OFFICERS
The Trustees are responsible for deciding matters of general policy and
reviewing the actions of the Investment Advisers, distributor and transfer
agent. The officers of the Trust conduct and supervise each Fund's daily
business operations. The Additional Statement contains information as to the
identity of, and other information about, the Trustees and officers of the
Trust.
INVESTMENT ADVISERS
INVESTMENT ADVISERS. Goldman Sachs Funds Management, L.P., One New York
Plaza, New York, New York 10004, a Delaware limited partnership which is an
affiliate of Goldman Sachs, serves as the investment adviser to the Adjustable
Rate Government and Short Duration Government Funds. Goldman Sachs Funds
Management, L.P. registered as an investment adviser in 1990. Goldman Sachs
Asset Management, One New York Plaza, New York, New York 10004, a separate
operating division of Goldman Sachs, serves as investment adviser to the Short
Duration Tax-Free, Government Income, Municipal Income, Core Fixed Income and
High Yield Funds. Goldman Sachs registered as an investment adviser in 1981.
Goldman Sachs Asset Management International, 133 Peterborough Court, London
EC4A 2BB, England, an affiliate of Goldman Sachs, serves as investment adviser
to the Global Income Fund. Goldman Sachs Asset Management International became
a member of the Investment Management Regulatory Organization Limited in 1990
and registered as an investment adviser in 1991. As of June 30, 1997, GSAM,
GSFM and GSAMI, together with their affiliates, acted as investment adviser,
administrator or distributor for assets in excess of $ billion.
Under a Management Agreement with each Fund, the applicable Investment
Adviser, subject to the general supervision of the Trustees, provides day-to-
day advice as to the Fund's portfolio transactions. Goldman Sachs has agreed
to permit the Trust to use the name "Goldman Sachs" or a derivative thereof as
part of each Fund's name for as long as a Fund's Management Agreement is in
effect.
In performing its investment advisory services, each Investment Adviser,
while remaining ultimately responsible for the management of the Funds, is
able to draw upon the research and expertise of its affiliate offices for
portfolio decisions and management with respect to certain portfolio
securities. In addition, the Investment Advisers will have access to the
research of, and proprietary technical models developed by, Goldman Sachs and
may apply quantitative and qualitative analysis in determining the appropriate
allocations among the categories of issuers and types of securities.
Under the Management Agreement, each Investment Adviser also: (i) supervises
all non-advisory operations of each Fund that it advises; (ii) provides
personnel to perform such executive, administrative and clerical services as
are reasonably necessary to provide effective administration of each Fund;
(iii) arranges for at each Fund's expense (a) the preparation of all required
tax returns, (b) the preparation and submission of reports to existing
shareholders, (c) the periodic updating of prospectuses and statements of
additional information and (d) the preparation of reports to be filed with the
SEC and other regulatory authorities; (iv) maintains each Fund's records; and
(v) provides office space and all necessary office equipment and services.
ADJUSTABLE RATE GOVERNMENT AND SHORT DURATION GOVERNMENT FUNDS. The Fund's
portfolio manager is Jonathan A. Beinner. Mr. Beinner is a Vice President of
Goldman Sachs and Co-Head of GSAM's U.S. Fixed Income Department. Mr. Beinner
joined the Investment Adviser in 1990 after working in the trading and
arbitrage group of Franklin Savings Association.
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GOVERNMENT INCOME AND CORE FIXED INCOME FUNDS. The Fund's portfolio managers
are Jonathan A. Beinner and Richard C. Lucy. See above for information about
Mr. Beinner. Messrs. Beinner and Lucy each specialize in investing in a
particular type of security the Fund may hold. Mr. Lucy is a Vice President of
Goldman Sachs and Co-Head of GSAM's U.S. Fixed Income Department. Mr. Lucy
joined the Investment Adviser in 1992 after spending nine years managing fixed
income assets at Brown Brothers Harriman & Co.
SHORT DURATION TAX-FREE AND MUNICIPAL INCOME FUNDS. The Fund's portfolio
managers are Benjamin S. Thompson and Elisabeth Schupf Lonsdale. Mr. Thompson
and Ms. Lonsdale each specialize in municipal securities. Mr. Thompson's
responsibilities include developing investment strategy and structuring
portfolios.
Ms. Lonsdale is also responsible for GSAM's municipal credit research. Mr.
Thompson worked in the institutional sales and marketing group at GSAM until
he joined the fixed-income team in 1993. Prior to joining GSAM in early 1992,
Mr. Thompson worked in the Structured Finance Group of the Chase Manhattan
Bank. Before rejoining Goldman Sachs in 1995, Ms. Lonsdale was a Director of
Fitch Investors Service evaluating the credit ratings of tax-backed issues.
Prior to that, she worked for ten years in the Goldman Sachs Municipal Finance
Department.
GLOBAL INCOME FUND. The Fund's portfolio managers are Stephen Fitzgerald and
Andrew Wilson. Mr. Fitzgerald joined GSAMI in 1992 and is an Executive
Director and Chief Investment Officer for international fixed income. Prior to
1992, he spent two years managing multi-currency fixed income and balanced
portfolios at Invesco MIM Limited, where he was a senior member of the
derivative products group. Mr. Wilson joined GSAMI in 1995 and is Executive
Director and Portfolio Manager for international fixed income. Prior to
joining GSAMI, he spent three years as an Assistant Director at Rothschild
Asset Management where he was responsible for managing global and
international bond portfolios, with specific focus on the U.S., Canadian,
Australian and Japanese economies. Prior to his employment at Rothschild, Mr.
Wilson spent seven years at the Reserve Bank of New Zealand, his most recent
position as Trading Manager of foreign reserves management. Mr. Wilson's
employment at the Reserve Bank at New Zealand also included a two year
assignment to the foreign investment unit at the Bank of England in London.
It is the responsibility of the Investment Adviser to make investment
decisions for a Fund and to place the purchase and sale orders for the Fund's
portfolio transactions in U.S. and foreign securities and currency markets.
Such orders may be directed to any broker including, to the extent and in the
manner permitted by applicable law, Goldman Sachs or its affiliates. In
effecting purchases and sales of portfolio securities for the Funds, the
Investment Advisers will seek the best price and execution of a Fund's orders.
In doing so, where two or more brokers or dealers offer comparable prices and
execution for a particular trade, consideration may be given to whether the
broker or dealer provides investment research or brokerage services or sells
shares of any Goldman Sachs Fund. See the Additional Statement for a further
description of the Investment Advisers' brokerage allocation practices.
37
<PAGE>
As compensation for its services rendered and assumption of certain expenses
pursuant to separate Management Agreements, GSAM, GSFM and GSAMI are entitled
to the following fees, computed daily and payable monthly at the annual rates
listed below:
<TABLE>
<CAPTION>
FOR THE FISCAL
CONTRACTUAL YEAR ENDED
RATE* OCTOBER 31, 1996*
----------- -----------------
GSAM
- ----
<S> <C> <C>
Government Income................................. 0.65% 0.25%
Municipal Income.................................. 0.55% 0.55%
Short Duration Tax-Free........................... 0.40% 0.40%
Core Fixed Income................................. 0.40% 0.40%
High Yield........................................ 0.70% N/A
<CAPTION>
GSFM
- ----
<S> <C> <C>
Adjustable Rate Government........................ 0.40% 0.40%
Short Duration Government......................... 0.50% 0.40%
<CAPTION>
GSAMI
- -----
<S> <C> <C>
Global Income..................................... 0.90% 0.59%
</TABLE>
- --------
* With respect to the Government Income, Municipal Income and Global Income
Funds, a Management Agreement combining both advisory and administrative
services was adopted effective April 30, 1997. The Management Agreements for
the other funds previously combined such services. The contractual rate set
forth in the table is the rate payable under the Management Agreements and
is identical to the aggregate advisory and administration fees payable by
each Fund under the previously separate investment advisory (including
subadvisory in the case of the Global Income Fund) and administration
agreements. For the fiscal year ended October 31, 1996, the annual rate
expressed is the combined advisory and administration fees paid (after
voluntary fee limitations). The difference, if any, between the stated fees
and the actual fees paid by the Funds reflects that the applicable
Investment Adviser did not charge the full amount of the fees to which it
would have been entitled. The Investment Advisers may discontinue or modify
such limitations in the future at their discretion, although they have no
current intention to do so.
The Investment Advisers to the Short Duration Government, Short Duration
Tax-Free, Core Fixed Income, Government Income, Municipal Income, Global
Income and High Yield Funds have voluntarily agreed to reduce or limit certain
"Other Expenses" of such Funds (excluding management, distribution and
authorized dealer service fees, taxes, interest and brokerage fees and
litigation, indemnification and other extraordinary expenses and transfer
agency fees in the case of the Global Income and High Yield Funds) to the
extent such expenses exceed 0.05%, 0.05%, 0.05%, 0.00%, 0.05%, 0.06% and 0.01%
per annum of such Funds' average daily net assets, respectively. Such
reductions or limits, if any, are calculated monthly on a cumulative basis and
may be discontinued or modified by the applicable Investment Adviser in its
discretion at any time.
Goldman Sachs may from time to time, at its own expense, provide
compensation to certain Authorized Dealers and other persons for performing
administrative services to their customers. These services include maintaining
account records, processing orders to purchase, redeem and exchange Fund
shares and responding to certain customer inquiries. In addition, these
services may also include responding to certain inquiries from and providing
written materials to depository institutions about a Fund; furnishing advice
about and assisting depository institutions in obtaining from state regulatory
agencies any rulings, exemptions or other authorizations
38
<PAGE>
that may be required to conduct a mutual fund sales program; acting as liaison
between depository institutions and national regulatory organizations;
assisting with the preparation of sales material; and providing general
assistance and advice in establishing and maintaining mutual fund sales
programs on the premises of depository institutions.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
GOLDMAN SACHS. The involvement of the Investment Advisers, 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 a Fund or limit a Fund's investment activities. Goldman Sachs and
its affiliates engage in proprietary trading and advise accounts and funds
which have investment objectives similar to those of the Funds and/or which
engage in and compete for transactions in the same types of securities,
currencies and instruments as the Funds. Goldman Sachs and its affiliates will
not 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 in general it is not anticipated that the Investment Advisers will have
access to proprietary information for the purpose of managing a Fund. The
results of a Fund's investment activities, therefore, may differ from those of
Goldman Sachs and its affiliates and it is possible that a Fund could sustain
losses during periods in which Goldman Sachs and its affiliates and other
accounts achieve significant profits on their trading for proprietary or other
accounts. From time to time, a Fund's activities may be limited because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. See
"Management--Activities of Goldman Sachs and its Affiliates and Other Accounts
Managed by Goldman Sachs" in the Additional Statement for further information.
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of each Fund's shares. Shares may
also be sold by Authorized Dealers. Authorized Dealers include investment
dealers that are members of the NASD and certain other financial service
firms. To become an Authorized Dealer, a dealer or financial service firm must
enter into a sales agreement with Goldman Sachs. The minimum investment
requirements, services, programs and purchase and redemption options for
shares purchased through a particular Authorized Dealer may be different from
those available to investors purchasing through other Authorized Dealers.
Goldman Sachs, 4900 Sears Tower, Chicago, Illinois 60606 also serves as each
Fund's transfer agent (the "Transfer Agent") and as such performs various
shareholder servicing functions. As compensation for the services rendered to
the Government Income, Municipal Income, Global Income and High Yield Funds by
Goldman Sachs (as Transfer Agent) and the assumption by Goldman Sachs of the
expenses related thereto, Goldman Sachs is entitled to receive a fee from each
such Fund, with respect to Class A, Class B and Class C shares of $12,000 per
year plus $7.50 per account, together with out-of-pocket and transaction-
related expenses (including those out-of-pocket expenses payable to servicing
and/or sub-transfer agents). Goldman Sachs is entitled to receive a fee from
the Adjustable Rate Government Fund, Short Duration Government, Short Duration
Tax-Free and Core Fixed Income Funds with respect to Class A, Class B and
Class C shares, where applicable, equal to its proportionate share of the
total transfer agency fees borne by the Fund. Such fees are equal to the fixed
charges set forth above applicable to Class A, Class B and Class C shares plus
0.04% of the average daily net assets of the other classes of the Fund.
Shareholders with inquiries regarding any Fund should contact Goldman Sachs
(as Transfer Agent) at the address or the telephone number set forth on the
back cover page of this Prospectus.
39
<PAGE>
REPORTS TO SHAREHOLDERS
Shareholders will receive an annual report containing audited financial
statements and a semi-annual report. Each shareholder will also be provided
with a printed confirmation for each transaction in the shareholder's account
and an individual quarterly account statement. A year-to-date statement for
any account will be provided upon request made to Goldman Sachs. The Funds do
not generally provide sub-accounting services.
HOW TO INVEST
ALTERNATIVE PURCHASE ARRANGEMENTS
Each Fund continuously offers through this Prospectus Class A, Class B and
Class C shares (except that the Adjustable Rate Government Fund does not
currently offer Class B and Class C shares), as described more fully in "How
to Buy Shares of the Funds." If you do not specify in your instructions to the
Funds which class of shares you wish to purchase, the Funds will assume that
your instructions apply to Class A shares.
CLASS A SHARES. If you invest less than $1 million in Class A shares you
will pay an initial sales charge. Certain purchases may qualify for reduced
initial sales charges. If you initially invest $1 million or more in Class A
shares of a Fund, no sales charge will be imposed at the time of purchase, but
you will incur a deferred sales charge equal to 1.00% if you redeem your
shares within 18 months of purchase. Direct purchases (as opposed to
exchanges) of $1 million or more of Class A shares of the Adjustable Rate
Government Fund will not be subject to a deferred sales charge when redeemed.
Class A shares are subject to distribution fees of 0.25% (which currently are
being waived in the case of Adjustable Rate Government, Short Duration
Government, Short Duration Tax-Free, Core Fixed Income, Municipal Income,
Government Income and High Yield Funds and are limited to 0.21% for the Global
Income Fund) and authorized dealer service fees of 0.25%, respectively, of
each Fund's average daily net assets attributable to Class A shares.
CLASS B SHARES. Class B shares are sold without an initial sales charge, but
are subject to a contingent deferred sales charge ("CDSC") of up to 4% in the
case of the Short Duration Government and Short Duration Tax-Free Funds and up
to 5% in the case of the Government Income, Municipal Income, Core Fixed
Income, Global Income and High Yield Funds if redeemed within six years of
purchase. Class B shares are subject to distribution and authorized dealer
service fees of 0.75% (which are currently being limited to 0.60%) and 0.25%,
respectively, of each of Short Duration Government and Short Duration Tax-Free
Fund's average daily net assets attributable to Class B shares and of 0.75%
and 0.25%, respectively, of each of Government Income, Municipal Income, Core
Fixed Income, Global Fixed Income and High Yield Fund's average daily net
assets attributable to Class B shares. See "Distribution and Authorized Dealer
Service Plans." Class B shares will automatically convert to Class A shares,
based on their relative net asset values, eight years after the initial
purchase. Your entire investment in Class B shares is available to work for
you from the time you make your initial investment, but the distribution fee
paid by Class B shares will cause your Class B shares (until conversion to
Class A shares) to have a higher expense ratio and to pay lower dividends, to
the extent dividends are paid, than Class A shares.
CLASS C SHARES. Class C shares are sold without an initial sales charge, but
are subject to a CDSC of 1% if redeemed within 12 months of purchase. Class C
shares are subject to distribution and authorized dealer
service fees [of 0.75% (which is currently being limited to 0.60%) and 0.25%,
respectively, of each of Short Duration Government and Short Duration Tax-Free
Fund's average daily net assets attributable to Class B shares
40
<PAGE>
and] of 0.75% and 0.25%, respectively, of each [of Government Income,
Municipal Income, Core Fixed Income, Global Fixed Income and High Yield]
Fund's average daily net assets attributable to Class C shares. See
"Distribution and Authorized Dealer Service Plans." Class C shares have no
conversion feature, and accordingly, an investor that purchases Class C shares
will be subject to distribution fees that will be imposed on Class C shares
for an indefinite period, subject to annual approval by the Fund's Trustees
and certain regulatory limitations. Your entire investment in Class C shares
is available to work for you from the time you make your initial investment,
but the distribution fee paid by Class C shares will cause your Class C shares
to have a higher expense ratio and to pay lower dividends, to the extent
dividends are paid, then Class A shares (or Class B shares after conversion to
Class A shares).
FACTORS TO CONSIDER IN CHOOSING CLASS A, CLASS B OR CLASS C SHARES. The
decision as to which class to purchase depends on the amount you invest, the
intended length of the investment and your personal situation. For example, if
you are making an investment of $100,000 or more that qualifies for a reduced
sales charge, you should consider purchasing Class A shares. A brief
description of when the initial sales charge may be reduced or eliminated is
set forth below under "Right of Accumulation" and "Statement of Intention." If
you prefer not to pay an initial sales charge on an investment and plan to
hold your investment for at least six years (five in the case of the Short
Duration Government and Tax-Free Funds), you might consider purchasing Class B
shares. If you prefer not to pay an initial sales charge and are unsure of the
length of your investment or plan to hold your investment for less than eight
years, you may prefer Class C shares. There is no size limit on the purchase
of Class A shares. There is a maximum purchase limitation of $250,000 and
$1,000,000 in the aggregate on purchases of Class B shares and Class C shares,
respectively. Although Class C shares are subject to a CDSC for only twelve
months at a lower rate than Class B shares, Class C shares do not have the
conversion feature applicable to Class B shares, making them subject to higher
distribution fees for an indefinite period. Authorized Dealers may receive
different compensation for selling Class A, Class B or Class C shares.
HOW TO BUY SHARES OF THE FUNDS -- CLASS A, CLASS B AND CLASS C SHARES
You may purchase shares of the Funds through any Authorized Dealer
(including Goldman Sachs) or directly from a Fund, c/o National Financial Data
Services, Inc. ("NFDS"), P.O. Box 419711, Kansas City, MO 64141-6711 on any
Business Day (as defined under "Additional Information") at the net asset
value next determined after receipt of an order, plus, in the case of Class A
shares, any applicable sales charge. If, by the close of regular trading on
the New York Stock Exchange (normally 4:00 p.m. New York time), a purchase
order is received by a Fund, Goldman Sachs or an Authorized Dealer, the price
per share will be based on the net asset value computed on the day the
purchase order is received. If a purchase order for shares of the Adjustable
Rate Government, Short Duration Government, Short Duration Tax-Free, Core
Fixed Income or High Yield Funds is received by an Authorized Dealer by
4:00 p.m., New York time and payment is made by (a) wire transfer or ACH
transfer, shares will be issued and dividends declared with respect to such
shares will begin to accrue on the later of (i) the Business Day after receipt
by the Authorized Dealer of the purchase order or (ii) the date of receipt of
payment for the shares or (b) check, Federal Reserve draft or bank wire,
shares will be issued and dividends declared with respect to such shares will
begin to accrue on the Business Day after the date payment is received.
Dividends with respect to the Government Income and Municipal Income Funds
declared with respect to such shares will begin to accrue on the Business Day
after receipt of payment. Shares of the Global Income Fund will begin to be
eligible for dividends paid on or after the day the shares are purchased.
The minimum initial investment in each Fund is $1,000. An initial investment
minimum of $250 applies to purchases in connection with Individual Retirement
Account Plans or accounts established under the Uniform
41
<PAGE>
Gift to Minors Act ("UGMA"). For purchases through the Automatic Investment
Plan, the minimum investment is $50. The minimum subsequent investment is $50.
These requirements may be waived at the discretion of the Trust's officers.
You may pay for purchases of shares by check (except that the Trust will not
accept a check drawn on a foreign bank or a third party check), Federal
Reserve draft, federal funds wire, ACH transfer or bank wire. Purchases of
shares by check or Federal Reserve draft should be made payable as follows:
(i) to an investor's Authorized Dealer, if purchased through such Authorized
Dealer, or (ii) to Goldman Sachs Fixed Income Funds -- (Name of Fund and Class
of shares) and sent to NFDS, P.O. Box 419711, Kansas City, MO 64141-6711.
Federal funds wires, ACH transfers and bank wires should be sent to State
Street Bank and Trust Company ("State Street"). Payment must be received
within three Business Days after receipt of the purchase order. An investor's
Authorized Dealer is responsible for forwarding payment promptly to the Fund.
In order to make an initial investment in a Fund, an investor must establish
an account with the Fund by furnishing to the Fund, Goldman Sachs or the
investor's Authorized Dealer the information in the Account Application
attached to this Prospectus. The Funds may refuse to open an account for any
investor who fails to (1) provide a social security number or other taxpayer
identification number, or (2) certify that such number is correct (if required
to do so under applicable law).
The Funds reserve the right to redeem shares of any shareholder whose
account balance is less than $50 as a result of earlier redemptions. Such
redemptions will not be implemented if the value of a shareholder's account
falls below the minimum account balance solely as a result of market
conditions. A Fund will give sixty (60) days' prior written notice to
shareholders whose shares are being redeemed to allow them to purchase
sufficient additional shares of the Fund to avoid such redemption. In
addition, the Funds and Goldman Sachs reserve the right to modify the minimum
investment, the manner in which shares are offered and the sales charge rates
applicable to future purchases of shares.
OFFERING PRICE -- CLASS A SHARES
The offering price of Class A shares of the Government Income, Municipal
Income, Core Fixed Income, Global Income and High Yield Funds is the next
determined net asset value per share plus a sales charge, if any, paid to
Goldman Sachs at the time of purchase of shares as shown in the following
table:
<TABLE>
<CAPTION>
SALES CHARGE MAXIMUM DEALER
SALES CHARGE AS AS PERCENTAGE ALLOWANCE AS
AMOUNT OF PURCHASE PERCENTAGE OF OF NET AMOUNT PERCENTAGE OF
(INCLUDING SALES CHARGE, IF ANY) OFFERING PRICE INVESTED OFFERING PRICE***
- -------------------------------- --------------- ------------- -----------------
<S> <C> <C> <C>
Less Than $100,000............. 4.50% 4.71% 4.00%
$100,000 up to (but less than)
$250,000...................... 3.00 3.09 2.50
$250,000 up to (but less than)
$500,000...................... 2.50 2.56 2.00
$500,000 up to (but less than)
$1 million.................... 2.00 2.04 1.75
$1 million or more............. 0.00* 0.00* **
The offering price of Class A shares of the Short Duration Government and
Short Duration Tax-Free Funds is the next determined net asset value per share
plus a sales charge, if any, paid to Goldman Sachs at the time of purchase of
shares as shown in the following table:
<CAPTION>
SALES CHARGE MAXIMUM DEALER
SALES CHARGE AS AS PERCENTAGE ALLOWANCE AS
AMOUNT OF PURCHASE PERCENTAGE OF OF NET AMOUNT PERCENTAGE OF
(INCLUDING SALES CHARGE, IF ANY) OFFERING PRICE INVESTED OFFERING PRICE***
- -------------------------------- --------------- ------------- -----------------
<S> <C> <C> <C>
Less than $250,000............. 3.00% 3.09% 2.50%
$250,000 up to (but less than)
$500,000...................... 2.50 2.56 2.00
$500,000 up to (but less than)
$1 million.................... 2.00 2.04 1.75
$1 million or more............. 0.00* 0.00* **
</TABLE>
42
<PAGE>
The offering price of Class A shares of the Adjustable Rate Government Fund
is the next determined net asset value per share plus a sales charge, if any,
paid to Goldman Sachs at the time of purchase of shares as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE MAXIMUM DEALER
SALES CHARGE AS AS PERCENTAGE ALLOWANCE AS
AMOUNT OF PURCHASE PERCENTAGE OF OF NET AMOUNT PERCENTAGE OF
(INCLUDING SALES CHARGE, IF ANY) OFFERING PRICE INVESTED OFFERING PRICE***
- -------------------------------- --------------- ------------- -----------------
<S> <C> <C> <C>
Less Than $500,000............. 1.50% 1.52% 1.25%
$500,000 up to (but less than)
$1 million.................... 1.00 1.01 0.75
$1 million or more............. 0.00 0.00 0.00
</TABLE>
- --------
* No sales charge is payable at the time of purchase of Class A shares of $1
million or more, but a CDSC may be imposed in the event of certain
redemption transactions made within 18 months of purchase.
** Goldman Sachs pays a one-time commission to Authorized Dealers who
initiate or are responsible for purchases of $1 million or more of shares
of the Funds equal to 1.00% of the amount under $3 million, 0.50% of the
next $2 million, and 0.25% thereafter. Goldman Sachs may also pay, with
respect to all or a portion of the amount purchased, a commission in
accordance with the foregoing schedule to Authorized Dealers who initiate
or are responsible for purchases of $1 million or more by plans or "wrap"
accounts satisfying the criteria set forth in (h) or (j) below. Purchases
by such plans will be made at net asset value with no initial sales
charge, but if all of the shares held are redeemed within 18 months after
the end of the calendar month in which such purchase was made, a
contingent deferred sales charge (CDSC), as described below, of 1.00% will
be imposed upon the plan sponsor or the third party administrator. In
addition, Authorized Dealers shall remit to Goldman Sachs such payments
received in connection with "wrap" accounts in the event that shares are
redeemed within 18 months after the end of the calendar month in which the
purchase was made.
*** During special promotions, the entire sales charge may be reallowed to
Authorized Dealers. Authorized Dealers to whom substantially the entire
sales charge is reallowed may be deemed to be "underwriters" under the
Securities Act of 1933.
Purchases of $1 million or more of Class A shares of each Fund (other than
Adjustable Rate Government Fund, will be made at net asset value with no
initial sales charge, but if the shares are redeemed within 18 months after
the end of the calendar month in which the purchase was made, excluding any
period of time in which the shares were exchanged into and remained invested
in an ILA Portfolio (the contingent deferred sales charge period), a CDSC of
1.00% will be imposed. Any applicable CDSC will be assessed on an amount equal
to the lesser of the current market value or the original purchase cost of the
redeemed Class A shares. Accordingly, no CDSC will be imposed on increases in
account value above the initial purchase price, including any dividends which
have been reinvested in additional Class A shares. In determining whether a
CDSC applies to a redemption, the calculation will be determined in a manner
that results in the lowest possible rate being charged. Therefore, it will be
assumed that the redemption is first made from any Class A shares in your
account that are not subject to the CDSC. The CDSC is waived on redemptions in
certain circumstances. See "Waiver or Reduction of Contingent Deferred Sales
Charges" below.
Class A shares of the Funds may be sold at net asset value without payment
of any sales charge to (a) Goldman Sachs, its affiliates or their respective
officers, partners, directors or employees (including retired
43
<PAGE>
employees and former partners), any partnership of which Goldman Sachs is a
general partner, any Trustee or officer of the Trust and designated family
members of any of the above individuals; (b) qualified retirement plans of
Goldman Sachs; (c) trustees or directors of investment companies for which
Goldman Sachs or an affiliate acts as sponsor; (d) any employee or registered
representative of any Authorized Dealer or their respective spouses and
children; (e) banks, trust companies or other types of depository institutions
investing for their own account or investing for accounts for which they have
investment discretion; (f) banks, trust companies or other types of depository
institutions investing for accounts for which they do not have investment
discretion; (g) any state, county or city, or any instrumentality, department,
authority or agency thereof, which is prohibited by applicable investment laws
from paying a sales charge or commission in connection with the purchase of
shares of a Fund; (h) pension and profit sharing plans, pension funds and
other company-sponsored benefit plans that (1) buy shares costing $500,000 or
more, or (2) have at the time of purchase, 100 or more eligible participants,
or (3) certify that they project to have annual plan purchases of $200,000 or
more, or (4) are provided administrative services by a third-party
administrator that in the aggregate satisfies (1) or (3) above;
(i) shareholders whose purchase is attributable to redemption proceeds
(subject to appropriate documentation) from a registered open-end management
investment company not distributed or managed by Goldman Sachs or its
affiliates, if such redemption has occurred no more than 60 days prior to the
purchase of shares of the Funds and the shareholder either (a) paid an initial
sales charge or (b) was at some time subject to a deferred sales charge with
respect to the redemption proceeds; (j) "wrap" accounts for the benefit of
clients of broker-dealers, financial institutions or financial planners,
provided that they have entered into an agreement with GSAM specifying
aggregate minimums and certain operating policies and standards;
(k) registered investment advisers investing for accounts for which they
receive asset-based fees; (l) accounts over which GSAM or its advisory
affiliates have investment discretion; and (m) shareholders receiving
distributions from a qualified retirement plan invested in the Goldman Sachs
Funds and reinvesting such proceeds in a Goldman Sachs IRA. Purchasers must
certify eligibility for an exemption on the Account Application and notify
Goldman Sachs if the shareholder is no longer eligible for an exemption.
Exemptions will be granted subject to confirmation of a purchaser's
entitlement. Investors purchasing shares of the Funds at net asset value
without payment of any initial sales charge may be charged a fee if they
effect transactions in shares through a broker or agent. In addition, under
certain circumstances, dividends and distributions from any of the Goldman
Sachs Funds may be reinvested in shares of each Fund at net asset value, as
described under "Cross-Reinvestment of Dividends and Distributions and
Automatic Exchange Program."
REINVESTMENT OF REDEMPTION PROCEEDS -- CLASS A SHARES
A shareholder who redeems Class A shares of a Fund may reinvest at net asset
value any portion or all of his redemption proceeds (plus that amount
necessary to acquire a fractional share to round off his purchase to the
nearest full share) in Class A shares of a Fund or of any other Goldman Sachs
Fund. Shareholders should obtain and read the applicable prospectuses of such
other funds and consider their objectives, policies and applicable fees before
investing in any of such funds. This reinvestment privilege is subject to the
condition that the shares redeemed have been held for at least thirty (30)
days before the redemption and that the reinvestment is effected within ninety
(90) days after such redemption. If you paid a CDSC upon a redemption and
reinvest in Class A shares subject to the conditions set forth above, your
account will be credited with the amount of the CDSC previously charged, and
the reinvested shares will continue to be subject to a CDSC. The holding
period of the Class A shares acquired through reinvestment for purposes of
computing the CDSC payable upon a subsequent redemption, will include the
holding period of the redeemed shares. Shares are sold to a reinvesting
shareholder at the net asset value next determined following timely receipt by
Goldman Sachs or an Authorized Dealer of a written purchase order indicating
that the shares are eligible for reinvestment at net asset value.
44
<PAGE>
A reinvesting shareholder may be subject to tax as a result of such
redemption. If the redemption occurs within ninety (90) days after the
original purchase of the Class A shares, any sales charge paid on the original
purchase cannot be taken into account by a reinvesting shareholder to the
extent an otherwise applicable sales charge is not imposed pursuant to the
reinvestment privilege for purposes of determining gain or loss, if any,
realized on the redemption, but instead will be added to the tax basis of the
Class A shares received in the reinvestment. To the extent that any loss is
realized and shares of the same Fund are purchased within thirty (30) days
before or after the redemption, some or all of the loss may not be allowed as
a deduction depending upon the number of shares purchased. Shareholders should
consult their own tax advisers concerning the tax consequences of a redemption
and reinvestment. Upon receipt of a written request, the reinvestment
privilege may be exercised once annually by a shareholder, except that there
is no such time limit as to the availability of this privilege in connection
with transactions the sole purpose of which is to reinvest the proceeds at net
asset value in a tax-sheltered retirement plan.
RIGHT OF ACCUMULATION -- CLASS A SHARES
Class A purchasers may qualify for reduced sales charges when the current
market value of holdings (shares at current offering price), plus new
purchases, reaches $100,000 or more in the case of Government Income,
Municipal Income, Core Fixed Income, Global Income and High Yield Funds,
$250,000 or more in the case of Short Duration Government and Short Duration
Tax-Free Funds and $500,000 or more in the case of Adjustable Rate Government
Fund. Class A shares of the Goldman Sachs Funds may be combined under the
Right of Accumulation. See Additional Statement for more information about the
Right of Accumulation.
STATEMENT OF INTENTION -- CLASS A SHARES
Purchases of $100,000 or more in the case of Government Income, Municipal
Income, Core Fixed Income, Global Income and High Yield Funds, $250,000 or
more in the case of Short Duration Government and Short Duration Tax-Free
Funds and $500,000 in the case of the Adjustable Rate Government Fund made
over a 13-month period are eligible for reduced sales charges. Class A shares
of the Goldman Sachs Funds may be combined under the Statement of Intention.
See the Additional Statement for more information about the Statement of
Intention.
OFFERING PRICE -- CLASS B SHARES
Investors may purchase Class B shares of each Fund (other than Adjustable
Rate Government Fund) at the next determined net asset value without the
imposition of an initial sales charge. However, Class B shares redeemed within
six years of purchase will be subject to a CDSC at the applicable rates shown
in the tables that follow. At redemption, the charge will be assessed on the
amount equal to the lesser of the current market value or the original
purchase cost of the shares being redeemed. No CDSC will be imposed on
increases in account value above the initial purchase price, including shares
derived from the reinvestment of dividends or capital gains distributions.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of purchase until the time of redemption of Class B shares. For
the purpose of determining the number of years from the time of any purchase,
all payments during a month will be aggregated and deemed to have been made on
the first day of that month. In processing redemptions of Class B shares, the
Funds will first redeem shares not
45
<PAGE>
subject to any CDSC, and then shares held longest during the eight-year
period. As a result, a redeeming shareholder will pay the lowest possible
CDSC.
<TABLE>
<CAPTION>
CDSC AS A PERCENTAGE OF
DOLLAR AMOUNTS SUBJECT TO CDSC
-----------------------------------------
GOVERNMENT INCOME,
MUNICIPAL INCOME, SHORT DURATION
GLOBAL INCOME, GOVERNMENT AND SHORT
YEAR SINCE CORE FIXED INCOME DURATION TAX-
PURCHASE AND HIGH YIELD FUNDS FREE FUNDS
---------- -------------------- --------------------
<S> <C> <C>
First.......................... 5.0% 4.0%
Second......................... 4.0% 3.0%
Third.......................... 3.0% 2.0%
Fourth......................... 3.0% 2.0%
Fifth.......................... 2.0% 1.0%
Sixth.......................... 1.0% 0.0%
Seventh and thereafter......... none none
</TABLE>
Proceeds from the CDSC are payable to the Distributor and may be used in
whole or part to defray the Distributor's expenses related to providing
distribution-related services to the Funds in connection with the sale of
Class B shares, including the payment of compensation to Authorized Dealers. A
commission equal to 4.0% in the case of Government Income, Municipal Income,
Core Fixed Income, Global Income and High Yield Funds and 3.0% in the case of
Short Duration Government and Short Duration Tax-Free Funds of the amount
invested is paid to Authorized Dealers.
Class B shares of a Fund will automatically convert into Class A shares of
the same Fund at the end of the calendar quarter that is eight years after the
purchase date, except as noted below. Class B shares of a Fund acquired by
exchange from Class B shares of another Fund will convert into Class A shares
of such Fund based on the date of the initial purchase. Class B shares
acquired through reinvestment of distributions will convert into Class A
shares based on the date of the initial purchase of the shares on which the
distribution was paid. The conversion of Class B shares to Class A shares will
not occur at any time the Funds are advised that such conversions may
constitute taxable events for federal tax purposes, which the Funds believe is
unlikely. If conversions do not occur as a result of possible taxability,
Class B shares would continue to be subject to higher expenses than Class A
shares for an indeterminate period.
OFFERING PRICE -- CLASS C SHARES
Investors may purchase Class C shares of the Funds at the next determined
net asset value without the imposition of an initial sales charge. However, if
Class C shares are redeemed within 12 months of purchase a CDSC of 1% will be
deducted from the redemption proceeds. At redemption, the charge will be
assessed on the amount equal to the lesser of the current market value or the
original purchase cost of the shares being redeemed. No CDSC will be imposed
on increases in account value above the initial purchase price, including
shares derived from the reinvestment of dividends or capital gains
distributions.
For the purpose of determining the number of months from the time of any
purchase, all payments during a month will be aggregated and deemed to have
been made on the first day of that month. In processing redemptions of Class C
shares, the Funds will first redeem shares held for longer than 12 months, and
then shares held for the shortest period during the 12 month period. As a
result, a redeeming shareholder will pay the lowest possible CDSC. Proceeds
from the CDSC are payable to the Distributor and may be used in whole or in
part to
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defray the Distributor's expenses related to providing distribution-related
services to the Funds in connection with the sale of Class C shares, including
the payment of compensation to Authorized Dealers. A commission equal to 1.00%
of the amount invested is paid to Authorized Dealers.
WAIVER OR REDUCTION OF CONTINGENT DEFERRED SALES CHARGE--CLASS A, B AND C
SHARES
The CDSC on Class B shares, Class C shares and Class A shares that are
subject to a CDSC may be waived or reduced if the redemption relates to (a)
retirement distributions or loans to participants or beneficiaries from
pension and profit sharing plans, pension funds and other company sponsored
benefit plans (each a "Plan"); (b) the death or disability (as defined in
section 72 of the Code) of a participant or beneficiary in a Plan; (c)
hardship withdrawals by a participant or beneficiary in a Plan; (d) satisfying
the minimum distribution requirements of the Code; (e) the establishment of
"substantially equal periodic payments" as described in Section 72(t) of the
Code; (f) the separation from service by a participant or beneficiary in a
Plan; (g) the death or disability (as defined in section 72 of the Code) of a
shareholder if the redemption is made within one year of such event; (h)
excess contributions being returned to a Plan; (i) distributions from a
qualified retirement plan invested in the Goldman Sachs Funds which are being
reinvested into a Goldman Sachs IRA; and (j) redemption proceeds which are to
be reinvested in accounts or non-registered products over which GSAM or its
advisory affiliates have investment discretion. In addition, Class A, Class B
and Class C shares subject to a Systematic Withdrawal Plan may be redeemed
without a CDSC. However, Goldman Sachs reserves the right to limit such
redemptions, on an annual basis, to 12% of the value of [each of] your Class B
[and Class C] shares and 10% of the value of your Class A shares.
SERVICES AVAILABLE TO SHAREHOLDERS
AUTOMATIC INVESTMENT PLAN
Systematic cash investments may be made through a shareholder's bank via the
Automated Clearing House Network or a shareholder's checking account via bank
draft each month. Required forms are available from Goldman Sachs or any
Authorized Dealer.
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS AND AUTOMATIC EXCHANGE
PROGRAM
A shareholder may elect to cross-reinvest dividends and capital gain
distributions paid by a Fund in shares of the same class or an equivalent
class of any other Goldman Sachs Fund or ILA Portfolio. See "Fund Highlights."
Shareholders may also elect to exchange automatically a specified dollar
amount of shares of a Fund for shares of the same class or an equivalent class
of any other Goldman Sachs Fund or ILA Portfolio. Shares acquired through
cross-reinvestment of dividends or the automatic exchange program will be
purchased at net asset value and will not be subject to any initial or
contingent deferred sales charge as a result of the cross- reinvestment or
exchange, but shares subject to a CDSC acquired under the automatic exchange
program may be subject to a CDSC at the time of redemption from the fund into
which the exchange is made determined on the basis of the date and value of
the investor's initial purchase of the fund from which the exchange (or any
prior exchange) is made. Automatic exchanges are made monthly on the fifteenth
day of each month or the first Business Day thereafter. The minimum dollar
amount for automatic exchanges must be at least $50 per month. Cross-
reinvestments and automatic exchanges are subject to the following conditions:
(i) the value of the shareholder's account(s) in the fund which is paying the
dividend or from which the automatic exchange is being
47
<PAGE>
made must equal or exceed $5,000 and (ii) the value of the account in the
acquired fund must equal or exceed the acquired fund's minimum initial
investment requirement or the shareholder must elect to continue cross-
reinvestment or automatic exchanges until the value of acquired fund shares in
the shareholder's account equals or exceeds the acquired fund's minimum
initial investment requirement. 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 of the fund into which dividends are invested or
automatic exchanges are made.
TAX-SHELTERED RETIREMENT PLANS
The Funds (other than the Short Duration Tax-Free and Municipal Income
Funds) offer their shares for purchase by retirement plans, including IRA
plans for individuals and their non-employed spouses, IRA plans for employees
in connection with employer sponsored SEP, SAR-SEP and SIMPLE IRA plans, and
defined contribution plans such as 401(k) Salary Reduction Plans. Detailed
information concerning these plans may be obtained from the Transfer Agent.
This information should be read carefully, and consultation with an attorney
or tax adviser may be advisable. The information sets forth the service fee
charged for retirement plans and describes the federal income tax consequences
of establishing a plan.
EXCHANGE PRIVILEGE
Shares of a Fund may be exchanged at net asset value without the imposition
of an initial sales charge or CDSC at the time of exchange for shares of the
same class or an equivalent class of any other Fund, Goldman Sachs Fund or ILA
Portfolio. A shareholder needs to obtain and read the prospectus of the fund
into which the exchange is made. The shares of these other funds acquired by
an exchange may later be exchanged for shares of the same (or an equivalent
class) of the original Fund at the next determined net asset value without the
imposition of an initial or contingent deferred sales charge if the dollar
amount in the Fund resulting from such exchanges is below the shareholder's
all-time highest dollar amount on which it has previously paid the applicable
sales charge. Shares of these other funds purchased through dividends and/or
capital gains reinvestment may be exchanged for shares of the Funds without a
sales charge. In addition to free automatic exchanges pursuant to the
Automatic Exchange Program, six free exchanges are permitted in each twelve-
month period. A fee of $12.50 may be charged for each subsequent exchange
during such period. The exchange privilege may be modified or withdrawn at any
time upon sixty (60) days' notice to shareholders and is subject to certain
limitations.
An exchange of shares subject to a CDSC will not be subject to the
applicable CDSC at the time of exchange. Shares subject to a CDSC acquired in
an exchange will be subject to the CDSC of the shares originally held. For
purposes of determining the amount of any applicable CDSC, the length of time
a shareholder had owned shares will be measured from the date the shareholder
acquired the original shares subject to a CDSC and will not be affected by any
subsequent exchange.
An exchange may be made by identifying the applicable Fund and class of
shares and either writing to Goldman Sachs, Attention: Goldman Sachs Fixed
Income Funds, Shareholder Services, c/o NFDS, P.O. Box 419711, Kansas City, MO
64141-6711 or, unless the investor has specifically declined telephone
exchange privileges on the Account Application or elected in writing not to
utilize telephone exchanges, by a telephone request to the Transfer Agent at
800-526-7384 (8:00 a.m. to 4:00 p.m. Chicago time). Certain procedures are
employed to prevent unauthorized or fraudulent exchange requests as set forth
under "How to Sell Shares of the
48
<PAGE>
Funds." Under the telephone exchange privilege, shares may be exchanged among
accounts with different names, addresses and social security or other taxpayer
identification numbers only if the exchange instructions are in writing and
received in accordance with the procedures set forth under "How to Sell Shares
of the Funds." In times of drastic economic or market changes the telephone
exchange privilege may be difficult to implement.
For federal income tax purposes, an exchange, including an automatic
exchange, is treated as a redemption of the shares surrendered in the
exchange, on which an investor may be subject to tax, followed by a purchase
of shares received in the exchange. If such redemption occurs within ninety
(90) days after the purchase of such shares, to the extent an initial sales
charge that would otherwise apply to the shares received in the exchange is
not imposed, the sales charge paid on such purchase of Class A shares cannot
be taken into account by the exchanging shareholder for purposes of
determining gain or loss, if any, realized on such redemption for federal
income tax purposes, but instead will be added to the tax basis of the shares
received in the exchange. Shareholders should consult their own tax advisers
concerning the tax consequences of an exchange.
All exchanges which represent an initial investment in a Fund must satisfy
the minimum investment requirements of the Fund into which the shares are
being exchanged. Exchanges are available only in states where exchanges may
legally be made.
OTHER PURCHASE INFORMATION
Authorized Dealers and other financial intermediaries provide varying
arrangements for their clients to purchase and redeem Fund shares. Some may
establish higher minimum investment requirements and others may limit the
availability of certain privileges with respect to the purchase and redemption
of shares or the reinvestment of dividends. Firms may arrange with their
clients for other investment or administrative services and may independently
establish and charge additional fees not described in this Prospectus to their
clients for such services. If shares of a Fund are held in a "street name"
account or were purchased through an Authorized Dealer, shareholders 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 Funds and Goldman Sachs each reserves the right to reject any specific
purchase order (including exchanges) or to restrict purchases or exchanges by
a particular purchaser (or group of related purchasers). This may occur, for
example, when a purchaser or group of purchasers' pattern of frequent
purchases, sales or exchanges of shares of a Fund is evident, or if purchases,
sales or exchanges are, or a subsequent abrupt redemption might be, of a size
that would disrupt management of a Fund.
In the sole discretion of Goldman Sachs, a Fund may accept securities
instead of cash for the purchase of shares of the Fund. Such purchases will be
permitted only if the Investment Adviser determines that any securities
acquired in this manner are consistent with the Fund's investment objectives,
restrictions and policies and are desirable investments for the Fund.
The Investment Advisers, Distributor, and/or their affiliates may also pay
additional compensation, out of their assets and not as an additional charge
to the Funds, to selected Authorized Dealers and other persons in connection
with the sale, distribution and/or servicing of Class A, Class B or Class C
shares (such as additional payments based on new sales, amounts exceeding pre-
established thresholds, or the length of time clients' assets have remained in
a Fund), and will from time to time, subject to applicable NASD regulations,
contribute to various non-cash and cash incentive arrangements to promote the
sale of shares, as well as sponsor various educational programs, sales
contests and/or promotions in which participants may receive reimbursement of
expenses, entertainment and prizes such as travel awards, merchandise, cash,
investment research and educational information and related support materials.
This additional compensation may vary among Authorized Dealers
49
<PAGE>
depending upon such factors as the amounts their clients have invested (or may
invest) in the Funds, the particular program involved, or the amount of
reimbursable expenses. Additional compensation based on sales may, but is
currently not expected to, exceed .50% (annualized) of the amount invested.
For Further information, see "Other Information Regarding Purchases,
Redemptions, Exchanges and Dividends" in the Additional Statement.
DISTRIBUTION AND AUTHORIZED DEALER SERVICE PLANS
DISTRIBUTION PLAN -- CLASS A SHARES
The Trust, on behalf of each Fund's Class A shares, has adopted a
Distribution Plan pursuant to Rule 12b-1 under the Act (the "Class A
Distribution Plan"). Under the Class A Distribution Plan, Goldman Sachs is
entitled to a quarterly fee from each Fund for distribution services equal, on
an annual basis, to 0.25% of a Fund's average daily net assets attributable to
Class A shares of such Fund. Currently, Goldman Sachs has voluntarily agreed
to waive the entire amount of such fee for the Adjustable Rate Government,
Short Duration Government, Short Duration Tax-Free, Core Fixed Income,
Government Income, Municipal Income and High Yield Funds and to limit the
amount of such fee to 0.21% of average daily net assets attributable to Class
A shares of the Global Income Fund. Goldman Sachs has no current intention of
modifying or discontinuing such waiver, but may do so in the future at its
discretion. For the period ended October 31, 1996, the Global Income Fund paid
Goldman Sachs a fee at the rate of 0.21% of the Fund's average daily net
assets attributable to Class A shares of such Fund.
Goldman Sachs may use the distribution fee for its expenses of distributing
Class A shares of the Funds. The types of expenses for which Goldman Sachs may
be compensated for distribution services under the Class A Distribution Plan
include compensation paid to and expenses incurred by Authorized Dealers,
Goldman Sachs and their respective officers, employees and sales
representatives, allocable overhead, telephone and travel expenses, the
printing of prospectuses for prospective shareholders, preparation and
distribution of sales literature, advertising of any type and all other
expenses incurred in connection with activities primarily intended to result
in the sale of Class A shares. If the fee received by Goldman Sachs pursuant
to the Class A Distribution Plan exceeds its expenses, Goldman Sachs may
realize a profit from these arrangements. The Class A Distribution Plan will
be reviewed and is subject to approval annually by the Trustees. The aggregate
compensation that may be received under the Class A Distribution Plan for
distribution services may not exceed the limitations imposed by the NASD's
Conduct Rules.
DISTRIBUTION PLAN -- CLASS B AND CLASS C SHARES
The Trust, on behalf of each Fund's Class B and Class C shares (other than
the Adjustable Rate Government Fund which does not offer Class B or Class C
shares), has adopted a Distribution Plan pursuant to Rule 12b-1 under the Act
(each a "Distribution Plan"). Goldman Sachs is entitled to a quarterly fee
from each Fund under its Class B or Class C Distribution Plan for distribution
services equal, on an annual basis, to 0.75% of its average daily net assets
attributable to Class B or Class C shares. Goldman Sachs has voluntarily
agreed to limit such fee to 0.60% of the average daily net assets of the Short
Duration Government and Short Duration Tax-Free Funds, attributable to Class B
[and Class C] shares of such Funds. For the fiscal year ended October 31, 1996
the Funds then offering Class B shares paid distribution fees with respect to
their Class B shares at the foregoing rate.
Goldman Sachs may use the distribution fee for its expenses of distributing
Class B and Class C shares of the Funds. The types of expenses for which
Goldman Sachs may be compensated for distribution services under
50
<PAGE>
the Class B and Class C Distribution Plans include compensation paid to and
expenses incurred by Authorized Dealers, Goldman Sachs and their respective
officers, employees and sales representatives, commissions paid to Authorized
Dealers, allocable overhead, telephone and travel expenses, the printing of
prospectuses for prospective shareholders, preparation and distribution of
sales literature, advertising of any type and all other expenses incurred in
connection with activities primarily intended to result in the sale of Class B
and Class C shares. If the fee received by Goldman Sachs pursuant to a
Distribution Plan exceeds its expenses, Goldman Sachs may realize a profit
from these arrangements. The Distribution Plans will be reviewed and are
subject to approval annually by the Trustees. The aggregate compensation that
may be received under each Distribution Plan for distribution services may not
exceed the limitations imposed by the NASD's Conduct Rules.
In connection with the sale of Class C shares, Goldman Sachs pays sales
commissions of 0.75% of the purchase price to Authorized Dealers from its own
resources at the time of sale. Goldman Sachs plans to pay the 0.75%
distribution fee on a quarterly basis as an ongoing commission to Authorized
Dealers on Class C shares that have been outstanding for one year or more.
AUTHORIZED DEALER SERVICE PLANS
The Trust on behalf of each Fund's Class A, Class B and Class C shares has
adopted non-Rule 12b-1 Authorized Dealer Service Plans (each a "Service Plan")
pursuant to which Goldman Sachs, Authorized Dealers or other persons are
compensated for providing personal and account maintenance services. Each Fund
pays a fee under its Class A, Class B or Class C Service Plan equal on an
annual basis to 0.25% of its average daily net assets attributable to Class A,
Class B or Class C shares. The fee for personal and account maintenance
services paid pursuant to a Service Plan may be used to make payments to
Goldman Sachs, Authorized Dealers and their officers, sales representatives
and employees for responding to inquiries of, and furnishing assistance to,
shareholders regarding ownership of their shares or their accounts or similar
services not otherwise provided on behalf of the Funds. The Service Plans will
be reviewed and are subject to approval annually by the Trustees. For the
fiscal year ended October 31, 1996, each Fund (other than the Short Duration
Government, Short Duration Tax-Free, Core Fixed Income and High Yield Funds
which did not offer Class A or Class B shares) paid Authorized Dealer service
fees at the foregoing rate for each Fund's Class A and Class B shares.
In connection with the sale of Class C shares, Goldman Sachs pays the 0.25%
service fee to Authorized Dealers in advance for the first year after the
shares have been sold by the Authorized Dealer. After the shares have been
held for one year, Goldman Sachs pays the service fee on a quarterly basis. In
addition, as described above under "Distribution Plan--Class B and Class C
Shares," Goldman Sachs pays sales commissions of 0.75% of the purchase price
to Authorized Dealers from its own resources at the time of sale. Accordingly,
the total up front commission paid by Goldman Sachs to the Authorized Dealer
at the time of sale of Class C shares is 1.0% of the purchase price.
HOW TO SELL SHARES OF THE FUNDS
Each Fund will redeem its shares upon request of a shareholder on any
Business Day at the net asset value next determined after the receipt of such
request in proper form, subject to any applicable CDSC. See "Net Asset Value."
Redemption proceeds will be mailed by check to a shareholder within three (3)
Business Days of receipt of a properly executed request. If shares to be
redeemed were recently purchased by check, a Fund may delay transmittal of
redemption proceeds until such time as it has assured itself that good funds
have been collected for the purchase of such shares. This may take up to
fifteen (15) days. Redemption requests may be made by writing to or calling
the Transfer Agent at the address or telephone number set forth on the back
cover page of this Prospectus or an Authorized Dealer.
51
<PAGE>
The Trust accepts telephone requests for redemption of shares for amounts up
to $50,000 within any seven (7) calendar day period, except for investors who
have specifically declined telephone redemption privileges on the Account
Application or elected in writing not to utilize telephone redemptions
(proceeds which are sent to a Goldman Sachs brokerage account are not subject
to the $50,000 limit). It may be difficult to implement redemptions by
telephone in times of drastic economic or market changes. By completing an
Account Application, an investor agrees that the Trust, the Distributor and
the Transfer Agent shall not be liable for any loss incurred by the investor
by reason of the Trust accepting unauthorized telephone redemption requests
for his account if the Trust reasonably believes the instructions to be
genuine. Thus, shareholders risk possible losses in the event of a telephone
redemption not authorized by them. The Trust may accept telephone redemption
instructions from any person identifying himself as the owner of an account or
the owner's broker where the owner has not declined in writing to utilize this
service.
In an effort to prevent unauthorized or fraudulent redemption and exchange
requests by telephone, Goldman Sachs and NFDS each employ reasonable
procedures specified by the Trust to confirm that such instructions are
genuine. Consequently, proceeds of telephone redemption requests will be sent
only to the shareholder's address of record or authorized bank account
designated in the Account Application and exchanges of shares will be made
only to an identical account. Telephone requests will also be recorded. The
Trust may implement other procedures from time to time. If reasonable
procedures are not employed, the Trust may be liable for any loss due to
unauthorized or fraudulent transactions. Proceeds of telephone redemptions
will be mailed to the shareholder's address of record or wired to the
authorized bank account indicated on the Account Application, unless the
shareholder provides written instructions (accompanied by a signature
guarantee) indicating another address. Telephone redemptions will not be
accepted during the 30-day period following any change in a shareholder's
address of record. This redemption option does not apply to shares held in a
"street name" account. Shareholders whose accounts are held in "street name"
should contact their broker of record who may effect telephone redemptions on
their behalf. The Trust reserves the right to terminate or modify the
telephone redemption service at any time. Shares of each Fund (other than
Global Income Fund) earn dividends accrued through the day on which such
shares are redeemed.
Written requests for redemptions must be signed by each shareholder with its
signature guaranteed by a bank, a securities broker or dealer, a credit union
having authority to issue signature guarantees, a savings and loan
association, a building and loan association, a cooperative bank, a federal
savings bank or association, a national securities exchange, a registered
securities association or a clearing agency, provided that such institution
satisfies the standards established by the Transfer Agent.
The Funds will also arrange for the proceeds of redemptions effected by any
means to be wired as federal funds to the bank account designated in the
shareholder's Account Application. Redemption proceeds will normally be wired
on the next Business Day in federal funds (for a total one Business Day delay)
following receipt of a properly executed wire transfer redemption request.
Wiring of redemption proceeds may be delayed one additional Business Day if
the Federal Reserve Bank is closed on the day redemption proceeds would
ordinarily be wired. A transaction fee of $7.50 may be charged for payments of
redemption proceeds by wire. In order to change the bank designated on the
Account Application to receive redemption proceeds, a written request must be
received by the Transfer Agent. This request must be signature guaranteed as
set forth above. Further documentation may be required for executors, trustees
or corporations. Once wire transfer instructions have been given by Goldman
Sachs or an Authorized Dealer, neither a Fund, the Trust, Goldman Sachs nor
any Authorized Dealer assumes any further responsibility for the performance
of intermediaries or the shareholder's bank in the transfer process. If a
problem with such performance arises, the shareholder should deal directly
with such intermediaries or bank.
Additional documentation regarding a redemption by any means may be required
to effect a redemption when deemed appropriate by the Transfer Agent. The
request for such redemption will not be considered to have been received in
proper form until such additional documentation has been received.
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SYSTEMATIC WITHDRAWAL PLAN
A shareholder may draw on shareholdings systematically via check or ACH in
any amount specified by the shareholder over $50. Checks are only available on
or about the 25th of each month. Each systematic withdrawal is a redemption
and therefore a taxable transaction. A minimum balance of $5,000 in shares of
a Fund is required. The maintenance of a withdrawal plan concurrently with
purchases of additional Class A, Class B or Class C shares would be
disadvantageous because of the sales charge imposed on your purchases of Class
A shares or the imposition of a CDSC on your redemptions of Class A, Class B
or Class C shares. The CDSC applicable to Class A, Class B and Class C shares
redeemed under a systematic withdrawal plan may be waived. See "How to
Invest--Waiver or Reduction of Contingent Deferred Sales Charge." See
Additional Statement for more information about the Systematic Withdrawal
Plan.
DIVIDENDS
Each dividend from net investment income and capital gains distributions, if
any, declared by a Fund on its outstanding shares will, at the election of
each shareholder, be paid (i) in cash, (ii) in additional shares of the same
class of the Fund or (iii) in shares of the same or an equivalent class of any
other Goldman Sachs Fund or units of the ILA Portfolios (the Prime Obligations
Portfolio only for Class B and Class C) as described under "Cross-Reinvestment
of Dividends and Distributions and Automatic Exchange Program." This election
should initially be made on a shareholder's Account Application and may be
changed upon written notice to Goldman Sachs at any time prior to the record
date for a particular dividend or distribution. If no election is made, all
dividends from net investment income and capital gains distributions will be
reinvested in the Fund. Capital gains distributions will be reinvested or paid
in cash, in accordance with the shareholder's prior election, on the payment
date.
The election to reinvest dividends and distributions paid by the Fund in
additional shares or units of the Fund or any other Goldman Sachs Fund or ILA
Portfolio 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 or units of the Fund, another Goldman Sachs Fund or an
ILA Portfolio.
Each Fund intends that all or substantially all of its net investment income
and net realized long-term and short-term capital gains, after reduction by
available capital losses, including any capital losses carried forward from
prior years, will be declared as dividends for each taxable year. In the case
of the Core Fixed Income, Global Income and High Yield Funds, net loss, if
any, from certain foreign currency transactions or instruments that is
otherwise taken into account in calculating net investment income or net
realized capital gains for accounting purposes may not be taken into account
in determining the amount of dividends to be declared and paid, with the
result that a portion of the Fund's dividends may be treated as a return of
capital, nontaxable to the extent of a shareholder's tax basis in his shares.
Each Fund (other than the Global Income Fund) will declare dividends daily and
pay dividends monthly. The Global Income Fund will declare and pay dividends
monthly. All of the Funds will pay dividends from net realized long-term and
short-term capital gains, reduced by available capital losses, at least
annually. From time to time a portion of any Fund's dividends may constitute a
return of capital.
At the time of an investor's purchase of shares of a Fund a portion of the
net asset value per share may be represented by undistributed income (in the
case of the Global Income Fund) or realized or unrealized appreciation of any
Fund's portfolio securities. Therefore, subsequent distributions on such
shares from such income or realized appreciation may be taxable to the
investor even if the net asset value of the investor's shares is, as a result
of the distributions, reduced below the cost of such shares and the
distributions (or portions thereof) represent a return of a portion of the
purchase price.
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NET ASSET VALUE
The net asset value per share of each class of a Fund is calculated by the
Fund's custodian as of the close of regular trading on the New York Stock
Exchange (normally 3:00 p.m. Chicago time, 4:00 p.m. New York time) on each
Business Day (as such term is defined under "Additional Information")
immediately after the determination, if any, of the income to be declared as a
dividend (except in the case of the Global Income Fund). Net asset value per
share of each class is calculated by determining the net assets attributable
to each class and dividing by the number of outstanding shares of that class.
Each Fund's portfolio securities for which accurate market quotations 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 and
other portfolio securities are valued at fair value, based on yield
equivalents, a pricing matrix or other sources, under valuation procedures
established by the Trustees. Debt obligations with a remaining maturity of 60
days or less are valued at amortized cost. The Board of Trustees has
determined that the amortized cost of such securities approximates fair market
value.
PERFORMANCE INFORMATION
From time to time each Fund may publish yield, distribution rate and average
annual total return and the Short Duration Tax-Free and Municipal Income Funds
may publish their tax equivalent yields in advertisements and communications
to shareholders or prospective investors. Average annual total return is
determined by computing the average annual percentage change in value of
$1,000 invested at the maximum public offering price for specified periods
ending with the most recent calendar quarter, assuming reinvestment of all
dividends and distributions at net asset value. The total return calculation
assumes a complete redemption of the investment at the end of the relevant
period. Total return calculations for Class A shares reflect the effect of
paying the maximum initial sales charge. Investment at a lower sales charge
would result in higher performance figures. Total return calculations for
Class B and Class C shares reflect deduction of the applicable CDSC imposed
upon redemption of Class B and Class C shares held for the applicable period.
Each Fund may also from time to time advertise total return on a cumulative,
average, year-by-year or other basis for various specified periods by means of
quotations, charts, graphs or schedules. In addition, each Fund may furnish
total return calculations based on investments at various sales charge levels
or at net asset value. Any performance data which is based on a Fund's net
asset value per share would be reduced if a sales charge were taken into
account. In addition to the above, each Fund may from time to time advertise
its performance relative to certain averages, performance rankings, indices,
other information prepared by recognized mutual fund statistical services and
investments for which reliable performance data is available.
Yield is computed by dividing net investment income earned during a recent
thirty-day period by the product of the average daily number of shares
outstanding and entitled to receive dividends during the period and the
maximum offering price per share on the last day of the relevant period. The
results are compounded on a bond equivalent (semi-annual) basis and then
annualized. 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.
54
<PAGE>
Tax equivalent yield represents the yield an investor would have to earn to
equal, after taxes, the tax-free yield of the Short Duration Tax-Free or the
Municipal Income Funds. Tax equivalent yield is calculated by dividing the
applicable Fund's tax-exempt yield by one minus a stated federal tax rate.
Quotations of distribution rates are calculated by annualizing the most
recent distribution of net investment income for a monthly, quarterly or other
relevant period and dividing this amount by the net asset value per share or
maximum public offering price on the last day of the period for which the
distribution rates are being calculated.
Each Fund's yield, total return and distribution rate will be calculated
separately for each class of shares in existence. Because each class of shares
may be subject to different expenses, the yield, total return and distribution
rate calculations with respect to each class of shares for the same period
will differ. The investment performance of the Class A, Class B and Class C
shares will be affected by the payment of a sales charge and distribution fees
and other class specific expenses. See "Shares of the Trust."
The investment results of a Fund will fluctuate over time and any
presentation of investment results for any prior period should not be
considered a representation of what an investment may earn or what the Fund's
performance may be in any future period. In addition to information provided
in shareholder reports, the Funds may, in their discretion, from time to time,
make a list of their holdings available to investors upon request.
SHARES OF THE TRUST
Each Fund is a series of the Goldman Sachs Trust, which was formed under the
laws of the State of Delaware on January 28, 1997. The Funds were formerly
series of Goldman Sachs Trust, a Massachusetts business trust, and were
reorganized into the Trust as of April 30, 1997. The Trustees have authority
under the Trust's Declaration of Trust to create and classify shares of
beneficial interest in separate series, without further action by
shareholders. Additional series may be added in the future. The Trustees also
have authority to classify or reclassify any series or portfolio of shares
into one or more classes.
When issued, shares are fully paid and non-assessable. In the event of
liquidation, shareholders are entitled to share pro rata in the net assets of
the applicable Fund available for distribution to such shareholders. All
shares are freely transferable and have no preemptive, subscription or
conversion rights. Shareholders are entitled to one vote per share, provided
that at the option of the Trustees, shareholders will be entitled to a number
of votes based upon the net asset values represented by their shares.
The Trust does not intend to hold annual meetings of shareholders. However,
pursuant to the Trust's By-Laws, the recordholders of at least 10% of the
shares outstanding and entitled to vote at a special meeting may require the
Trust to hold such special meeting of shareholders for any purpose and,
recordholders may, under certain circumstances, as permitted by the Act,
communicate with other shareholders in connection with requiring a special
meeting of shareholders. The Trustees will call a special meeting for the
purpose of electing Trustees if, at any time, less than a majority of Trustees
holding office at the time were elected by shareholders.
In the interest of economy and convenience, the Trust does not issue
certificates representing the Funds' shares. Instead, the Transfer Agent
maintains a record of each shareholder's ownership. Each shareholder receives
confirmation of purchase and redemption orders from the Transfer Agent. Fund
shares and any dividends and distributions paid by the Funds are reflected in
account statements from the Transfer Agent.
55
<PAGE>
As of April 1, 1997, the shareholders listed below owned beneficially and of
record 25% or more of the outstanding shares of such Fund: Short Duration
Government Fund--State Street Bank and Trust Company, P.O. Box 1992, Boston,
MA 02105-1992 (34.05%).
TAXATION
FEDERAL TAXES
Each Fund is treated as a separate entity for tax purposes, has elected or
intends to elect to be treated as a regulated investment company and intends
to qualify for such treatment for each taxable year under Subchapter M of the
Code. To qualify as such, a Fund must satisfy certain requirements relating to
the sources of its income, diversification of its assets and distribution of
its income to shareholders. As a regulated investment company, a Fund will not
be subject to federal income or excise tax on any net investment income and
net realized capital gains that are distributed to its shareholders in
accordance with certain timing requirements of the Code.
The Short Duration Tax-Free and Municipal Income Funds intend to satisfy
certain requirements of the Code so that they may distribute the tax-exempt
interest they receive as "exempt-interest dividends," as defined in the Code.
If such requirements are satisfied, distributions of the Short Duration Tax-
Free and Municipal Income Funds that are attributable to interest on tax-
exempt obligations and that the Funds properly designate as exempt-interest
dividends will be exempt from regular federal income tax, although all or a
portion of such a distribution may be subject to the federal alternative
minimum tax and the entire distribution may be includable in the tax base for
determining taxability of social security or railroad retirement benefits.
Persons who are "substantial users" (or related persons to such substantial
users) of facilities financed by industrial development or certain private
activity bonds should consult their own tax advisers before purchasing shares
of the Short Duration Tax-Free and Municipal Income Funds. Interest on
indebtedness incurred or continued to purchase or carry shares of the Short
Duration Tax-Free and Municipal Income Funds is not deductible to the extent
attributable to the Funds' distributions that are exempt-interest dividends.
Dividends paid by a Fund from net investment income, certain net realized
foreign exchange gains, the excess of net short-term capital gain over net
long-term capital loss and original issue discount or market discount income
will be taxable to shareholders as ordinary income, except for any exempt-
interest dividends paid by the Short Duration Tax-Free and Municipal Income
Funds, as described above. Dividends paid by a Fund from the excess of net
long-term capital gain over net short-term capital loss will be taxable as
long-term capital gains regardless of how long the shareholders have held
their shares. These tax consequences will apply regardless of whether
distributions are received in cash or reinvested in shares. Certain
distributions paid by a Fund in January of a given year may be taxable to
shareholders as if received the prior December 31. Shareholders will be
informed annually about the amount and character of distributions received
from the Funds for federal income tax purposes.
Investors should consider the tax implications of buying shares immediately
prior to a distribution. Investors who purchase shares shortly before the
record date for a distribution other than a daily dividend will pay a per
share price that includes the value of the anticipated distribution and will
be taxed on any taxable distribution even though the distribution represents a
return of a portion of the purchase price.
Redemptions and exchanges of shares are taxable events.
56
<PAGE>
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on distributions (other than exempt-
interest dividends), redemptions and exchanges if they fail to furnish their
correct taxpayer identification number and certain certifications required by
the Internal Revenue Service or if they are otherwise subject to backup
withholding. Individuals, corporations and other shareholders that are not
U.S. persons under the Code are subject to different tax rules and may be
subject to nonresident alien withholding at the rate of 30% (or a lower rate
provided by an applicable tax treaty) on amounts treated as ordinary dividends
from the Funds.
The Core Fixed Income, Global Income and High Yield Funds may be subject to
foreign withholding or other foreign taxes on income or gain from certain
foreign securities. If more than 50% of the value of the total assets of
either Fund is comprised of stock or securities of foreign corporations at the
end of its taxable year and the applicable Fund so elects, that Fund's
shareholders will include in their gross incomes (in addition to dividends and
distributions they receive) their pro rata shares of qualified foreign taxes
paid by that Fund and may be entitled under the Code to claim foreign tax
credits or deductions with respect to such taxes. It is not expected that the
Core Fixed Income Fund will qualify to make this election with respect to such
taxes. If either Fund cannot or does not so elect, it may deduct these taxes
in computing its taxable income, if any.
OTHER TAXES
In addition to federal taxes, a shareholder may be subject to state, local
or foreign taxes on payments received from the Funds, including exempt-
interest dividends. A state income (and possibly local income and/or
intangible property) tax exemption is generally available to the extent (if
any) a Fund's distributions are derived from interest on (or, in the case of
intangible property taxes, the value of its assets is attributable to) certain
U.S. government obligations and/or tax-exempt municipal obligations issued by
or on behalf of the particular state or a political subdivision thereof,
provided in some states that certain thresholds for holdings of such
obligations and/or reporting requirements are satisfied. For a further
discussion of certain tax consequences of investing in shares of the Funds,
see "Taxation" in the Additional Statement. Shareholders are urged to consult
their own tax advisers regarding specific questions as to federal, state and
local taxes as well as to any foreign taxes.
ADDITIONAL INFORMATION
The term "a vote of the majority of the outstanding shares" of a Fund means
the vote of the lesser of (i) 67% or more of the shares 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 (ii) more than 50% of the outstanding
shares of the Fund.
As used in this Prospectus, the term "Business Day" means any day the New
York Stock Exchange is open for trading, which is Monday through Friday except
for holidays. The New York Stock Exchange is closed on the following holidays:
New Year's Day, Presidents' Day (observed), Good Friday, Memorial Day
(observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
57
<PAGE>
APPENDIX
STATEMENT OF INTENTION
(APPLICABLE ONLY TO CLASS A SHARES PURCHASED SUBJECT TO A SALES CHARGE)
If a shareholder anticipates purchasing $100,000 ($500,000 in the case of
the Adjustable Rate Government Fund and $250,000 in the case of Short Duration
Government and Short Duration Tax-Free Funds) or more of Class A shares of a
Fund alone or in combination with Class A shares of another Fund or another
Goldman Sachs Fund within a 13-month period, the shareholder may obtain Class
A shares of the Fund at the same reduced sales charge as though the total
quantity were invested in one lump sum by filing this Statement of Intention
incorporated by reference in the Account Application. Income dividends and
capital gain distributions taken in additional shares will not apply toward
the completion of this Statement of Intention.
To ensure that the reduced price will be received on future purchases, the
investor must inform Goldman Sachs that this Statement of Intention is in
effect each time shares are purchased. Subject to the conditions mentioned
below, each purchase will be made at the public offering price applicable to a
single transaction of the dollar amount specified on the Account Application.
The investor makes no commitment to purchase additional shares, but if his
purchases within 13 months plus the value of shares credited toward completion
do not total the sum specified, he will pay the increased amount of the sales
charge prescribed in the Escrow Agreement.
ESCROW AGREEMENT
Out of the initial purchase (or subsequent purchases if necessary) 5% of the
dollar amount specified on the Account Application shall be held in escrow by
the Transfer Agent in the form of shares registered in the investor's name.
All income dividends and capital gains distributions on escrowed shares will
be paid to the investor or to his order. When the minimum investment so
specified is completed (either prior to or by the end of the thirteenth
month), the shareholder will be notified and the escrowed shares will be
released. In signing the Account Application, the investor irrevocably
constitutes and appoints the Transfer Agent his attorney to surrender for
redemption any or all escrowed shares with full power of substitution in the
premises.
If the intended investment is not completed, the investor will be asked to
remit to Goldman Sachs any difference between the sales charge on the amount
specified and on the amount actually attained. If the investor does not within
20 days after written request by Goldman Sachs pay such difference in the
sales charge, the Transfer Agent will redeem an appropriate number of the
escrowed shares in order to realize such difference. Shares remaining after
any such redemption will be released by the Transfer Agent.
58
<PAGE>
- --------------------------------------------------------------------------------
GOLDMAN SACHS ASSET
MANAGEMENT
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS FUNDS
MANAGEMENT, L.P.
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS ASSET
MANAGEMENT INTERNATIONAL
133 PETERBOROUGH COURT
LONDON, ENGLAND EC4A 2BB
GOLDMAN, SACHS & CO.
DISTRIBUTOR
85 BROAD STREET
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
TRANSFER AGENT
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN
1776 HERITAGE DRIVE
NORTH QUINCY, MASSACHUSETTS 02110
TOLL FREE (IN U.S.) . . . . . . . . 800-526-7384
FIPROAB
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GOLDMAN SACHS
FIXED INCOME FUNDS
- --------------------------------------------------------------------------------
PROSPECTUS CLASS A, B AND C SHARES
[LOGO] GOLDMAN
SACHS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION--JUNE 13, 1997
GOLDMAN SACHS MONEY MARKET FUNDS
GOLDMAN SACHS-INSTITUTIONAL LIQUID ASSETS
(PRIME OBLIGATIONS PORTFOLIO)
(TAX-EXEMPT DIVERSIFIED PORTFOLIO)
ILA SERVICE UNITS
ILA CLASS B UNITS
ILA CLASS C UNITS
4900 Sears Tower
Chicago, Illinois 60606
Goldman Sachs Trust (the "Trust") is an open-end, management investment
company (a "mutual fund") which includes the Goldman Sachs-Institutional Liquid
Assets portfolios. This Prospectus relates to the offering of ILA Service
shares of beneficial interest ("ILA Service Units") of the Prime Obligations
and Tax-Exempt Diversified Portfolios (the "Portfolios"), and ILA Class B and
Class C shares of beneficial interest ("ILA Class B Units" and "ILA Class C
Units," respectively) of the Prime Obligations Portfolio. ILA Class B Units and
ILA Class C Units will typically be issued only upon an exchange of Class B or
Class C Shares, respectively, of any mutual fund sponsored by Goldman Sachs
("Goldman Sachs Funds"). Goldman Sachs Asset Management, a separate operating
division of Goldman, Sachs & Co., serves as each Portfolio's investment
adviser. Goldman, Sachs & Co. serves as each Portfolio's distributor and
transfer agent.
The Prime Obligations Portfolio seeks to maximize current income to the
extent consistent with the preservation of capital and the maintenance of
liquidity by investing exclusively in high quality money market instruments.
The Portfolio pursues its objective by investing in a diversified portfolio of
securities of the U.S. Government, its agencies, authorities and
instrumentalities, obligations of U.S. banks, commercial paper and other short-
term obligations of U.S. companies, states, municipalities and other entities,
and repurchase agreements.
The Tax-Exempt Diversified Portfolio seeks to the extent consistent with the
preservation of capital and prescribed portfolio standards, a high level of
income excluded from gross income for federal income tax purposes, by investing
primarily in municipal instruments. The Portfolio pursues its objective by
investing in a diversified portfolio of municipal obligations issued by or on
behalf of states, territories and possessions of the United States and their
political subdivisions, agencies, authorities and instrumentalities, and the
District of Columbia.
AN INVESTMENT IN A PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT A PORTFOLIO WILL BE ABLE TO MAIN-
TAIN A STABLE NET ASSET VALUE OF $1.00 PER UNIT.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION.................... Toll Free:
800-526-7384
This Prospectus provides you with information about the Portfolios that you
should know before investing. It should be read and retained for future
reference. If you would like more detailed information, the Statement of
Additional Information dated , 1997, as amended or supplemented from time
to time, is available upon request without charge by calling the telephone
number listed above or by writing Goldman Sachs, Attention: Shareholder
Services, Goldman Sachs Trust, 4900 Sears Tower, Chicago, Illinois 60606. The
Statement of Additional Information, which is incorporated by reference into
this Prospectus, has been filed with the Securities and Exchange Commission.
The Tax-Exempt Diversified Portfolio may not be available in certain states.
Please call the phone number above to determine availability in your state. The
SEC maintains a Web site (http://www.sec.gov) that contains the Statement of
Additional Information and other information regarding the Trust.
- --------------------------------------------------------------------------------
UNITS OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT IN-
SURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN A PORTFOLIO INVOLVES INVEST-
MENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is , 1997.
<PAGE>
UNITHOLDER AND PORTFOLIO EXPENSES
<TABLE>
<CAPTION>
PRIME OBLIGATIONS TAX-EXEMPT
PORTFOLIO DIVERSIFIED
------------------------------------------- PORTFOLIO
(ILA SERVICE) (ILA CLASS B+) (ILA CLASS C+) (ILA SERVICE)
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
UNITHOLDER TRANSACTION
EXPENSES
Maximum Sales Charge
Imposed on Purchases.. None None None None
Sales Charge Imposed on
Reinvested
Distributions......... None None None None
Deferred Sales Load
Imposed on
Redemptions........... None 5.0%(1) 1.0%(2) None
Exchange Fee........... None None None None
ANNUAL OPERATING
EXPENSES (3)
(as a percentage of
average daily net
assets)
Management Fees (after
limitations) (4)...... 0.35% 0.35% 0.35% 0.26%
Distribution (Rule 12b-
1) Fees............... None 0.75% 0.75% None
Other Expenses
Service Fees.......... 0.40% None None 0.40%
Authorized Dealer
Service Fees......... None 0.25% 0.25% None
Other Expenses (after
expense limitation)
(5).................. 0.07% 0.07% 0.07% 0.06%
---- ---- ---- ----
TOTAL OPERATING EXPENSES
(6).................... 0.82% 1.42% 1.42% 0.72%
==== ==== ==== ====
</TABLE>
EXAMPLE OF EXPENSES
You would pay the following expenses on a hypothetical $1,000 investment,
assuming a 5% annual return and redemption at the end of each time period:
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Prime Obligations Portfolio
ILA Service Units...................................... $ 8 $26 $46 $101
ILA Class B Units......................................
--Assuming complete redemption at end of period....... $64 $75 $98 $148*
--Assuming no redemption.............................. $14 $45 $78 $148*
ILA Class C Units......................................
--Assuming complete redemption at end of period....... $24 $45 $78 $170
--- --- --- ----
--Assuming no redemption.............................. $14 $45 $78 $170
--- --- --- ----
Tax-Exempt Diversified Portfolio
ILA Service Units...................................... $ 7 $23 $40 $ 89
</TABLE>
- -------
+ Investors wishing to purchase units of the Prime Obligations Portfolio are
generally required to purchase ILA Service Units. ILA Class B and Class C
Units of the Prime Obligations Portfolio will typically be issued only in
exchange for Class B or Class C Shares, respectively, of any other Goldman
Sachs Fund.
(1) A contingent deferred sales charge is imposed on units redeemed within six
years of purchase at a rate of 5% in the first year, declining to 1% in
the sixth year, and eliminated thereafter. See "Additional Services--Of-
fering Price--ILA Class B Units".
(2) A contingent deferred sales charge is imposed upon units redeemed within
12 months of purchase. See "Additional Services--Offering Price--ILA Class
C Units".
(3) Based on estimated amounts for the current fiscal year.
* ILA Class B Units convert to ILA Service Units eight years after purchase;
therefore, ILA Class B expenses in the hypothetical example above assume
this conversion.
2
<PAGE>
(4) The Investment Adviser has voluntarily agreed that a portion of the man-
agement fee would not be imposed on the Tax-Exempt Diversified Portfolio
equal to .09%. Without such limitation, management fees for the Portfolio
would be 0.35%.
(5) The Investment Adviser has voluntarily agreed to reduce or limit certain
other expenses (excluding management fees, fees payable to Service Organi-
zations, as defined herein, distribution and authorized dealer service
fees, taxes, interest and brokerage and litigation, indemnification and
other extraordinary expenses) to the extent such expenses exceed 0.07% of
the Prime Obligations Portfolio's average daily net assets and 0.06% of
the Tax-Exempt Diversified Portfolio's average daily net assets.
(6) Without the limitations described above, "Other Expenses" and "Total Oper-
ating Expenses" of the Portfolios for the current fiscal year are esti-
mated to be as follows:
<TABLE>
<CAPTION>
TOTAL
OTHER OPERATING
EXPENSES EXPENSES
-------- ---------
<S> <C> <C>
Prime Obligations Portfolio (ILA Service Units)........... .08% 0.83%
Prime Obligations Portfolio (ILA Class B Units)........... .08% 1.43%
Prime Obligations Portfolio (ILA Class C Units)........... .08% 1.43%
Tax-Exempt Diversified Portfolio (ILA Service Units)...... .06% 0.81%
</TABLE>
The information set forth in the foregoing table and hypothetical example
relates only to ILA Service Units of the Prime Obligations and Tax-Exempt Di-
versified Portfolios and ILA Class B and Class C Units of the Prime Obliga-
tions Portfolio. The Portfolios also offer ILA Units and ILA Administration
Units. The other classes of the Portfolios are subject to different fees and
expenses (which affect performance) and are entitled to different services.
Information regarding any other class of the Portfolios may be obtained from
your sales representative or from Goldman Sachs by calling the number on the
front cover of this Prospectus.
Service Organizations may charge other fees to their customers who are the
beneficial owners of ILA Service Units in connection with their customers' ac-
counts. Due to the Distribution and Service Plans, a long-term shareholder may
pay more than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc.'s ("NASD")
rules regarding investment companies. Such fees, if any, may affect the return
such customers realize with respect to their investments.
The purpose of the foregoing table is to assist investors in understanding
the various fees and expenses of a Portfolio that an investor will bear di-
rectly or indirectly. The information on fees and expenses included in the ta-
ble and the hypothetical example above are based on each Portfolio's estimated
fees and expenses and should not be considered as representative of past or
future expenses. Actual fees and expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, a Portfo-
lio's actual performance will vary and may result in an actual return or less
than 5%. See "Management--Investment Adviser."
FINANCIAL HIGHLIGHTS
The following data with respect to a unit (of the class specified) of the
Prime Obligations and Tax-Exempt Diversified Portfolios outstanding during the
periods indicated have been audited by Arthur Andersen LLP, independent
auditors, as indicated in their report incorporated by reference and attached
to the Statement of Additional Information from the annual report to
unitholders for the fiscal year ended December 31, 1996 (the "Annual Report"),
and should be read in conjunction with the financial statements and related
notes incorporated by reference and attached to the Statement of Additional
Information. During the periods shown, the Trust did not offer Class C Units
of any Portfolio. Accordingly, there are no financial highlights for this
Class.
3
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Unit Outstanding Throughout Each Period
Prime Obligations Portfolio
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT OPERATIONS
-----------------------------------
NET RATIO OF NET
NET ASSET REALIZED TOTAL NET ASSET RATIO OF NET INVESTMENT
VALUE AT NET GAIN ON INCOME FROM VALUE AT EXPENSES TO INCOME TO
BEGINNING INVESTMENT INVESTMENT INVESTMENT DISTRIBUTIONS END TOTAL AVERAGE NET AVERAGE NET
OF PERIOD INCOME TRANSACTIONS OPERATIONS TO UNITHOLDERS OF PERIOD RETURN (A) ASSETS ASSETS
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEARS
ENDED DECEMBER
31,
1996-ILA units.. $1.00 $0.0511 -- $0.0511 $(0.0511) $1.00 5.22% 0.41% 5.11%
1996-ILA Admin-
istration units. 1.00 0.0497 -- 0.0497 (0.0497) 1.00 5.06 0.56 4.97
1996-ILA Service
units........... 1.00 0.0474 -- 0.0474 (0.0474) 1.00 4.80 0.81 4.74
1996-ILA B
units (b)....... 1.00 0.0262 -- 0.0262 (0.0262) 1.00 3.97(d) 1.41(d) 4.09(d)
1995-ILA units.. 1.00 0.0566 -- 0.0566 (0.0566) 1.00 5.79 0.41 5.66
1995-ILA Admin-
istration units. 1.00 0.0551 -- 0.0551 (0.0551) 1.00 5.63 0.56 5.51
1995-ILA Service
units........... 1.00 0.0522 -- 0.0522 (0.0522) 1.00 5.37 0.81 5.22
1994-ILA units.. 1.00 0.0394 -- 0.0394 (0.0394) 1.00 4.07 0.40 3.94
1994-ILA Admin-
istration units. 1.00 0.0379 -- 0.0379 (0.0379) 1.00 3.91 0.55 3.79
1994-ILA Service
units........... 1.00 0.0365 -- 0.0365 (0.0365) 1.00 3.66 0.80 3.65
1993-ILA units.. 1.00 0.0291 0.0002 0.0293 (0.0293) 1.00 2.97 0.40 2.91
1993-ILA Admin-
istration units. 1.00 0.0275 0.0003 0.0278 (0.0278) 1.00 2.82 0.55 2.75
1993-ILA Service
units........... 1.00 0.0250 0.0001 0.0251 (0.0252) 1.00 2.56 0.80 2.50
1992-ILA units.. 1.00 0.0364 0.0010 0.0374 (0.0374) 1.00 3.75 0.40 3.64
1992-ILA Admin-
istration units. 1.00 0.0339 0.0010 0.0349 (0.0349) 1.00 3.60 0.55 3.39
1992-ILA Service
units........... 1.00 0.0311 0.0010 0.0321 (0.0320) 1.00 3.34 0.80 3.11
1991-ILA units.. 1.00 0.0591 0.0003 0.0594 (0.0594) 1.00 6.10 0.40 5.91
1991-ILA Admin-
istration units. 1.00 0.0568 0.0003 0.0571 (0.0571) 1.00 5.94 0.55 5.68
1991-ILA Service
units........... 1.00 0.0558 0.0003 0.0561 (0.0561) 1.00 5.68 0.80 5.58
1990-ILA units.. 1.00 0.0793 -- 0.0793 (0.0793) 1.00 8.21 0.38 7.93
1990-ILA Admin-
istration
units (c)....... 1.00 0.0438 -- 0.0438 (0.0438) 1.00 7.81(d) 0.55(d) 7.62(d)
1990-ILA Service
units (c)....... 1.00 0.0425 -- 0.0425 (0.0425) 1.00 7.56(d) 0.80(d) 7.25(d)
1989-ILA units.. 1.00 0.0890 -- 0.0890 (0.0890) 1.00 9.27 0.40 8.90
1988-ILA units.. 1.00 0.0714 -- 0.0714 (0.0714) 1.00 7.48 0.40 7.14
1987-ILA units.. 1.00 0.0634 -- 0.0634 (0.0634) 1.00 6.50 0.40 6.34
<CAPTION>
RATIOS ASSUMING NO
WAIVER OF FEES AND NO
EXPENSE LIMITATIONS
-------------------------
NET RATIO OF NET
ASSETS AT RATIO OF NET INVESTMENT
END OF EXPENSES TO INCOME TO
PERIOD AVERAGE NET AVERAGE NET
(IN 000'S) ASSETS ASSETS
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEARS
ENDED DECEMBER
31,
1996-ILA units.. $1,154,787 0.43% 5.09%
1996-ILA Admin-
istration units. 23,738 0.58 4.95
1996-ILA Service
units........... 84,707 0.83 4.72
1996-ILA B
units (b)....... 346 1.43(d) 4.07(d)
1995-ILA units.. 1,261,251 0.43 5.64
1995-ILA Admin-
istration units. 63,018 0.58 5.49
1995-ILA Service
units........... 227,233 0.83 5.20
1994-ILA units.. 1,963,846 0.42 3.92
1994-ILA Admin-
istration units. 149,234 0.57 3.77
1994-ILA Service
units........... 170,453 0.82 3.63
1993-ILA units.. 2,332,771 0.42 2.89
1993-ILA Admin-
istration units. 189,431 0.57 2.73
1993-ILA Service
units........... 137,804 0.82 2.48
1992-ILA units.. 3,444,591 0.42 3.62
1992-ILA Admin-
istration units. 257,321 0.57 3.37
1992-ILA Service
units........... 22,044 0.82 3.09
1991-ILA units.. 3,531,736 0.42 5.89
1991-ILA Admin-
istration units. 198,417 0.57 5.66
1991-ILA Service
units........... 18,789 0.82 5.56
1990-ILA units.. 2,833,541 0.38 7.93
1990-ILA Admin-
istration
units (c)....... 209,272 0.55(d) 7.62(d)
1990-ILA Service
units (c)....... 19,039 0.80(d) 7.25(d)
1989-ILA units.. 3,761,964 0.40 8.90
1988-ILA units.. 3,799,628 0.40 7.14
1987-ILA units.. 5,814,280 0.40 6.34
</TABLE>
- ----
(a)Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
(b)ILA Class B unit activity commenced during May of 1996.
(c)ILA Administration and Service unit activity commenced during June of 1990.
(d)Annualized.
4
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Tax-Exempt Diversified Portfolio
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT OPERATIONS
-------------------------------------
NET RATIO OF NET
NET ASSET REALIZED TOTAL NET ASSET RATIO OF NET INVESTMENT
VALUE AT NET GAIN (LOSS) ON INCOME FROM VALUE AT EXPENSES TO INCOME TO
BEGINNING INVESTMENT INVESTMENT INVESTMENT DISTRIBUTIONS END TOTAL AVERAGE NET AVERAGE NET
OF PERIOD INCOME TRANSACTIONS OPERATIONS TO UNITHOLDERS OF PERIOD RETURN (A) ASSETS ASSETS
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEARS
ENDED DECEMBER
31,
1996-ILA units.. $1.00 $0.0320 $ -- $0.0320 $(0.0320) $1.00 3.25% 0.31% 3.20%
1996-ILA Admin-
istration units. 1.00 0.0306 -- 0.0306 (0.0306) 1.00 3.09 0.46 3.06
1996-ILA Service
units........... 1.00 0.0279 -- 0.0279 (0.0279) 1.00 2.84 0.71 2.79
1995-ILA units.. 1.00 0.0365 -- 0.0365 (0.0365) 1.00 3.72 0.31 3.65
1995-ILA Admin-
istration units. 1.00 0.0351 -- 0.0351 (0.0352) 1.00 3.57 0.46 3.51
1995-ILA Service
units........... 1.00 0.0324 -- 0.0324 (0.0325) 1.00 3.31 0.71 3.24
1994-ILA units.. 1.00 0.0264 -- 0.0264 (0.0264) 1.00 2.71 0.30 2.64
1994-ILA Admin-
istration units. 1.00 0.0250 -- 0.0250 (0.0250) 1.00 2.55 0.45 2.50
1994-ILA Service
units........... 1.00 0.0220 -- 0.0220 (0.0220) 1.00 2.30 0.70 2.20
1993-ILA units.. 1.00 0.0222 -- 0.0222 (0.0222) 1.00 2.25 0.30 2.22
1993-ILA Admin-
istration units. 1.00 0.0207 -- 0.0207 (0.0207) 1.00 2.09 0.45 2.08
1993-ILA Service
units........... 1.00 0.0183 -- 0.0183 (0.0183) 1.00 1.84 0.70 1.83
1992-ILA units.. 1.00 0.0277 -- 0.0277 (0.0277) 1.00 2.82 0.30 2.77
1992-ILA Admin-
istration units. 1.00 0.0266 -- 0.0266 (0.0266) 1.00 2.67 0.45 2.66
1992-ILA Service
units........... 1.00 0.0243 -- 0.0243 (0.0243) 1.00 2.41 0.70 2.43
1991-ILA units.. 1.00 0.0424 -- 0.0424 (0.0424) 1.00 4.33 0.32 4.24
1991-ILA Admin-
istration units. 1.00 0.0406 -- 0.0406 (0.0406) 1.00 4.17 0.47 4.06
1991-ILA Service
units........... 1.00 0.0386 -- 0.0386 (0.0386) 1.00 3.91 0.72 3.86
1990-ILA units.. 1.00 0.0550 (0.0001) 0.0549 (0.0549) 1.00 5.64 0.40 5.50
1990-ILA Admin-
istration
units (c)....... 1.00 0.0301 -- 0.0301 (0.0300) 1.00 5.43(b) 0.55(b) 5.40(b)
1990-ILA Service
units (c)....... 1.00 0.0259 -- 0.0259 (0.0259) 1.00 5.17(b) 0.80(b) 5.16(b)
1989-ILA units.. 1.00 0.0591 (0.0001) 0.0590 (0.0590) 1.00 6.07 0.40 5.91
1988-ILA units.. 1.00 0.0487 0.0003 0.0490 (0.0490) 1.00 5.03 0.40 4.87
1987-ILA units.. 1.00 0.0413 (0.0003) 0.0410 (0.0410) 1.00 4.23 0.40 4.13
<CAPTION>
RATIOS ASSUMING NO
WAIVER OF FEES AND NO
EXPENSE LIMITATIONS
-------------------------
NET RATIO OF NET
ASSETS AT RATIO OF NET INVESTMENT
END OF EXPENSES TO INCOME TO
PERIOD AVERAGE NET AVERAGE NET
(IN 000'S) ASSETS ASSETS
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEARS
ENDED DECEMBER
31,
1996-ILA units.. $1,514,443 0.41% 3.10%
1996-ILA Admin-
istration units. 59,097 0.56 2.96
1996-ILA Service
units........... 28,921 0.81 2.69
1995-ILA units.. 1,342,585 0.42 3.54
1995-ILA Admin-
istration units. 48,773 0.57 3.40
1995-ILA Service
units........... 49,647 0.82 3.13
1994-ILA units.. 1,434,965 0.41 2.53
1994-ILA Admin-
istration units. 97,778 0.56 2.39
1994-ILA Service
units........... 36,492 0.81 2.09
1993-ILA units.. 1,769,477 0.41 2.11
1993-ILA Admin-
istration units. 99,896 0.56 1.97
1993-ILA Service
units........... 45,172 0.81 1.72
1992-ILA units.. 1,333,925 0.42 2.65
1992-ILA Admin-
istration units. 50,225 0.57 2.54
1992-ILA Service
units........... 29,534 0.82 2.31
1991-ILA units.. 1,044,986 0.42 4.14
1991-ILA Admin-
istration units. 37,567 0.57 3.96
1991-ILA Service
units........... 52,399 0.82 3.76
1990-ILA units.. 603,895 0.40 5.50
1990-ILA Admin-
istration
units (c)....... 42,498 0.55(b) 5.40(b)
1990-ILA Service
units (c)....... 56,810 0.80(b) 5.16(b)
1989-ILA units.. 688,556 0.40 5.91
1988-ILA units.. 907,782 0.40 4.87
1987-ILA units.. 965,714 0.40 4.13
</TABLE>
- ----
(a)Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
(b)Annualized.
(c)ILA Administration and Service unit activity commenced during June and July
of 1990, respectively.
5
<PAGE>
AN INTRODUCTION TO THE PORTFOLIOS
THE TRUST: The Trust is an open-end, management investment company regis-
tered under the Investment Company Act of 1940, as amended (the "Investment
Company Act"). Each Portfolio is a separate pool of assets which pursues its
investment objective through separate investment policies, as described below.
THE ADVISER: Goldman Sachs Asset Management, a separate operating division
of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the Portfolios' invest-
ment adviser (the "Adviser" or "GSAM").
THE DISTRIBUTOR: Goldman Sachs, which serves as the Portfolios' distributor
and transfer agent, is one of the largest international investment banking and
brokerage firms in the United States.
THE PORTFOLIOS: Each Portfolio's securities are valued by the amortized cost
method as permitted by a rule ("Rule 2a-7") of the Securities and Exchange
Commission ("SEC"). Under such rule, each Portfolio may invest only in securi-
ties that are determined to present minimal credit risk and meet certain other
criteria.
INVESTMENT OBJECTIVES AND POLICIES FOR PRIME OBLIGATIONS PORTFOLIO: To
seek to maximize current income to the extent consistent with the preserva-
tion of capital and the maintenance of liquidity by investing exclusively
in high quality money market instruments.
INVESTMENT OBJECTIVES AND POLICIES FOR TAX-EXEMPT DIVERSIFIED
PORTFOLIO: To seek to the extent consistent with the preservation of capi-
tal and prescribed portfolio standards, a high level of income exempt from
federal income tax by investing primarily in Municipal Instruments, as de-
fined herein.
NET ASSET VALUE: Each Portfolio seeks to maintain a stable net asset value
of $1.00 per unit.
MAXIMUM REMAINING MATURITY OF PORTFOLIO INVESTMENTS: Thirteen months at the
time of purchase.
DOLLAR-WEIGHTED AVERAGE PORTFOLIO MATURITY ("WAM"): Not more than ninety
days as required by Rule 2a-7.
FIRST TIER SECURITIES: Each Portfolio may purchase securities which are
rated (or that have been issued by an issuer that is rated with respect to a
class of short-term debt obligations, or any security within that class, com-
parable in priority and quality with such securities) in the highest short-
term rating category by at least two NRSROs (as defined below), or if only one
NRSRO has assigned a rating, by that NRSRO. U.S. Government Securities as de-
fined herein are considered First Tier Securities.
SECOND TIER SECURITIES: The Tax-Exempt Diversified Portfolio may purchase
securities which are not First Tier Securities but which are rated in the top
two short-term rating categories by at least two NRSROs, or if only one NRSRO
has assigned a rating, by that NRSRO. The Prime Obligations Portfolio will not
invest in a security which is a Second Tier Security at the time of purchase.
UNRATED SECURITIES: To the extent permitted by Rule 2a-7, unrated securities
may be purchased if they are deemed to be of comparable quality to First Tier
Securities, or, to the extent that a Portfolio may purchase Second Tier Secu-
rities, comparable in quality to Second Tier Securities.
NRSROS: Nationally Recognized Statistical Rating Organizations include Stan-
dard & Poor's Ratings Group ("S&P"), Moody's Investors Service, Inc.
("Moody's"), Fitch Investors Services, Inc., Duff and Phelps, Inc., IBCA Lim-
ited and its affiliate IBCA Inc., and Thomson BankWatch, Inc. For a descrip-
tion of each NRSRO's rating categories, see Appendix A to the Statement of Ad-
ditional Information.
6
<PAGE>
INVESTMENT POLICIES MATRIX
<TABLE>
<CAPTION>
PRIME OBLIGATIONS PORTFOLIO TAX-EXEMPT DIVERSIFIED PORTFOLIO
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
US Treasury Obligations [_]
- ---------------------------------------------------------------------------------------------
US Government Securities [_]
- ---------------------------------------------------------------------------------------------
Bank Obligations
[_]
US Banks Only
- ---------------------------------------------------------------------------------------------
Commercial Paper [_] [_]
Tax-exempt only
- ---------------------------------------------------------------------------------------------
Short-Term Obligations of
Corporations and Other [_]
Entities US entities Only
- ---------------------------------------------------------------------------------------------
Repurchase Agreements [_]
- ---------------------------------------------------------------------------------------------
Asset-Backed & Receivables- [_]
Backed Securities+
- ---------------------------------------------------------------------------------------------
Taxable Municipals [_]
- ---------------------------------------------------------------------------------------------
Tax-Exempt Municipals [_]
At least 80% of net assets in
Municipal Instruments (except in
extraordinary circumstances)
- ---------------------------------------------------------------------------------------------
Credit Quality**** First Tier First or Second Tier
- ---------------------------------------------------------------------------------------------
Investment Companies [_] [_]
Up to 10% of total Up to 10% of total assets in
assets in other other investment companies
investment companies
- ---------------------------------------------------------------------------------------------
Unrated Securities [_] [_]
- ---------------------------------------------------------------------------------------------
Summary of Taxation for Taxable federal and Tax-exempt federal and taxable
Distributors* state** state***
- ---------------------------------------------------------------------------------------------
Miscellaneous May (but does not currently
intend to) invest up to 20% in
AMT securities and may
temporarily invest in the taxable
money market instruments
described herein
</TABLE>
Note: See "Description of Securities and Investment Techniques" for a descrip-
tion of, and certain criteria applicable to, each of these categories of
investments.
+ To the extent required by Rule 2a-7, asset-backed and receivables-backed
securities will be rated by the requisite number of NRSROs.
* See "Taxes" below for an explanation of the tax consequences summarized
in the table above.
** Taxable in many states except for distributions from U.S. Treasury obli-
gation interest income and certain U.S. Government securities interest
income.
*** Taxable except for distributions from interest on obligations of an in-
vestor's state of residence in certain states.
****To the extent permitted by Rule 2a-7, a Portfolio holding a security fully
supported by a guarantee may substitute the credit quality of the guarantee
in determining the credit quality of the security.
7
<PAGE>
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
U.S. TREASURY OBLIGATIONS
"U.S. Treasury Obligations" are securities issued or guaranteed by the U.S.
Treasury, payments of principal and interest on which are backed by the full
faith and credit of the U.S. Government.
U.S. GOVERNMENT SECURITIES
"U.S. Government Securities" are obligations issued or guaranteed by the
U.S. Government, its agencies, authorities or instrumentalities. Unlike U.S.
Treasury Obligations, securities issued or guaranteed by U.S. Government agen-
cies, authorities or instrumentalities are supported either by (a) the full
faith and credit of the U.S. Government (such as securities of the Government
National Mortgage Association), (b) the right of the issuer to borrow from the
Treasury (such as securities of the Student Loan Marketing Association), (c)
the discretionary authority of the U.S. Government to purchase the agency's
obligations (such as securities of the Federal National Mortgage Association
and the Federal Home Loan Mortgage Corporation), or (d) only the credit of the
issuer. No assurance can be given that the U.S. Government will provide finan-
cial support to U.S. Government agencies, authorities or instrumentalities in
the future. U.S. Government Securities may include zero coupon bonds. Such
bonds may be purchased when yields are attractive.
Securities guaranteed as to principal and interest by the U.S. Government,
its agencies, authorities or instrumentalities are deemed to include (a) secu-
rities for which the payment of principal and interest is backed by an irrevo-
cable letter of credit issued by the U.S. Government, its agencies, authori-
ties or instrumentalities and (b) participations in loans made to foreign gov-
ernments or their agencies that are so guaranteed. The secondary market for
certain of these participations is limited. Such participations may therefore
be regarded as illiquid.
Each Portfolio 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 Portfolio may also acquire securities issued or guaranteed as to prin-
cipal and interest by the U.S. Government, its agencies, authorities or in-
strumentalities in the form of custodial receipts that evidence ownership of
future interest payments, principal payments or both on certain notes or bonds
issued by the U.S. Government, its agencies, authorities or instrumentalities.
For certain securities law purposes, custodial receipts are not considered ob-
ligations of the U.S. Government.
U.S. BANK OBLIGATIONS
The Prime Obligations Portfolio may invest in "U.S. Bank Obligations" lim-
ited to securities issued or guaranteed by U.S. banks (including certificates
of deposit, commercial paper, unsecured bank promissory notes and bankers' ac-
ceptances) which have more than $1 billion in total assets at the time of pur-
chase. Such obligations may also include debt obligations issued by U.S. sub-
sidiaries of such banks.
COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE OBLIGATIONS
The Prime Obligations Portfolio may invest in "Commercial Paper" (including
variable amount master demand notes and asset-backed commercial paper) which
is payable in U.S. dollars and is issued or guaranteed
8
<PAGE>
by U.S. corporations, U.S. commercial banks, or other entities. In addition,
the Portfolio may invest in other short-term obligations (including short-term
funding agreements) payable in U.S. dollars and issued or guaranteed by U.S.
corporations or other entities.
ASSET-BACKED AND RECEIVABLES-BACKED SECURITIES
The Prime Obligations Portfolio may invest in "Asset-Backed and Receivables-
Backed Securities" which represent participations in, or are secured by and
payable from, pools of assets such as motor vehicle installment sale con-
tracts, installment loan contracts, leases of various types of real and per-
sonal property, receivables from revolving credit (credit card) agreements and
other categories of receivables. Such asset pools are securitized through the
use of privately-formed trusts or special purpose-corporations. Payments or
distributions of principal and interest may be guaranteed up to certain
amounts and for a certain time period by a letter of credit or a pool insur-
ance policy issued by a financial institution, or other credit enhancements
may be present. To the extent consistent with its investment objective and
policies, the Prime Obligations Portfolio may invest in new types of mortgage-
related securities and in other asset-backed securities that may be developed
in the future to the extent consistent with its investment objective and poli-
cies.
MUNICIPAL OBLIGATIONS
MUNICIPAL INSTRUMENTS: Obligations issued by or on behalf of states, terri-
tories and possessions of the United States and their political subdivisions,
agencies, authorities and instrumentalities, and the District of Columbia, the
interest from which is, in the opinion of bond counsel, if any, excluded from
gross income for federal income tax purposes.
Such Municipal Instruments may include:
(A) fixed rate notes and similar debt instruments rated in the highest
short-term rating category or in one of the two highest long-term rating
categories;
(B) variable and floating rate demand instruments rated in the highest
short-term or one of the two highest long-term rating categories;
(C) tax-exempt commercial paper rated in the highest rating category;
(D) municipal bonds rated in one of the two highest rating categories;
and
(E) unrated notes, paper, bonds or other instruments determined to be of
comparable quality by the Adviser pursuant to criteria approved by the
Trustees.
As a matter of fundamental policy, at least 80% of the Tax-Exempt Diversi-
fied Portfolio's net assets will ordinarily be invested in Municipal Instru-
ments, except in extraordinary circumstances. The Portfolio may temporarily
invest in taxable money market instruments when the Adviser believes that the
market conditions dictate a defensive posture. Investments in taxable money
market instruments will be limited to those meeting the quality standards of
the Tax-Exempt Diversified Portfolio.
The Prime Obligations Portfolio may invest in short-term obligations issued
or guaranteed by state and municipal governments when yields on such securi-
ties are attractive compared to other taxable investments.
9
<PAGE>
MUNICIPAL NOTES AND BONDS. Municipal notes include tax anticipation notes
("TANs"), revenue anticipation notes ("RANs"), bond anticipation notes
("BANs"), tax and revenue anticipation notes ("TRANs") and construction loan
notes. Municipal bonds include general obligation bonds and revenue bonds.
General obligation bonds are backed by the taxing power of the issuing munici-
pality and are considered the safest type of bonds. Revenue bonds are backed
by the revenues of a project or facility such as the tolls from a toll bridge.
Revenue bonds also include lease rental revenue bonds which are issued by a
state or local authority for capital projects and are secured by annual lease
payments from the state or locality sufficient to cover debt service on the
authority's obligations. Industrial development bonds (generally referred to
under current tax law as "private activity bonds") are a specific type of rev-
enue bond backed by the credit and security of a private user and therefore
have more potential risk. Municipal bonds may be issued in a variety of forms,
including commercial paper, tender option bonds and variable and floating rate
securities.
TENDER OPTION BONDS. A tender option bond is a Municipal Instrument (gener-
ally held pursuant to a custodial arrangement) having a relatively long matu-
rity and bearing interest at a fixed rate substantially higher than prevailing
short-term, tax-exempt rates. The bond is typically issued in conjunction with
the agreement of a third party, such as a bank, broker-dealer or other finan-
cial institution, pursuant to which such institution grants the security
holder the option, at periodic intervals, to tender its securities to the in-
stitution and receive the face value thereof. As consideration for providing
the option, the financial institution receives periodic fees equal to the dif-
ference 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 pre-
vailing short-term, tax-exempt rate. However, an institution will not be obli-
gated to accept tendered bonds in the event of certain defaults or a signifi-
cant downgrading in the credit rating assigned to the issuer of the bond. The
tender option will be taken into account in determining the maturity of the
tender option bonds and a Portfolio's average portfolio maturity. There is a
risk that the Tax-Exempt Diversified Portfolio will not be considered the
owner of a tender option bond for federal income tax purposes and thus will
not be entitled to treat such interest as exempt from federal income tax.
REVENUE ANTICIPATION WARRANTS. Revenue Anticipation Warrants ("RAWs") are
issued in anticipation of the issuer's receipt of revenues and present the
risk that such revenues will be insufficient to satisfy the issuer's payment
obligations. The entire amount of principal and interest on RAWs is due at ma-
turity. RAWs, including those with a maturity of more than 397 days, may also
be repackaged as instruments which include a demand feature that permits the
holder to sell the RAWs to a bank or other financial institution at a purchase
price equal to par plus accrued interest on each interest rate reset date.
FLOATING AND VARIABLE RATE OBLIGATIONS. The value of floating and variable
rate obligations generally is more stable than that of fixed rate obligations
in response to changes in interest rate levels. Variable and floating rate ob-
ligations usually have demand features that permit the Portfolios to sell them
at par value plus accrued interest upon short notice. The issuers or financial
intermediaries providing demand features may support their ability to purchase
the obligations by obtaining credit with liquidity supports. These may include
lines of credit, which are conditional commitments to lend, and letters of
credit, which will ordinarily be irrevocable, both of which may be issued by
domestic banks or foreign banks which have a branch, agency or subsidiary in
the United States. When considering whether an obligation meets a Portfolio's
quality standards, the Portfolio will, to the extent permitted by Rule 2a-7,
look to the creditworthiness of the party providing unconditional demand fea-
tures or other unconditional obligations to support the credit of the issuer
of the security. A Portfolio may consider the maturity of a variable or float-
ing rate Municipal Instrument to be shorter than its ultimate stated
10
<PAGE>
maturity if the Portfolio has the right to demand prepayment of its principal
at specified intervals prior to the security's ultimate stated maturity, sub-
ject to the conditions for using amortized cost valuation under the Investment
Company Act. A Portfolio may purchase such variable or floating rate obliga-
tions from the issuers or may purchase certificates of participation, a type
of floating or variable rate obligation, which are interests in a pool of debt
obligations held by a bank or other financial institution.
INDUSTRIAL DEVELOPMENT BONDS. The Portfolios may invest in industrial devel-
opment bonds (generally referred to under current tax law as "private activity
bonds"), the interest from which would be an item of tax preference when dis-
tributed by the Tax-Exempt Diversified Portfolio as "exempt interest divi-
dends" to unitholders under the federal alternative minimum tax. See "Taxes"
and "Distributions." The Tax-Exempt Diversified Portfolio may, but does not
currently intend to, invest up to 20% of its net assets in private activity
bonds. If such policy should change in the future, unitholders would be noti-
fied and such investments would not exceed 20% of the Portfolio's net assets.
OTHER POLICIES. Ordinarily, the Tax-Exempt Diversified Portfolio expects
that 100% of its portfolio securities will be Municipal Instruments. However,
the Portfolio may hold cash or invest in short-term taxable securities as set
forth above. The Portfolio may invest 25% or more of the value of its total
assets in Municipal Instruments which are related in such a way that an eco-
nomic, business or political development or change affecting one Municipal In-
strument would also affect the other Municipal Instruments. For example, the
Portfolio may invest all of its assets in (a) Municipal Instruments the inter-
est on which is paid solely from revenues from similar projects such as hospi-
tals, electric utility systems, multi-family housing, nursing homes, commer-
cial facilities (including hotels), steel companies or life care facilities,
(b) Municipal Instruments whose issuers are in the same state, or (c) indus-
trial development obligations. Concentration of the Portfolio's investments in
these Municipal Instruments will subject the Portfolio, to a greater extent
than if such investment was more limited, to the risks of adverse economic,
business or political developments affecting any such state, industry or other
area of concentration.
Each Portfolio may purchase Municipal Instruments which are backed by let-
ters of credit, which will ordinarily be irrevocable, issued by domestic banks
or foreign banks (excluding the Prime Obligations Portfolio) which have a
branch, agency or subsidiary in the United States. In addition, the Portfolios
may acquire securities in the form of custodial receipts which evidence owner-
ship of future interest payments, principal payments or both on obligations of
certain state and local governments and authorities.
In order to enhance the liquidity, stability, or quality of a Municipal In-
strument, each Portfolio may acquire the right to sell the security to another
party at a guaranteed price and date.
REPURCHASE AGREEMENTS
Each Portfolio may only enter into repurchase agreements with primary deal-
ers in U.S. Government Securities. A repurchase agreement is an agreement un-
der which a Portfolio purchases securities and the seller agrees to repurchase
the securities within a particular time at a specified price. Such price will
exceed the original purchase price, the difference being income to the Portfo-
lio, and will be unrelated to the interest rate on the purchased security. A
Portfolio's custodian or sub-custodian will maintain custody of the purchased
securities for the duration of the agreement. The value of the purchased secu-
rities, including accrued interest, will at all times equal or exceed the
value of the repurchase agreement. In the event of bankruptcy of the seller or
failure of the seller to repurchase the securities as agreed, a Portfolio
could suffer losses, including loss of interest on or principal of the secu-
rity and costs associated with delay and enforcement of the repurchase agree-
ment. In
11
<PAGE>
evaluating whether to enter into a repurchase agreement, the Adviser will
carefully consider the creditworthiness of the seller pursuant to procedures
reviewed and approved by the Trustees. Distributions of the income from repur-
chase agreements entered into by a Portfolio will be taxable to its
unitholders. In addition, each Portfolio, together with other registered in-
vestment companies having advisory agreements with the Adviser or any of its
affiliates, may transfer uninvested cash balances into a single joint account,
the daily aggregate balance of which will be invested in one or more repur-
chase agreements.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES
The Portfolios may purchase when-issued securities and make contracts to
purchase or sell securities for a fixed price at a future date beyond custom-
ary settlement time. A Portfolio is required to hold and maintain in a segre-
gated account with the Portfolio's custodian or subcustodian until three days
prior to settlement date, cash or liquid assets in an amount sufficient to
meet the purchase price. Alternatively, a Portfolio 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. Although a Portfolio would generally purchase securities
on a when-issued or forward commitment basis with the intention of acquiring
securities for its portfolio, the Portfolio may dispose of a when-issued secu-
rity or forward commitment prior to settlement if the Adviser deems it appro-
priate to do so.
OTHER INVESTMENT COMPANIES
The Adviser will determine, under guidelines established by the Trustees,
whether securities issued by other money market investment companies present
minimal credit risks. The amount of a Portfolio's investments in securities of
other investment companies will be subject to the limitations on such invest-
ments prescribed by the Investment Company Act. These limits include a prohi-
bition on any Portfolio acquiring more than 3% of the voting shares of any
other investment company, and a prohibition on investing more than 5% of a
Portfolio's total assets in securities of any one investment company or more
than 10% of its total assets in securities of all investment companies. Each
Portfolio will indirectly bear its proportionate share of any management fees
and other expenses paid by such other investment companies. Such other invest-
ment companies will have investment objectives, policies and restrictions sub-
stantially similar to those of the acquiring Portfolio and will be subject to
substantially the same risks.
INVESTMENT LIMITATIONS
RULE 2A-7. Each Portfolio will comply with the conditions for using amor-
tized cost valuation set forth in Rule 2a-7 under the Investment Company Act
including, but not limited to, those conditions relating to maturity, diversi-
fication and credit quality. These operating policies may be more restrictive
than the fundamental policies set forth in the Statement of Additional Infor-
mation.
INVESTMENT RESTRICTIONS. Each Portfolio is subject to certain investment re-
strictions that are described in detail under "Investment Restrictions" in the
Statement of Additional Information. Fundamental investment restrictions and
the investment objective of a Portfolio cannot be changed without approval of
a majority of the outstanding units of that Portfolio. All policies not spe-
cifically designated as fundamental are non-fundamental and may be changed
without unitholder approval.
12
<PAGE>
RESTRICTED AND OTHER ILLIQUID SECURITIES. Each Portfolio may purchase secu-
rities that are not registered ("restricted securities") under the Securities
Act of 1933 ("1933 Act"), but can be offered and sold to "qualified institu-
tional buyers" under Rule 144A under the 1933 Act. However, a Portfolio will
not invest more than 10% of its net assets in illiquid investments, which in-
clude fixed time deposits maturing in more than seven days and restricted se-
curities. Restricted securities (including commercial paper issued pursuant to
Section 4(2) of the 1933 Act) which the Board of Trustees has determined are
liquid, based upon a continuing review of the trading markets for the specific
restricted security, will not be deemed to be illiquid investments for pur-
poses of this restriction. The Board of Trustees may adopt guidelines and del-
egate to the Adviser the daily function of determining and monitoring the li-
quidity of restricted securities. The Board, however, will retain sufficient
oversight and be ultimately responsible for the determinations. Since it is
not possible to predict with assurance that the market for restricted securi-
ties eligible for resale under Rule 144A will continue to be liquid, the Ad-
viser will carefully monitor each Portfolio's investments in these securities,
focusing on such important factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in a Portfolio to the extent that quali-
fied institutional buyers become for a time uninterested in purchasing these
restricted securities.
In addition, each Portfolio may not invest in repurchase agreements maturing
in more than seven days and securities which are not readily marketable if, as
a result thereof, more than 10% of the net assets of that Portfolio (taken at
market value) would be invested in such investments. Certain repurchase agree-
ments which mature in more than seven days can be liquidated before the nomi-
nal fixed term on seven days or less notice. Such repurchase agreements will
be regarded as liquid instruments.
MANAGEMENT
THE ADVISER
GSAM, One New York Plaza, New York, New York 10004, a separate operating di-
vision of Goldman, Sachs & Co., acts as investment adviser to the Portfolios.
Goldman Sachs registered as an investment adviser in 1981. As of , 1997,
Goldman Sachs, together with its affiliates, acted as investment adviser, ad-
ministrator or distributor for approximately $ billion in assets.
As of , 1997, Goldman Sachs and its consolidated subsidiaries had assets
of approximately $ billion and partners' capital of $ billion and ranked
as one of the largest international investment banking and brokerage firms in
the United States. Founded in 1869, Goldman Sachs is a major investment bank-
ing and brokerage firm providing a broad range of financing and investment
services both in the United States and abroad.
Pursuant to an SEC order, the Prime Obligations Portfolio may enter into
principal transactions in certain taxable money market instruments, including
repurchase agreements, with Goldman Sachs.
Under the Investment Advisory Agreements, GSAM continually manages each
Portfolio, including the purchase, retention and disposition of its securities
and other assets. In addition, GSAM administers the Portfolios' business af-
fairs and performs various unitholder servicing functions to the extent not
provided by other organizations. GSAM may pay a Service Organization, as de-
fined herein, other than Goldman Sachs, compensation equal on an annual basis
up to .10% of the average daily net assets of the ILA Service Units attribut-
able to
13
<PAGE>
or held of record by such Service Organization for providing certain
unitholder services to its customers. The management of each Portfolio is sub-
ject to the supervision of the Trustees and each Portfolio's investment poli-
cies. For these services, the Trust, on behalf of each Portfolio, pays GSAM a
monthly fee at an annual rate of each Portfolio's average daily net assets as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
CONTRACTUAL DECEMBER 31,
RATE 1996
----------- ------------
<S> <C> <C>
Prime Obligations Portfolio............................ .35% .35%
Tax-Exempt Diversified Portfolio....................... .35% .25%
</TABLE>
The difference, if any, between the stated fees and the actual advisory fees
paid by the Portfolios reflects the fact that GSAM did not charge the full
amount of the advisory fees to which it would have been entitled.
GSAM has agreed to reduce or otherwise limit the daily expenses of each
Portfolio (excluding fees payable to Service Organizations, as defined herein,
distribution and authorized dealer service fees, taxes, interest, brokerage
and litigation, indemnification and other extraordinary expenses), on an
annualized basis, to .43% of the average daily net assets of the Portfolio
less the effect of fee reductions, if any. Such reductions or limits, if any,
are calculated monthly on a cumulative basis. Any such reductions or limits
may be discontinued or modified only with the express approval of the Trust-
ees. In addition, GSAM has voluntarily agreed to reduce or limit the Prime Ob-
ligations and Tax-Exempt Diversified Portfolios' annual total operating ex-
penses (excluding fees payable to Service Organizations, as defined herein,
and distribution and authorized dealer service fees), to .42% and .32%, re-
spectively, of average daily net assets. GSAM has no current intention to, but
may in the future, discontinue or modify either of the limitations at its dis-
cretion.
THE DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 4900 Sears Tower, Chicago, Illinois 60606, serves as the Dis-
tributor of units of each Portfolio pursuant to a Distribution Agreement with
the Trust. The Distributor will assist in the sale of units of each Portfolio
upon the terms described herein. Units of each Portfolio may also be sold by
certain investment dealers, including members of the NASD and certain other
financial service firms that have sales agreements with Goldman Sachs ("Autho-
rized Dealers"). Goldman Sachs, 4900 Sears Tower, Chicago, Illinois also
serves as the Transfer Agent of each Portfolio. For the transfer agency serv-
ices, Goldman Sachs receives .04% (on an annualized basis) of the average
daily net assets with respect to the Tax-Exempt Diversified Portfolio. Goldman
Sachs is entitled to receive a fee from the Prime Obligations Portfolio equal
to each class' proportionate share of the total transfer agency fees borne by
the Portfolio. Such fees are equal to the fixed per account charge of $12,000
per year plus $7.50 per account, together with out-of-pocket and transaction
related expenses (including those out-of-pocket expenses payable to servicing
and/or sub-transfer agents) applicable to ILA Class B and Class C shares plus
..04% of the average daily net assets of the other classes of the Prime Obliga-
tions Portfolio.
From time to time, Goldman Sachs or any of its affiliates may purchase and
hold units of the Portfolios in order to increase the assets of the Portfo-
lios. Increasing the Portfolios' assets may enhance investment flexibility and
diversification. Goldman Sachs reserves the right to redeem at any time some
or all of the Portfolio units acquired for its own account. Goldman Sachs will
consider the effect of redemptions on the Portfolios and other unitholders in
deciding whether to redeem its units.
14
<PAGE>
ADDITIONAL SERVICES
SERVICE PLAN (ILA SERVICE UNITS ONLY)
Each Portfolio has adopted a Service Plan with respect to the ILA Service
Units which authorizes it to compensate Service Organizations for providing
account administration and personal and account maintenance services to their
customers who are beneficial owners of such Units. Each Portfolio will enter
into agreements with Service Organizations, including Goldman Sachs, which
purchase ILA Service Units, on behalf of their customers ("Service Agree-
ments"). On behalf of its clients who purchase ILA Service Units of a Portfo-
lio, Goldman Sachs will provide services as set forth under the Service Agree-
ment. The Service Agreements will provide for compensation to each Service Or-
ganization in an amount up to .40% (on an annualized basis) of the average
daily net assets of the ILA Service Units of that Portfolio attributable to or
held in the name of the Service Organization for its customers; provided, how-
ever, that the fee paid for personal and account maintenance services shall
not exceed .25% of such average daily net assets. The services provided by a
Service Organization may include acting, directly or through an agent, as the
sole unitholder of record, maintaining account records for its customers,
processing orders to purchase, redeem and exchange ILA Service Units for its
customers, responding to inquiries from prospective and existing unitholders
and assisting customers with investment procedures.
For the fiscal year ended December 31, 1996, the Trust, on behalf of each
Portfolio, paid Service Organizations fees at the annual rate of .40% of each
Portfolio's average daily net assets attributable to ILA Service Units.
Holders of ILA Service Units of a Portfolio will bear all expenses and fees
paid to Service Organizations with respect to such Units as well as any other
expenses which are directly attributable to such Units.
Service Organizations may charge other fees to their customers who are the
beneficial owners of ILA Service Units in connection with their customer ac-
counts. These fees would be in addition to any amounts received by the Service
Organization under a Service Agreement and may affect an investor's return
with respect to an investment in a Portfolio.
All inquiries of beneficial owners of ILA Service Units of the Portfolios
should be directed to such owners' Service Organization.
DISTRIBUTION AND AUTHORIZED DEALER SERVICE PLANS (ILA CLASS B AND CLASS C
UNITS ONLY)
DISTRIBUTION PLAN-ILA CLASS B AND CLASS C UNITS. Prime Obligations Portfo-
lio, with respect to each of its ILA Class B and Class C Units, has adopted a
Distribution Plan pursuant to Rule 12b-1 under the Investment Company Act
(each a "Distribution Plan"). Under the ILA Class B and Class C Distribution
Plans, Goldman Sachs is entitled to a quarterly fee from the Portfolio for
distribution services equal, on an annual basis, to 0.75% of the average daily
net assets attributable to its ILA Class B and Class C Units, respectively.
Goldman Sachs may use the distribution fee for its expenses of distributing
the ILA Class B and Class C Units. The types of expenses for which Goldman
Sachs may be compensated for distribution services under the ILA Class B and
Class C Distribution Plans include compensation paid to and expenses incurred
by authorized dealers, Goldman Sachs and their respective officers, employees
and sales representatives, commissions paid to authorized dealers, allocable
overhead, telephone and travel expenses, the printing of prospectuses for pro-
spective unitholders, preparation and distribution of sales literature, adver-
tising of any type and all other expenses incurred in connection with activi-
ties primarily intended to result in the sale of ILA Class B and Class C
Units.
15
<PAGE>
If the fee received by Goldman Sachs pursuant to a Distribution Plan exceeds
its expenses, Goldman Sachs may realize a profit from these arrangements. The
Distribution Plans will be reviewed and are subject to approval annually by
the Board of Trustees of the Trust. The aggregate compensation that may be re-
ceived under each Distribution Plan for distribution services may not exceed
the limitations imposed by the NASD's Conduct Rules.
In connection with the sale of ILA Class C Units, Goldman Sachs pays sales
commissions of 0.75% of the purchase price to Authorized Dealers from its own
resources at the time of sale. Goldman Sachs plans to pay the 0.75% distribu-
tion fee on a quarterly basis as an ongoing commission to Authorized Dealers
on ILA Class C Units that have been outstanding for one year or more.
AUTHORIZED DEALER SERVICE PLAN-ILA CLASS B AND CLASS C UNITS. Prime Obliga-
tions Portfolio, with respect to each of its ILA Class B and Class C Units,
has adopted a non-Rule 12b-1 Authorized Dealer Service Plan (each a "Service
Plan") pursuant to which Goldman Sachs, Authorized Dealers or other persons
are compensated for providing personal and account maintenance services. The
Portfolio pays a fee under its ILA Class B and Class C Service Plans equal on
an annual basis to 0.25% of its average daily net assets attributable to ILA
Class B and Class C Units, respectively. The fee for personal and account
maintenance services paid pursuant to a Service Plan may be used to make pay-
ments to Goldman Sachs, authorized dealers and their officers, sales repre-
sentatives and employees for responding to inquiries of, and furnishing assis-
tance to, unitholders regarding ownership of their units or their accounts or
similar services not otherwise provided on behalf of the Portfolios. The Serv-
ice Plans will be reviewed and are subject to approval annually by the Board
of Trustees.
In connection with the sale of ILA Class C Units, Goldman Sachs pays the
0.25% service fee to Authorized Dealers in advance for the first year after
the Units have been sold by the Authorized Dealer. After the Units have been
held for one year, Goldman Sachs pays the service fee on a quarterly basis. In
addition, as described above under "Distribution Plan--ILA Class B and Class C
Units," Goldman Sachs pays sales commissions of 0.75% of the purchase price to
Authorized Dealers from its own resources at the time of sale. Accordingly,
the total up front commission paid by Goldman Sachs to the Authorized Dealer
at the time of sale of ILA Class C Units is 1.0% of the purchase price.
ALTERNATIVE PURCHASE ARRANGEMENTS
Each Portfolio continuously offers ILA Service Units and the Prime Obliga-
tions Portfolio also offers ILA Class B and Class C Units through this pro-
spectus, as described more fully below. ILA Class B and Class C Units of the
Prime Obligations Portfolio will be typically issued only upon an exchange of
Class B or Class C Shares, respectively, of any of the Goldman Sachs Funds (as
defined herein) or to accounts which intend to systematically exchange ILA
Class B or Class C Units for Class B or Class C Shares, respectively, of any
of the Goldman Sachs Funds. If an investor does not specify in the instruc-
tions to the Portfolios which class of Units an investor wishes to purchase,
exchange or redeem, the Portfolios will assume that the instructions apply to
ILA Service Units, since such units are not subject to any contingent deferred
sales charge or distribution fees.
ILA SERVICE UNITS. ILA Service Units of the Portfolios may be purchased
through Goldman Sachs acting as a Service Organization or through Authorized
Dealers. ILA Service Units are not subject to any initial or contingent de-
ferred sales charge or any fee for distribution services. However, ILA Service
Units are subject to a service fee at the annual rate of 0.40% of the Portfo-
lios' average daily net assets attributable to ILA Service Units.
16
<PAGE>
ILA CLASS B UNITS. ILA Class B Units of the Prime Obligations Portfolio may
be purchased through Goldman Sachs or through Authorized Dealers. ILA Class B
Units are sold without an initial sales charge, but are subject to a contin-
gent deferred sales charge ("CDSC"), as described below, if redeemed within
six years of purchase. ILA Class B Units are also subject to distribution and
authorized dealer service fees of up to 0.75% and 0.25%, respectively, of the
Portfolio's average daily net assets attributable to ILA Class B Units. Your
entire investment in ILA Class B Units is available to work for you from the
time you make your initial investment, but the distribution fee paid by ILA
Class B Units will cause your Units (until conversion to ILA Service Units) to
have a higher expense ratio and to pay lower dividends than ILA Service Units.
ILA Class B Units will automatically convert to ILA Service Units, based on
their relative net asset values, eight years after purchase. No CDSC is im-
posed upon exchanges between the Prime Obligations Portfolio and another
Goldman Sachs Fund. However, units or shares acquired in an exchange will be
subject to the CDSC to the same extent as if there had been no exchange. For
purposes of determining whether the CDSC is applicable, the length of time an
investor has owned units or shares acquired by exchange will be measured from
the date the investor acquired the original units or shares and will not be
affected by any subsequent exchange. There is a maximum purchase limitation of
$250,000 on purchases of ILA Class B Units by each investor.
ILA CLASS C UNITS. ILA Class C Units are sold without an initial sales
charge, but are subject to a CDSC of 1% if redeemed within 12 months of pur-
chase. ILA Class C Units are subject to distribution and authorized dealer
service fees of 0.75% and 0.25%, respectively, of each Portfolio's average
daily net assets attributable to ILA Class C Units. See "Distribution and Au-
thorized Dealer Service Plans (ILA Class B and Class C Units only)." ILA Class
C Units have no conversion feature, and accordingly, an investor that pur-
chases ILA Class C Units will be subject to distribution fees that will be im-
posed on ILA Class C Units for an indefinite period, subject to annual ap-
proval by the Portfolio's Board of Trustees and certain regulatory limita-
tions. Your entire investment in ILA Class C Units is available to work for
you from the time you make your initial investment, but the distribution fee
paid by ILA Class C Units will cause your ILA Class C Units to have a higher
expense ratio and to pay lower dividends, to the extent dividends are paid,
than ILA Service Units (or Class B Units after conversion to ILA Service
Units).
OFFERING PRICE-ILA CLASS B UNITS
Investors may purchase ILA Class B Units of the Prime Obligations Portfolio
at the next determined net asset value without the imposition of an initial
sales charge. However, ILA Class B Units redeemed within six years of purchase
will be subject to a CDSC at the rates shown in the table that follows. At re-
demption, the charge will be assessed on the amount equal to the lesser of the
current market value or the original purchase cost of the units being re-
deemed. No CDSC will be imposed on increases in account value above the ini-
tial purchase price, including units derived from the reinvestment of divi-
dends or capital gains distributions.
17
<PAGE>
The amount of the CDSC, if any, will vary depending on the number of years
from the time of purchase until the time of redemption of ILA Class B Units.
For the purpose of determining the number of years from the time of any pur-
chase, all payments during a month will be aggregated and deemed to have been
made on the first day of that month. In processing redemptions of ILA Class B
Units, the Portfolio will first redeem units not subject to any CDSC, and then
units held longest during the eight-year period. As a result, a redeeming
unitholder will pay the lowest possible CDSC.
<TABLE>
<CAPTION>
CDSC AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CDSC
- ------------------- ---------------
<S> <C>
First........................................................... 5.0%
Second.......................................................... 4.0%
Third........................................................... 3.0%
Fourth.......................................................... 3.0%
Fifth........................................................... 2.0%
Sixth........................................................... 1.0%
Seventh and thereafter.......................................... none
</TABLE>
Proceeds from the CDSC are payable to the Distributor and may be used in
whole or part to defray the Distributor's expenses related to providing dis-
tribution-related services in connection with the sale of ILA Class B Units,
including the payment of compensation to Authorized Dealers. A commission
equal to 4% of the amount invested is paid to Authorized Dealers.
ILA Class B Units of the Prime Obligations Portfolio will automatically con-
vert into ILA Service Units of the Prime Obligations Portfolio at the end of
the calendar quarter that is eight years after the purchase date, except as
noted below. ILA Class B Units of the Portfolio acquired by exchange from
Class B Shares of another Goldman Sachs Fund will convert into ILA Service
Units based on the date of the initial purchase. ILA Class B Units acquired
through reinvestment of distributions will convert into ILA Service Units
based on the date of the initial purchase of the units on which the distribu-
tion was paid.
OFFERING PRICE--ILA CLASS C UNITS
Investors may purchase ILA Class C Units of the Portfolios at the next de-
termined net asset value without the imposition of an initial sales charge.
However, if ILA Class C Units are redeemed within 12 months of purchase a CDSC
of 1% will be deducted from the redemption proceeds. At redemption, the charge
will be assessed on the amount equal to the lesser of the current market value
or the original purchase cost of the units being redeemed. No CDSC will be im-
posed on increases in account value above the initial purchase price, includ-
ing units derived from the reinvestment of dividends or capital gains distri-
butions.
For the purpose of determining the number of months from the time of any
purchase, all payments during a month will be aggregated and deemed to have
been made on the first day of that month. In processing redemptions of ILA
Class C Units, the Portfolios will first redeem units held for longer than 12
months, and then units held for the shortest period during the 12 month peri-
od. As a result, a redeeming unitholder will pay the lowest possible CDSC.
Proceeds from the CDSC are payable to the Distributor and may be used in whole
or in part to defray the Distributor's expenses related to providing distribu-
tion-related services to the Funds in connection with the sale of ILA Class C
Units, including the payment of compensation to Authorized Dealers. A commis-
sion equal to 1.00% of the amount invested is paid to Authorized Dealers.
18
<PAGE>
WAIVER OR REDUCTION OF CONTINGENT DEFERRED SALES CHARGE
The CDSC on ILA Class B and Class C units may be waived or reduced if the
redemption relates to (a) retirement distributions or loans to participants or
beneficiaries from pension and profit sharing plans, pension funds and other
company sponsored benefit plans (each a "Plan"); (b) the death or disability
(as defined in section 72 of the Code) of a participant or beneficiary in a
Plan; (c) hardship withdrawals by a participant or beneficiary in a Plan; (d)
satisfying the minimum distribution requirements of the Code; (e) the estab-
lishment of "substantially equal periodic payments" as described in Section
72(t) of the Code; (f) the separation from service by a participant or benefi-
ciary in a Plan; (g) the death or disability (as defined in section 72 of the
Code) of a shareholder if the redemption is made within one year of such
event; (h) excess contributions being returned to a Plan; (i) distributions
from a qualified retirement plan invested in the Goldman Sachs Funds which are
being reinvested into a Goldman Sachs IRA; and (j) redemption proceeds which
are to be reinvested in accounts or non-registered products over which GSAM or
its advisory affiliates have investment discretion.
GENERAL INFORMATION
ILA Service Units, ILA Class B Units and ILA Class C Units may be purchased
on any Business Day at the net asset value next determined after receipt by
State Street Bank and Trust Company ("State Street"), as agent for Goldman
Sachs, of both the purchase order and the purchase price in federal funds.
Purchase orders may be made by contacting Goldman Sachs or, if units are held
in a "street name" account, the applicable Authorized Dealer. Since the Port-
folios and Goldman Sachs will have no record of the beneficial owner's trans-
actions in a "street name" account, the beneficial owner should contact its
Authorized Dealer to purchase, redeem or exchange units, to make changes in or
give instructions concerning the account or to obtain information about the
account. It is the responsibility of the Authorized Dealer to promptly forward
orders and payment to the Portfolios.
Goldman Sachs may from time to time, at its own expense, provide compensa-
tion to certain Authorized Dealers and other persons for performing adminis-
trative services to their customers. These services include maintaining ac-
count records, processing orders to purchase, redeem and exchange units and
responding to certain customer inquires. In addition, these services may also
include responding to certain inquiries from and providing written materials
to depository institutions about the Portfolios; furnishing advice about and
assisting depository institutions in obtaining from state regulatory agencies
any rulings, exemptions or other authorizations that may be required to con-
duct a mutual fund sales program; acting as liaison between depository insti-
tutions and national regulatory organizations; assisting with the preparation
of sales material; and providing general assistance and advice in establishing
and maintaining mutual fund sales programs on the premises of depository in-
stitutions.
PURCHASES BY CHECK
Initial purchases of ILA Service Units, ILA Class B Units and ILA Class C
Units may be made by mailing a completed Account Application along with a Fed-
eral Reserve draft or check (except that a third party check will not be ac-
cepted) payable only to the appropriate Portfolio and drawn on a U.S. bank and
for subsequent investments may be made by mailing a check with the investor's
account number to Goldman Sachs Trust (Prime Obligations Portfolio--Indicate
Class of Units) or (Tax-Exempt Diversified Portfolio--Service Units), c/o
NFDS, P.O. Box 419711, Kansas City, MO 64141-6711. The order becomes effective
as soon as the check or draft is converted to federal funds. It is expected
that Federal Reserve drafts will ordinarily be converted to federal funds on
the day of receipt and that checks will be converted to federal funds within
two Business Days after receipt. Payment of redemption proceeds from ILA Serv-
ice Units, ILA Class B Units and ILA Class C Units purchased by check may be
delayed up to 15 days until the check has cleared, as described under "Redemp-
tion of Units".
19
<PAGE>
AUTOMATIC INVESTMENT PLAN
Systematic cash investments in ILA Service Units, ILA Class B Units or ILA
Class C Units may be made through a unitholder's bank via the Automated Clear-
ing House Network or a unitholder's checking account via bank draft each
month. Required forms are available from Goldman Sachs or any Authorized Deal-
er. A minimum investment of $50 is required for Automatic Investment Plans.
PURCHASES
ILA Service Units, ILA Class B Units and ILA Class C Units of the Prime Ob-
ligations Portfolio are deemed to have been purchased when an order becomes
effective and are entitled to dividends as follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
IF AN ORDER IS RECEIVED BY
STATE STREET DIVIDENDS BEGIN
-------------------------- -----------------
<S> <C>
By: 3:00 p.m.--N.Y. time Same Business Day
- ---------------------------------------------------
After: 3:00 p.m.--N.Y. time Next Business Day
- ---------------------------------------------------
</TABLE>
ILA Service Units of the Tax-Exempt Diversified Portfolio are deemed to have
been purchased when an order becomes effective and are entitled to dividends
as follows:
<TABLE>
<CAPTION>
IF AN ORDER IS RECEIVED BY
STATE STREET DIVIDENDS BEGIN
-------------------------- -----------------
<S> <C>
By: 1:00 p.m.--N.Y. time Same Business Day
- ---------------------------------------------------
After: 1:00 p.m.--N.Y. time Next Business Day
- ---------------------------------------------------
</TABLE>
A Business Day means any day on which the New York Stock Exchange is open,
except for days on which Chicago, Boston or New York banks are closed for lo-
cal holidays.
ILA Service Units of the Portfolios are purchased at the net asset value per
unit without the imposition of a sales charge. ILA Class B and Class C Units
acquired through an exchange will be purchased at the net asset value per unit
and will only be subject to the CDSC on the shares originally held. For pur-
poses of determining the amount of any applicable CDSC, the length of time a
unitholder has owned ILA Class B or Class C Units will be measured from the
date the unitholder acquired the original Class B shares and will not be af-
fected by any subsequent exchange. Investors should consult their Goldman
Sachs Fund Class B or Class C shares prospectus to determine the amount of
their remaining CDSC.
Goldman Sachs, as each Portfolio's transfer agent, will maintain a complete
record of transactions and ILA Service Units, ILA Class B Units or ILA Class C
Units held in each unitholder's account. The Trust and Goldman Sachs each re-
serves the right to reject any purchase order for any reason.
MINIMUM INVESTMENT AND OTHER INFORMATION
The Trust does not have any minimum purchase or account requirements with
respect to ILA Service Units. However, Goldman Sachs has established a minimum
initial investment requirement of $5,000. Shareholders of any Goldman Sachs
Fund who wish to purchase ILA Service Units of the Portfolios or ILA Class B
or Class C Units of the Prime Obligations Portfolio through an exchange of
shares of such a Goldman Sachs Fund may be subject to different minimum in-
vestment requirements. (See "Exchanges," on page 22 of the Prospectus.)
TAX-SHELTERED RETIREMENT PLANS
The Prime Obligations Portfolio is offered for purchase by retirement plans,
including Individual Retirement Account plans for individuals and their non-
employed spouses, IRA plans for employees in connection with employer spon-
sored SEP, SAR-SEP and SIMPLE IRA plans, and defined contribution plans such
as 401(k) Salary Reduction Plans.
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<PAGE>
Detailed information concerning these plans and copies of the plans may be
obtained from the Transfer Agent. This information should be read carefully,
and consultation with an attorney or tax adviser may be advisable. The infor-
mation sets forth the service fee charged for retirement plans and describes
the federal income tax consequences of establishing a plan.
The minimum initial investment for all such retirement plans is $5,000, ex-
cept for certain exchanges of shares of any Goldman Sachs Fund and except that
the minimum for tax-sheltered retirement plans is $250. There is a minimum of
$50 for all subsequent investments.
REPORTS TO UNITHOLDERS
The Trust will issue an annual report containing audited financial state-
ments and a semiannual report to record holders of ILA Service Units of each
Portfolio, including Service Organizations who hold such Units for the benefit
of their customers and to unitholders of ILA Class B and Class C Units of the
Prime Obligations Portfolio. Upon request, a printed confirmation for each
transaction will be provided by Goldman Sachs. Any dividends and distributions
paid by the Portfolio are also reflected in regular statements issued by
Goldman Sachs, in its capacity as transfer agent and income disbursing agent,
to unitholders of record. The Service Organizations, including Goldman Sachs,
will be responsible for providing similar services to their own customers who
are the beneficial owners of such Units.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
All or substantially all of each Portfolio's net investment income will be
declared daily (as of 4:00 p.m. New York time) as a dividend and distributed
monthly. Distributions will be made in additional ILA Service Units, ILA Class
B Units or ILA Class C Units of the same Portfolio or, at the election of a
Service Organization (with respect to ILA Service Units) or ILA Class B or ILA
Class C Unitholder, in cash. Such reinvestments will not be subject to any
CDSC. The election to reinvest dividends and distributions or receive them in
cash may be changed by a Service Organization or ILA Class B or ILA Class C
Unitholder at any time upon written notice to Goldman Sachs, in its capacity
as transfer agent and income disbursing agent. If no election is made, all
dividend and capital gain distributions will be reinvested. Dividends will be
reinvested as of the last calendar day of each month. Cash distributions will
be paid on or about the first business day of each month. Net short-term capi-
tal gains, if any, will be distributed in accordance with the requirements of
the Code and may be reflected in a Portfolio's daily distributions. Each Port-
folio may distribute at least annually its long-term capital gains, if any,
after reduction by available capital losses. In order to avoid excessive fluc-
tuations in the amount of monthly capital gains distributions, a portion of
any net capital gains realized on the disposition of securities during the
months of November and December may be distributed during the subsequent cal-
endar year. Although realized gains and losses on the assets of a Portfolio
are reflected in the net asset value of the Portfolio, they are not expected
to be of an amount which would affect the Portfolio's net asset value of $1.00
per unit.
A Portfolio's net investment income consists of the excess of (i) accrued
interest or discount (including both original issue and market discount on
taxable securities) on portfolio securities, and (ii) any income of the Port-
folio from sources other than capital gains over (iii) the amortization of
market premium on all portfolio securities and (iv) the estimated expenses of
the Portfolio, including a proportionate share of the general expenses of the
Trust.
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<PAGE>
TAXES
Each Portfolio is treated as a separate entity for federal income tax pur-
poses, has elected to be treated and intends to continue to qualify and be
treated as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986 (the "Code") for each taxable year. To qualify as such,
each Portfolio must satisfy certain requirements relating to the sources of
its income, diversification of its assets and distribution of its income to
unitholders. As a regulated investment company, each Portfolio will not be
subject to federal income or excise tax on any net investment income and net
realized capital gains that are distributed to its unitholders in accordance
with certain timing requirements of the Code.
Dividends paid by a Portfolio from net investment income, the excess of net
short-term capital gain over net long-term capital loss and original issue
discount or market discount income will be taxable to unitholders as ordinary
income, except for any "exempt-interest dividends" paid by the Tax-Exempt Di-
versified Portfolio, as described below. Dividends paid by a Portfolio from
the excess of net long-term capital gain over net short-term capital loss will
be taxable as long-term capital gain regardless of how long the unitholders
have held their units. These tax consequences will apply to distributions of
either Portfolio regardless of whether distributions are received in cash or
reinvested in units. Certain distributions paid by the Portfolios in January
of a given year will be taxable to unitholders as if received on December 31
of the year in which they are declared. Unitholders will be informed annually
about the amount and character of distributions received from the Portfolios
for federal income tax purposes, including any distributions that may consti-
tute a return of capital or any distributions of the Tax-Exempt Diversified
Portfolio that may constitute a tax preference item under the federal alterna-
tive minimum tax.
The Tax-Exempt Diversified Portfolio intends to satisfy certain requirements
of the Code for the payment of "exempt-interest dividends" not included in
unitholders' federal gross income. Dividends paid by the Tax-Exempt Diversi-
fied Portfolio from interest on tax-exempt obligations and properly designated
by the Portfolio as exempt-interest dividends, including dividends attribut-
able to exempt-interest dividends received by the Portfolio from other regu-
lated investment companies, will generally be exempt from federal income tax,
although a portion of such dividends may be subject to the federal alternative
minimum tax. Exempt-interest dividends will be considered in computing the
corporate federal alternative minimum tax and the extent, if any, to which so-
cial security or railroad retirement benefits are taxable. Persons who are
"substantial users" of facilities financed by certain industrial development
or private activity bonds should consult their own tax advisers before pur-
chasing units of the Tax-Exempt Diversified Portfolio. Interest incurred to
purchase or carry units of the Tax-Exempt Diversified Portfolio will not be
deductible for federal income tax purposes to the extent related to exempt-in-
terest dividends paid by the Portfolio.
Individuals and certain other classes of unitholders may be subject to 31%
backup withholding of federal income tax on taxable distributions if they fail
to furnish their correct taxpayer identification number and certain certifica-
tions required by the Internal Revenue Service or if they are otherwise sub-
ject to backup withholding. Individuals, corporations and other unitholders
that are not U.S. persons under the Code are subject to different tax rules
and may be subject to nonresident alien withholding at the rate of 30% (or a
lower rate provided by an applicable tax treaty) on amounts treated as ordi-
nary dividends from the Portfolios.
In addition to federal taxes, a unitholder may be subject to state and local
taxes on payments received from a Portfolio. A state income (and possibly lo-
cal income and/or intangible property) tax exemption is generally
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<PAGE>
available to the extent a Portfolio's distributions are derived from interest
on (or, in the case of intangible property taxes, the value of its assets is
attributable to) certain U.S. Government obligations and/or tax-exempt munici-
pal obligations issued by or on behalf of the particular state or a political
subdivision thereof, provided in some states that certain thresholds for hold-
ings of such obligations and/or reporting requirements are satisfied.
Unitholders should consult their own tax advisers concerning these matters.
AUTOMATIC EXCHANGE PROGRAM
Unitholders of a Portfolio may elect on the Account Application to automati-
cally exchange a specified dollar amount of ILA Service Units, ILA Class B
Units or ILA Class C Units for corresponding shares of any Goldman Sachs Fund.
In the case of ILA Service Units, such exchanges will be made into the rele-
vant Goldman Sachs Fund at the public offering price, which may include a
sales charge, unless a sales charge has previously been paid on the investment
represented by the exchanged units (i.e., the units to be exchanged were orig-
inally issued in exchange for shares on which a sales charge was paid), in
which case the automatic exchanges will be made at net asset value. In the
case of ILA Class B or Class C Unitholders, such exchanges will be made into
the relevant Goldman Sachs Fund at net asset value and will be subject to the
CDSC of the original shares held. For purposes of determining the amount of
any applicable CDSC, the length of time a unitholder has owned ILA Class B or
ILA Class C Units will be measured from the date the unitholder acquired the
original Class B or Class C shares and will not be affected by any subsequent
exchange. Investors should consult their Goldman Sachs Fund Class B or Class C
shares prospectus, as the case may be, to determine the amount of their appli-
cable CDSC. Dividends and/or capital gains of ILA Service Units of each Port-
folio and ILA Class B and Class C Units of the Prime Obligations Portfolio
which have been reinvested may be exchanged for corresponding shares of a
Goldman Sachs Fund without an initial sales charge or CDSC. These automatic
exchanges are made monthly on the fifteenth day of each month or the first
Business Day thereafter and are subject to the following conditions. The mini-
mum dollar amount for automatic exchanges must be at least $50 per month. At
the time the election is made (i) the value of the unitholder's account in the
Portfolio from which the exchange is made must equal or exceed $5,000 and (ii)
the value of the account in the acquired fund must equal or exceed the ac-
quired fund's minimum initial investment requirement or, if the unitholder has
elected the automatic exchange privilege and the value of the acquired fund
does not equal the acquired fund's minimum, such election must continue until
the minimum initial investment requirement is met. The names, addresses and
social security or other taxpayer identification numbers for the unitholder
accounts with the exchanged and acquired funds must be identical. A unitholder
should obtain and read the prospectus relating to any Goldman Sachs Fund and
its shares and consider its investment objective, policies and applicable fees
and expenses before electing an automatic exchange into that Goldman Sachs
Fund.
EXCHANGES
ILA Service Units of each Portfolio and ILA Class B and Class C Units of the
Prime Obligations Portfolio may be exchanged for units of the corresponding
class of any Goldman Sachs Fund. A unitholder should obtain and read the pro-
spectus for the relevant Goldman Sachs Fund and consider its investment objec-
tives, policies and applicable fees before making an exchange. Exchanges of
ILA Service Units from each Portfolio will be made into the relevant Goldman
Sachs Fund at the public offering price, which may include a sales charge, un-
less a sales charge has previously been paid on the investment represented by
the exchanged units (i.e., the units to be exchanged were originally issued in
exchange for shares on which a sales charge was paid), in which case the ex-
change will be made at net asset value. In the case of ILA Class B and Class C
Unitholders, such exchanges will be made into the relevant Goldman Sachs Fund
at net asset value and will be subject to the CDSC of the
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<PAGE>
original shares held. For purposes of determining the amount of any applicable
CDSC, the length of time a unitholder has owned ILA Class B or Class C Units
will be measured from the date the unitholder acquired the original Class B or
Class C shares and will not be affected by any subsequent exchange. Investors
should consult their Goldman Sachs Fund Class B or Class C shares prospectus
to determine the amount of their applicable CDSC. ILA Service Units of each
Portfolio or ILA Class B or Class C Units of the Prime Obligations Portfolio
purchased through dividend and/or capital gains reinvestment may be exchanged
for corresponding shares of a Goldman Sachs Fund without an initial sales
charge or CDSC.
ILA Service Units of a Portfolio acquired in an exchange transaction for
shares of a Goldman Sachs Fund will be subject to the CDSC, if any, of the
shares of the Goldman Sachs Fund originally held. For purposes of determining
the amount of any applicable CDSC, the length of time a unitholder had owned
units acquired will be measured from the date the unitholder acquired the
original units subject to a CDSC, and will not be affected by any subsequent
exchange. A subsequent exchange of ILA Service Units of a Portfolio that are
subject to a CDSC (i.e., because the ILA Service Units were acquired in an ex-
change transaction for shares of a Goldman Sachs Fund that were subject to a
CDSC) will not be subject to the applicable CDSC at the time of exchange.
An exchange may be made by contacting an Authorized Dealer or writing to
Goldman Sachs Trust, c/o NFDS, P.O. Box 419711, Kansas City, MO 64141-6711 or,
unless the investor has specifically declined telephone exchange privileges on
the Account Application or elected in writing not to utilize telephone ex-
changes, by a telephone request to the Transfer Agent at 1-800-526-7384
(9:00 a.m. to 5:00 p.m. New York time). Certain procedures are employed to
prevent unauthorized or fraudulent exchange requests as set forth under "Re-
demption of Units." Under the telephone exchange privilege, units may be ex-
changed among accounts with different names, addresses or social security or
other taxpayer identification numbers only if the exchange instructions are in
writing and are received in accordance with the procedures set forth under
"Redemption of Units." In times of drastic economic or market changes the tel-
ephone exchange privilege may be difficult to implement.
In addition to free automatic exchanges pursuant to the Automatic Exchange
Program, six free exchanges are permitted in each twelve-month period. It may
be difficult to implement the telephone exchange privilege in times of drastic
economic or market changes. In an effort to prevent unauthorized or fraudulent
exchange requests by telephone, Goldman Sachs employs reasonable procedures as
set forth under "Redemption of Units" to confirm that such instructions are
genuine. All exchanges are subject to the minimum investment requirements of
the Portfolio or Goldman Sachs Fund into which the shares or units are being
exchanged. The minimum initial exchange for shareholders of a Goldman Sachs
Fund is $5,000 or the full account share balance, whichever is less.
An exchange fee may be imposed or the exchange privilege may be modified or
withdrawn at any time upon 60 days' notice to unitholders. The Trust, the rel-
evant fund or Goldman Sachs may reject or restrict purchases of units or
shares by a particular purchaser or group, for example, when a pattern of fre-
quent purchases and sales of units or shares is evident or if the purchase and
sale orders are, or a subsequent abrupt redemption might be, of a size that
would disrupt management of a Portfolio or a Goldman Sachs Fund. Exchanges are
available only in states where the exchange may be legally made.
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<PAGE>
REDEMPTION OF UNITS
HOW TO REDEEM
ILA Service Units may be redeemed through Goldman Sachs acting as a Service
Organization as specified below.
ILA Service Units of a Portfolio may be redeemed without charge upon request
on any Business Day at the net asset value next determined after receipt by
State Street as agent for Goldman Sachs, as a Service Organization, of the re-
demption request. ILA Class B and Class C Units of the Prime Obligations Port-
folio may be redeemed without charge upon request on any Business Day at the
net asset value next determined after receipt of the redemption request less
any applicable CDSC. Investors should consult their Goldman Sachs Fund Class B
and Class C shares prospectus to determine the amount, if any, of the CDSC at
the time of redemption. Redemption requests may be made by contacting Goldman
Sachs or, if units are held in a "street name" account, the applicable Autho-
rized Dealer. Written requests may be addressed to Goldman Sachs Trust, c/o
NFDS, P.O. Box 419711, Kansas City, MO 64141-6711.
The Trust accepts telephone requests for redemption of units for amounts up
to $50,000 within any seven (7) calendar day period, except for investors who
have specifically declined telephone redemption privileges on the Account Ap-
plication or elected in writing not to utilize telephone redemptions (proceeds
which are sent to a Goldman Sachs brokerage account are not subject to the
$50,000 limit). It may be difficult to implement redemptions by telephone in
times of drastic economic or market changes. By completing an Account Applica-
tion, an investor agrees that the Trust, the Distributor and the Transfer
Agent shall not be liable for any loss incurred by the investor by reason of
the Trust accepting unauthorized telephone redemption requests for his account
if the Trust reasonably believes the instructions to be genuine. Thus,
unitholders risk possible losses in the event of a telephone redemption not
authorized by them. The Trust may accept telephone redemption instructions
from any person identifying himself as the owner of an account or the owner's
broker where the owner has not declined in writing to utilize this service.
In an effort to prevent unauthorized or fraudulent redemption and exchange
requests by telephone, Goldman Sachs and NFDS each employ reasonable
procedures specified by the Trust to confirm that such instructions are
genuine. Consequently, proceeds of telephone redemption requests will only be
sent to the unitholder's address of record or authorized bank account
designated in the Account Application and exchanges of units will only be made
to an identical account. Telephone requests will also be recorded. The Trust
may implement other procedures from time to time. If reasonable procedures are
not implemented, the Trust may be liable for any loss due to unauthorized or
fraudulent transactions. Proceeds of telephone redemptions will be mailed to
the unitholder's address of record or wired to the authorized bank account
indicated on the Account Application, unless the unitholder provides written
instructions (accompanied by a signature guarantee) indicating another
address. Telephone redemptions will not be accepted during the 30-day period
following any change in a unitholder's address of record. This redemption
option does not apply to units held in a "street name" account. Unitholders
whose accounts are held in "street name" should contact their broker of record
who may effect telephone redemptions on their behalf. The Trust reserves the
right to terminate or modify the telephone redemption service at any time.
Written requests for redemptions must be signed by each unitholder with its
signature guaranteed by a bank, a securities broker or dealer, a credit union
having authority to issue signature guarantees, a savings and loan associa-
tion, a building and loan association, a cooperative bank, a federal savings
bank or association, a national securities exchange, a registered securities
association or a clearing agency, provided that such institution satisfies the
standards established by the Transfer Agent.
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PAYMENT OF REDEMPTION PROCEEDS AND DIVIDENDS
In accordance with the following, redemption proceeds will be wired or
mailed to the record holder of ILA Service Units, ILA Class B Units or Class C
Units.
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<TABLE>
<CAPTION>
REDEMPTION REQUEST RECEIVED BY
STATE STREET AS AGENT FOR GOLDMAN REDEMPTION
SACHS PROCEEDS ORDINARILY DIVIDENDS
--------------------------------- ------------------- ---------
<C> <S> <C>
(1)Prime Obligations Portfolio
By:3:00 p.m.--N.Y. time (i) Wire Redemptions Sent Not earned on Day
Same Business Day request is received
(ii) Check Redemptions Sent
Next Business Day
- -----------------------------------------------------------------------------------------------------------------------------------
After: 3:00 p.m.--N.Y. time (i) Wire Redemptions Sent Earned on Day
Next Business Day request is received
(ii) Check Redemptions Sent
Within Two Business
Days
- -----------------------------------------------------------------------------------------------------------------------------------
(2)Tax-Exempt Diversified Portfolio
By:12:00 noon--N.Y. time (i) Wire Redemptions Sent Not earned on Day
Same Business Day request is received
(ii) Check Redemptions Sent
Next Business Day
- -----------------------------------------------------------------------------------------------------------------------------------
After:12:00 noon--N.Y. time (i) Wire Redemptions Sent Earned on Day
Next Business Day request is received
(ii) Check Redemptions Sent
Within Two Business
Days
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Portfolios will arrange for the proceeds of redemptions effected by any
means to be wired as federal funds to the bank account designated in the Ac-
count Application. Redemption proceeds will normally be wired as set forth
above, but may be paid up to three Business Days after receipt of the properly
executed redemption request. For example, payment may be delayed if the Fed-
eral Reserve Bank is closed on the day redemption proceeds would ordinarily be
wired. After a wire has been initiated by Goldman Sachs, neither Goldman Sachs
nor the Trust assumes any further responsibility for the performance of inter-
mediaries or the customer's Service Organization in the transfer process. If a
problem with such performance arises, the customer should deal directly with
such intermediaries or Service Organization.
CHECK REDEMPTION PRIVILEGE (ILA SERVICE UNITS ONLY)
Goldman Sachs or its agent, as a record holder of ILA Service Units of a
Portfolio, may elect to have a special account with State Street for the pur-
pose of permitting its customers to redeem ILA Service Units from their ac-
counts in each Portfolio by check. When State Street receives a completed ap-
plication form, Goldman Sachs or its agent, as a record holder of the ILA
Service Units, will forward to the requesting customer a supply of checks.
Checks drawn on this account may be payable to the order of any person in any
amount of $500 or more, but cannot be certified. The payee of the check may
cash or deposit it like any other check drawn on a bank. When such a check is
presented to State Street for payment, a sufficient number of full and frac-
tional ILA Service Units will be redeemed to cover the amount of the check.
Cancelled checks will be returned to the record holder of ILA Service Units by
State Street.
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The check redemption privilege enables a unitholder to receive the dividends
declared on the ILA Service Units to be redeemed until such time as the check
is processed. Because of this feature, the check redemption privilege may not
be used for a complete liquidation of a unitholder's account. If the amount of
a check is greater than the value of the ILA Service Units held in the
unitholder's account, the check will be returned unpaid, and the unitholder
may be subject to extra charges.
Goldman Sachs reserves the right to impose conditions on, limit the avail-
ability of or terminate the check redemption privilege at any time with re-
spect to a particular unitholder or all unitholders in general. The Trust and
State Street reserve the right at any time to suspend the procedure permitting
redemptions by check and intend to do so in the event that federal legislation
or regulations impose reserve requirements or other restrictions deemed by the
Trustees to be adverse to the interests of other ILA Service Unitholders of
the Portfolios.
NET ASSET VALUE
The net asset value of ILA Service Units of each Portfolio and ILA Class B
and Class C Units of Prime Obligations Portfolio is determined 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. Net asset value per unit for each class of units
of each Portfolio is calculated by determining the amount of net assets at-
tributable to each class of units and dividing by the number of units for such
class.
On any Business Day, as defined herein, when the Public Securities Associa-
tion ("PSA") recommends that the securities markets close early, the Prime Ob-
ligations Portfolio and Tax-Exempt Diversified Portfolio reserve the right to
cease accepting purchase and redemption orders for same Business Day credit at
the time the PSA recommends that the securities markets close. On days either
Portfolio closes early, purchase and redemption orders received after the PSA
recommended closing time will be credited to the next Business Day. In addi-
tion, each Portfolio reserves the right to advance the time by which purchase
and redemption orders must be received for same Business Day credit as permit-
ted by the SEC.
Each Portfolio seeks to maintain a net asset value of $1.00 per unit. In
this connection, each Portfolio values its portfolio securities on the basis
of amortized cost. The amortized cost method values a security at its cost on
the date of purchase and thereafter assumes a constant amortization to matu-
rity of any discount or premium, regardless of the impact of fluctuating in-
terest rates on the market value of the instrument. For a more complete de-
scription of the amortized cost valuation method and its effect on existing
and prospective unitholders, see the Statement of Additional Information.
There can be no assurance that a Portfolio will be able at all times to main-
tain a net asset value per unit of $1.00.
YIELD INFORMATION
From time to time, each Portfolio may advertise its yield, effective yield
and average total return. Average annual total return is determined by comput-
ing the average annual percentage change in value of $1,000 invested at the
maximum public offering price for a specified period of at least one year, as-
suming reinvestment of all dividends and distributions at net asset value. The
total return calculation assumes a complete redemption of the investment at
the end of the relevent period. Each Portfolio may furnish total return calcu-
lations based on a cumulative, average, year-by-year or other basis for vari-
ous specified periods by means of quotations, charts, graphs or schedules. The
yield of a Portfolio refers to the income generated by an investment in the
Portfolio over a seven-day period (which period will be stated in the adver-
tisement). This income is then annualized; that
27
<PAGE>
is, the amount of income generated by the investment during that week is as-
sumed to be generated each week over a 52-week period and is shown as a per-
centage of the investment. The effective yield is calculated similarly but,
when annualized, the income earned by an investment in the Portfolio is as-
sumed to be reinvested. The effective yield will be slightly higher than the
yield because of the compounding effect of this assumed reinvestment.
The Tax-Exempt Diversified Portfolio may also quote tax-equivalent yield.
The Portfolio's tax-equivalent yield is calculated by determining the rate of
return that would have to be achieved on a fully taxable investment to produce
the after-tax equivalent of the Portfolio's yield, assuming certain tax brack-
ets for a unitholder.
Investors should note that the investment results of a Portfolio are based
on historical performance and will fluctuate over time. Any presentation of a
Portfolio's total return, yield, effective yield or tax-equivalent yield for
any prior period should not be considered a representation of what an invest-
ment may earn or what a Portfolio's total return, yield, effective yield or
tax-equivalent yield may be in any future period. In addition to the above,
each Portfolio may from time to time advertise its performance relative to
certain averages, performance rankings, indices, other information prepared by
recognized mutual fund statistical services and investments for which reliable
performance data is available.
Total return, yield, effective yield and tax-equivalent yield will be calcu-
lated separately for each class of units in existence. Because each such class
of units is subject to different expenses, the net yield of such classes of a
Portfolio for the same period may differ. See "Organization and Units of the
Portfolios" below.
ORGANIZATION AND UNITS OF THE PORTFOLIOS
Each Portfolio is a series of the Goldman Sachs Trust, which was formed un-
der the laws of the State of Delaware on January 28, 1997. The Funds were for-
merly series of Goldman Sachs Money Market Trust, a Massachusetts business
trust, and were reorganized into the Trust as of April 30, 1997. The Trustees
have authority under the Trust's Declaration of Trust to create and classify
units of beneficial interest in separate series, without further action by
unitholders. Additional series may be added in the future. The Trustees also
have authority to classify or reclassify any series or portfolio of units into
one or more classes. (Institutions that provide services to holders of ILA Ad-
ministration or ILA Service Units are referred to in this Prospectus as "Serv-
ice Organizations").
When issued, units are fully paid and nonassessable. In the event of liqui-
dation, unitholders are entitled to share pro rata in the net assets of the
applicable Portfolio available for distribution to such unitholders. All units
are freely transferable and have no preemptive, subscription or conversion
rights. Unitholders are entitled to one vote per unit, provided that, at the
option of the Trustees, unitholders will be entitled to a number of votes
based upon the net asset values represented by their unitholders.
Units of a Portfolio will be voted separately by Portfolio with respect to
matters pertaining to that Portfolio except for the election of Trustees and
ratification of independent accountants. For example, unitholders of each
Portfolio are required to approve the adoption of any investment advisory
agreement relating to that Portfolio and any changes in fundamental investment
restrictions or policies of such Portfolio. Approval by the unitholders of one
Portfolio is effective only as to that Portfolio.
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The Trust does not intend to hold annual meetings of unitholders. However,
pursuant to the Trust's By-Laws, the recordholders of at least 10% of the
units outstanding and entitled to vote at a special meeting may require the
Trust to hold such special meeting of unitholders for any purpose, and
recordholders may, under certain circumstances, as permitted by the Investment
Company Act, communicate with other unitholders in connection with requiring a
special meeting of unitholders. The Trustees will call a special meeting of
unitholders for the purpose of electing Trustees if, at any time, less than a
majority of Trustees holding office at the time were elected by unitholders.
29
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GOLDMAN SACHS MONEY MARKET FUNDS
ILA SERVICE UNITS
ILA CLASS B UNITS
ILA CLASS C UNITS
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
TOLL FREE: 800-526-7384
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Unitholder and Portfolio Expenses.......................................... 2
Financial Highlights....................................................... 3
An Introduction to the Portfolios.......................................... 6
Investment Policies Matrix................................................. 7
Description of Securities and Investment
Techniques................................................................ 8
Investment Limitations..................................................... 12
Management................................................................. 13
Additional Services........................................................ 15
Service Plan.............................................................. 15
Distribution and Authorized Dealer
Service Plans............................................................ 15
Alternative Purchase Arrangements......................................... 16
Reports to Unitholders..................................................... 21
Distributions and Taxes.................................................... 21
Automatic Exchange Program................................................. 23
Exchanges.................................................................. 23
Redemption of Units........................................................ 25
Net Asset Value............................................................ 27
Yield Information.......................................................... 27
Organization and Units of the Portfolios................................... 28
</TABLE>
ILA PROSVCBDMM
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GOLDMAN SACHS MONEY MARKET FUNDS
GOLDMAN SACHS-- INSTITUTIONAL LIQUID ASSETS
PRIME OBLIGATIONS PORTFOLIO
TAX-EXEMPT DIVERSIFIED PORTFOLIO
-----------
PROSPECTUS
-----------
ILA SERVICE UNITS
ILA CLASS B UNITS
ILA CLASS C UNITS
MANAGED BY
GOLDMAN SACHS ASSET MANAGEMENT
A SEPARATE OPERATING DIVISION OF
GOLDMAN, SACHS & CO.
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<PAGE>
Subject to completion Dated _______________
PART B
STATEMENT OF ADDITIONAL INFORMATION
INSTITUTIONAL SHARES
GOLDMAN SACHS BALANCED FUND
GOLDMAN SACHS GROWTH AND INCOME FUND
GOLDMAN SACHS CORE U.S. EQUITY FUND
GOLDMAN SACHS CORE LARGE CAP GROWTH FUND
GOLDMAN SACHS CORE SMALL CAP EQUITY FUND
GOLDMAN SACHS CORE INTERNATIONAL EQUITY FUND
GOLDMAN SACHS CAPITAL GROWTH FUND
GOLDMAN SACHS MID CAP EQUITY FUND
GOLDMAN SACHS INTERNATIONAL EQUITY FUND
GOLDMAN SACHS SMALL CAP EQUITY FUND
GOLDMAN SACHS EMERGING MARKETS EQUITY FUND
GOLDMAN SACHS ASIA GROWTH FUND
GOLDMAN SACHS REAL ESTATE SECURITIES FUND
(EQUITY PORTFOLIOS OF GOLDMAN SACHS TRUST)
One New York Plaza
New York, New York 10004
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 Institutional Shares of Goldman Sachs Balanced Fund,
Goldman Sachs Growth and Income Fund, Goldman Sachs CORE U.S. Equity Fund,
Goldman Sachs CORE Large Cap Growth Fund, Goldman Sachs CORE Small Cap Equity
Fund, Goldman Sachs CORE International Equity Fund, Goldman Sachs Capital Growth
Fund, Goldman Sachs Mid Cap Equity Fund, Goldman Sachs International Equity
Fund, Goldman Sachs Small Cap Equity Fund, Goldman Sachs Emerging Markets Equity
Fund, Goldman Sachs Asia Growth Fund and Goldman Sachs Real Estate Securities
Fund dated August __, 1997, as amended and/or supplemented from time to time
(the "Prospectus"), which may be obtained without charge from Goldman, Sachs &
Co. at the telephone number, or writing to one of the addresses, listed below.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
====
<S> <C>
Introduction............................................................ B-3
Investment Policies..................................................... B-4
Investment Restrictions................................................. B-33
Management.............................................................. B-35
Portfolio Transactions and Brokerage.................................... B-48
Net Asset Value......................................................... B-54
Performance Information................................................. B-56
Shares of the Trust..................................................... B-62
Taxation................................................................ B-66
Financial Statements.................................................... B-72
Other Information....................................................... B-72
Appendix A:............................................................. 1-A
Appendix B:............................................................. 1-B
</TABLE>
Subject to Completion dated _________
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY STATE.
<PAGE>
<TABLE>
<S> <C>
GOLDMAN, SACHS & CO. GOLDMAN SACHS FUNDS
Distributor MANAGEMENT, L.P.
85 Broad Street Investment Adviser to:
New York, New York 10004 Goldman Sachs CORE U.S. Equity Fund and
Goldman Sachs Capital Growth Fund
One New York Plaza
GOLDMAN, SACHS & CO. New York, New York 10004
Transfer Agent
4900 Sears Tower GOLDMAN SACHS ASSET MANAGEMENT
Chicago, Illinois 60606 Investment Adviser to:
Goldman Sachs Balanced Fund,
Goldman Sachs CORE Large Cap Growth Fund,
GOLDMAN SACHS ASSET Goldman Sachs CORE Small Cap Equity Fund,
MANAGEMENT INTERNATIONAL Goldman Sachs CORE International Equity Fund,
Investment Adviser to: Goldman Sachs Growth and Income Fund,
Goldman Sachs International Equity Fund, Goldman Sachs Mid Cap Equity Fund,
Goldman Sachs Asia Growth Fund, and Goldman Sachs Small Cap Equity Fund, and
Goldman Sachs Emerging Markets Equity Fund Goldman Sachs Real Estate Securities Fund
133 Peterborough Court One New York Plaza
London, England EC4A 2BB New York, New York 10004
</TABLE>
Toll free (in U.S.).......800-621-2550
<PAGE>
INTRODUCTION
Goldman Sachs Trust (the "Trust") is an open-end, management investment
company. The following series of the Trust are described in this Additional
Statement: Goldman Sachs Balanced Fund ("Balanced Fund"), Goldman Sachs Growth
and Income Fund ("Growth and Income Fund"), CORE U.S. Equity Fund ("CORE U.S.
Equity Fund")(formerly known as "Goldman Sachs Select Equity Fund"), Goldman
Sachs CORE Large Cap Growth Fund ("CORE Large Cap Growth Fund"), Goldman Sachs
CORE Small Cap Equity Fund ("CORE Small Cap Equity Fund"), Goldman Sachs CORE
International Equity Fund ("CORE International Equity Fund"), Goldman Sachs Mid
Cap Equity Fund ("Mid Cap Equity Fund"), Goldman Sachs Capital Growth Fund
("Capital Growth Fund"), Goldman Sachs International Equity Fund
("International Equity Fund"), Goldman Sachs Small Cap Equity Fund ("Small Cap
Equity Fund"), Goldman Sachs Emerging Markets Equity Fund ("Emerging Markets
Equity Fund"), Goldman Sachs Asia Growth Fund ("Asia Growth Fund") and Goldman
Sachs Real Estate Securities Fund ("Real Estate Securities Fund") (collectively
referred to herein as the "Funds").
The Funds were initially organized as a series of a corporation formed
under the laws of the State of Maryland on September 27, 1989 and were
reorganized as a Delaware business trust as of April 30, 1997. The Trustees
have authority under the Trust's charter to create and classify shares into
separate series and to classify and reclassify any series or portfolio of shares
into one or more classes without further action by shareholders. Pursuant
thereto, the Trustees have created the Funds and other series. Additional
series may be added in the future from time to time. The Balanced, Growth and
Income, CORE U.S. Equity, CORE Large Cap Growth, CORE Small Cap Equity Fund,
CORE International Equity Fund, Capital Growth Fund, International Equity, Small
Cap Equity, Emerging Markets Equity, Asia Growth and Real Estate Securities
Funds currently offer five classes of shares: Class A Shares, Class B Shares,
Class C Shares, Institutional Shares and Service Shares. The Mid Cap Equity
Fund currently offers two classes of shares: Institutional Shares and Service
Shares. See "Shares of the Trust."
Goldman Sachs Asset Management, ("GSAM") a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as investment adviser to the
Balanced, Growth and Income, CORE Large Cap Growth, CORE Small Cap Equity, CORE
International Equity, Real Estate Securities, Mid Cap Equity and Small Cap
Equity Funds. Goldman Sachs Fund Management, L.P., ("GSFM") an affiliate of
Goldman Sachs, serves as investment adviser to the CORE U.S. Equity and Capital
Growth Funds. Goldman Sachs Asset Management International ("GSAMI"), an
affiliate of Goldman Sachs, serves as investment adviser to the International
Equity, Emerging Markets Equity and Asia Growth Funds. GSAM, GSFM and GSAMI
are sometimes referred to collectively herein as the "Advisers." Goldman Sachs
serves as each Fund's distributor and transfer agent. Each Fund's custodian is
State Street Bank and Trust Company ("State Street").
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 the Funds' investment objectives and policies.
There is no assurance that each Fund will achieve its objective.
B-3
<PAGE>
INVESTMENT POLICIES
Each Fund's share price will fluctuate with market, economic and, to the
extent applicable, foreign exchange conditions, so that an investment in any of
the Funds may be worth more or less when redeemed than when purchased. None of
the Funds should be relied upon as a complete investment program.
BALANCED FUND
=============
The investment objective of the Balanced Fund is to provide shareholders
with long-term capital growth and current income. The Balanced Fund seeks to
achieve its investment objective by investing in a balanced portfolio
diversified among both equity and fixed income securities.
Balanced Fund is intended to provide a foundation on which an investor can
build an investment portfolio or to serve as the core of an investment program,
depending on the investor's goals. Balanced Fund is designed for relatively
conservative investors who seek a combination of long-term capital growth and
current income in a single investment. Balanced Fund offers a portfolio of
equity and fixed income securities intended to provide less volatility than a
portfolio completely invested in equity securities and greater diversification
than a portfolio invested in only one asset class. Balanced Fund may be
appropriate for people who seek capital appreciation but are concerned about the
volatility typically associated with a fund that invests solely in stocks and
other equity securities.
FIXED INCOME STRATEGIES DESIGNED TO MAXIMIZE RETURN AND MANAGE RISK
GSAM's approach to managing the fixed income portion of Balanced Fund's
portfolio seeks to provide high returns relative to a market benchmark, the
Lehman Brothers Aggregate Bond Index, while also seeking to provide high current
income. This approach emphasizes (1) sector allocation strategies which enable
GSAM to tactically overweight or underweight one sector of the fixed-income
market (i.e., mortgages, corporate bonds, U.S. Treasuries, non-dollar bonds,
emerging market debt) versus another; (2) individual security selection based on
identifying relative value (fixed income securities inexpensive relative to
others in their sector); and (3) to a lesser extent, strategies based on GSAM's
expectation of the direction of interest rates or the spread between short-term
and long-term interest rates such as yield curve strategy.
GSAM seeks to manage fixed income portfolio risk in a number of ways.
These include diversifying the fixed income portion of the Balanced Fund's
portfolio among various types of fixed income securities and utilizing
sophisticated quantitative models to understand how the fixed income portion of
the portfolio will perform under a variety of market and economic scenarios.
In addition, GSAM uses extensive credit analysis to select and to monitor any
investment-grade or non-investment grade bonds that may be included in the
Balanced Fund's portfolio. In employing this and other investment strategies,
the GSAM team has access to extensive fundamental research and analysis
available through Goldman Sachs and a broad range of other sources.
A number of investment strategies will be used in selecting fixed income
securities for the Fund's portfolio. GSAM's fixed income investment philosophy
is to actively manage the portfolio within a risk-controlled framework. The
Adviser de-emphasizes interest rate anticipation by monitoring the duration of
the portfolio within a narrow range of the Adviser's target duration, and
instead focuses on seeking to add value through sector selection, security
selection and yield curve strategies.
MARKET SECTOR SELECTION. Market sector selection is the underweighting or
overweighting of one or more market sectors (i.e., U.S. Treasuries, U.S.
Government agency securities, corporate securities,
B-4
<PAGE>
mortgage-backed securities and asset-backed securities). GSAM may decide to
overweight or underweight a given market sector or subsector (e.g., within the
corporate sector, industrials, financial issuers and utilities) based on, among
other things, expectations of future yield spreads between different sectors or
subsectors.
ISSUER SELECTION. Issuer selection is the purchase and sale of corporate
securities based on a corporation's current and expected credit standing (within
the constraints imposed by Balanced Fund's minimum credit quality requirements).
This strategy focuses on four types of investment-grade corporate issuers.
Selection of securities from the first type of issuers -those with low but
stable credit - is intended to enhance total returns by providing incremental
yield. Selecting securities from the second type of issuers - those with low
and intermediate but improving credit quality - is intended to enhance total
returns in two stages. Initially, these securities are expected to provide
incremental yield. Eventually, price appreciation should occur relative to
alternative securities as credit quality improves, the nationally recognized
statistical rating organizations upgrade credit ratings, and credit spreads
narrow. Securities from the third type of issuers - issuers with deteriorating
credit quality - will be avoided, since total returns are typically enhanced by
avoiding the widening of credit spreads and the consequent relative price
depreciation. Finally, total returns can be enhanced by focusing on securities
that are rated differently by different rating organizations. If the securities
are trading in line with the higher published quality rating while GSAM concurs
with the lower published quality rating, the securities would generally be sold
and any potential price deterioration avoided. On the other hand, if the
securities are trading in line with the lower published quality rating while the
higher published quality rating is considered more realistic, the securities may
be purchased in anticipation of the expected market reevaluation and relative
price appreciation.
YIELD CURVE STRATEGY. Yield curve strategy consists of overweighting or
underweighting different maturity sectors relative to a benchmark to take
advantage of the shape of the yield curve. Three alternative maturity sector
selections are available: a "barbell" strategy in which short and long maturity
sectors are overweighted while intermediate maturity sectors are underweighted;
a "bullet" strategy in which, conversely, short-and long-maturity sectors are
underweighted while intermediate-maturity sectors are overweighted; and a
"neutral yield curve" strategy in which the maturity distribution mirrors that
of a benchmark.
CORE U.S. EQUITY, CORE LARGE CAP GROWTH, CORE SMALL CAP EQUITY AND CORE
=======================================================================
INTERNATIONAL EQUITY FUNDS
===========================
Under normal circumstances, the Funds will invest at least 90% of their
total assets in equity securities.
The investment strategy of the CORE U.S. Equity, CORE Large Cap Growth,
CORE Small Cap Equity and CORE International Equity Funds will be implemented to
the extent it is consistent with maintaining a Fund's qualification as a
regulated investment company under the Internal Revenue Code. A Fund's strategy
may be limited, in particular, by the requirement for such qualification that
less than 30% of the Fund's gross income for its taxable year be derived from
the sale or other disposition of stocks or securities or certain other
investments (generally including options and futures contracts) held for less
than three months.
Since normal settlement for equity securities is three trading days (for
certain international markets settlement may be longer), the Funds will need to
hold cash balances to satisfy shareholder redemption requests. Such cash
balances will normally range from 2% to 5% of a Fund's net assets. The Funds
may purchase futures contracts only with respect to the S&P 500 Index (in the
case of CORE U.S. Equity Fund) and a representative index (in the case of CORE
Large Cap Growth, CORE Small Cap Equity and CORE International Equity Funds) in
order to keep a Fund's effective equity exposure close to 100%. For exam-
B-5
<PAGE>
ple, if cash balances are equal to 10% of the net assets, the Fund may enter
into long futures contracts covering an amount equal to 10% of the Fund's net
assets. As cash balances fluctuate based on new contributions or withdrawals, a
Fund may enter into additional contracts or close out existing positions.
THE MULTIFACTOR MODEL. The Multifactor Model is a rigorous computerized
=====================
rating system for evaluating equity securities according to a variety of
investment characteristics (or factors). The factors used by the Multifactor
Model incorporate many variables studied by traditional fundamental analysts and
cover measures of value, growth, momentum, risk (e.g. price/earnings ratio,
book/price ratio, growth forecasts, earning estimate revisions, price momentum,
volatility and earnings stability). All of these factors have been shown to
significantly impact the performance of equity securities.
Because it includes many disparate factors, the Adviser believes that the
Multifactor Model is broader in scope and provides a more thorough evaluation
than most conventional, value-oriented quantitative models. As a result, the
securities ranked highest by the Multifactor Model do not have one dominant
investment characteristic (such as a low price/earnings ratio); rather, such
securities possess many different investment characteristics. By using a
variety of relevant factors to select securities, the Adviser believes that the
Fund will be better balanced and have more consistent performance than an
investment portfolio that uses only one or two factors to select securities.
The Adviser will monitor, and may occasionally suggest and make changes to,
the method by which securities are selected for or weighted in the Fund. Such
changes (which may be the result of changes in the Multifactor Model or the
method of applying the Multifactor Model) may include: (i) evolutionary changes
to the structure of the Multifactor Model (e.g., the addition of new factors or
a new means of weighting the factors); (ii) changes in trading procedures (e.g.,
trading frequency or the manner in which the Fund uses futures); or (iii)
changes in the method by which securities are weighted in the Fund. Any such
changes will preserve the Fund's basic investment philosophy of combining
qualitative and quantitative methods of selecting securities using a disciplined
investment process.
INTERNATIONAL EQUITY FUND
=========================
International Equity Fund will seek to achieve its investment objective by
investing primarily in equity and equity-related securities of issuers that are
organized outside the United States or whose securities are principally traded
outside the United States. Because research coverage outside the United States
is fragmented and relatively unsophisticated, many foreign companies that are
well-positioned to grow and prosper have not come to the attention of investors.
GSAMI believes that the high historical returns and less efficient pricing of
foreign markets create favorable conditions for International Equity Fund's
highly focused investment approach. For a description of the risks of the
International Equity Fund's investments in Asia, see "Investing in Emerging
Markets, including Asia."
A RIGOROUS PROCESS OF STOCK SELECTION. Using fundamental industry and
company research, GSAMI's equity team in London, Singapore and Tokyo seeks to
identify companies that may achieve superior long-term returns. Stocks are
carefully selected for International Equity Fund's portfolio through a three-
stage investment process. Because International Equity Fund is a long-term
holder of stocks, the portfolio managers adjust International Equity Fund's
portfolio only when expected returns fall below acceptable levels or when the
portfolio managers identify substantially more attractive investments.
Using the research of Goldman Sachs as well as information gathered from
other sources in Europe and the Asia-Pacific region, the Adviser seeks to
identify attractive industries around the world. Such industries are expected
to have favorable underlying economics and allow companies to generate
sustainable and predictable high returns. As a rule, they are less economically
sensitive, relatively free of regulation and favor strong franchises.
B-6
<PAGE>
Within these industries the Adviser seeks to identify well-run companies
that enjoy a stable competitive advantage and are able to benefit from the
favorable dynamics of the industry. This stage includes analyzing the current
and expected financial performance of the company; contacting suppliers,
customers and competitors; and meeting with management. In particular, the
portfolio managers look for companies whose managers have a strong commitment to
both maintaining the high returns of the existing business and reinvesting the
capital generated at high rates of return. Management should act in the
interests of the owners and seek to maximize returns to all stockholders.
GSAMI's currency team manages the foreign exchange risk embedded in foreign
equities by means of a currency overlay program. The program may be utilized to
protect the value of foreign investments in sustained periods of dollar
appreciation and to add returns by seeking to take advantage of foreign exchange
fluctuations.
The members of GSAMI's international equity team bring together years of
experience in analyzing and investing in companies in Europe and the Asia-
Pacific region. Their expertise spans a wide range of skills including
investment analysis, investment management, investment banking and business
consulting. GSAM's worldwide staff of over 300 professionals includes portfolio
managers based in London, Singapore and Tokyo who bring firsthand knowledge of
their local markets and companies to every investment decision.
CORPORATE DEBT OBLIGATIONS
==========================
Each Fund may, under normal market conditions, invest in corporate debt
obligations, including obligations of industrial, utility and financial issuers.
CORE U.S. Equity, CORE Large Cap Growth, CORE Small Cap Equity and CORE
International Equity Funds may only invest in debt securities that are cash
equivalents. Corporate debt obligations are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations and may
also be subject to price volatility due to such factors as market interest
rates, market perception of the creditworthiness of the issuer and general
market liquidity.
An economic downturn could severely affect the ability of highly leveraged
issuers of junk bond securities to service their debt obligations or to repay
their obligations upon maturity. Factors having an adverse impact on the market
value of junk bonds will have an adverse effect on a Fund's net asset value to
the extent it invests in such securities. In addition, a Fund may incur
additional expenses to the extent it is required to seek recovery upon a default
in payment of principal or interest on its portfolio holdings.
The secondary market for junk bonds, which is concentrated in relatively
few market makers, may not be as liquid as the secondary market for more highly
rated securities. This reduced liquidity may have an adverse effect on the
ability of Balanced, Growth and Income, Capital Growth, Mid Cap Equity, Small
Cap Equity, Emerging Markets Equity, Asia Growth and Real Estate Securities
Funds to dispose of a particular security when necessary to meet their
redemption requests or other liquidity needs. Under adverse market or economic
conditions, the secondary market for junk bonds could contract further,
independent of any specific adverse changes in the condition of a particular
issuer. As a result, the Advisers could find it difficult to sell these
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Prices realized upon the sale of such lower
rated or unrated securities, under such circumstances, may be less than the
prices used in calculating a Fund's net asset value.
Since investors generally perceive that there are greater risks associated
with the medium to lower rated securities of the type in which Balanced, Growth
and Income, Capital Growth, Mid Cap Equity, Small Cap Equity, Emerging Markets
Equity, Asia Growth and Real Estate Securities Funds may invest, the yields and
prices of such securities may tend to fluctuate more than those for higher rated
securities. In
B-7
<PAGE>
the lower quality segments of the fixed-income securities market, changes in
perceptions of issuers' creditworthiness tend to occur more frequently and in a
more pronounced manner than do changes in higher quality segments of the fixed-
income securities market, resulting in greater yield and price volatility.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In
addition, the prices of fixed-income securities fluctuate in response to the
general level of interest rates. Fluctuations in the prices of portfolio
securities subsequent to their acquisition will not affect cash income from such
securities but will be reflected in a Fund's net asset value.
Medium to lower rated and comparable non-rated securities tend to offer
higher yields than higher rated securities with the same maturities because the
historical financial condition of the issuers of such securities may not have
been as strong as that of other issuers. Since medium to lower rated securities
generally involve greater risks of loss of income and principal than higher
rated securities, investors should consider carefully the relative risks
associated with investment in securities which carry medium to lower ratings and
in comparable unrated securities. In addition to the risk of default, there are
the related costs of recovery on defaulted issues. The Advisers will attempt to
reduce these risks through portfolio diversification and by analysis of each
issuer and its ability to make timely payments of income and principal, as well
as broad economic trends and corporate developments.
ZERO COUPON BONDS
=================
A Fund's investments in fixed income securities may include zero coupon
bonds, which are debt obligations issued or purchased at a significant discount
from face value. The discount approximates the total amount of interest the
bonds would have accrued and compounded over the period until maturity. Zero
coupon bonds do not require the periodic payment of interest. Such investments
benefit the issuer by mitigating its need for cash to meet debt service but also
require a higher rate of return to attract investors who are willing to defer
receipt of such cash. Such investments may experience greater volatility in
market value than debt obligations which provide for regular payments of
interest. In addition, if an issuer of zero coupon bonds held by a Fund
defaults, the Fund may obtain no return at all on its investment. Each Fund
will accrue income on such investments for each taxable year which (net of
deductible expenses, if any) is distributable to shareholders and which, because
no cash is generally received at the time of accrual, may require the
liquidation of other portfolio securities to obtain sufficient cash to satisfy
the Fund's distribution obligations. See "Taxation."
VARIABLE AND FLOATING RATE SECURITIES
=====================================
The interest rates payable on certain fixed income securities in which a
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.
CUSTODIAL RECEIPTS
==================
Each Fund may invest up to 5% of its net assets in custodial receipts in
respect of securities issued or guaranteed as to principal and interest by the
U.S. Government, its agencies, instrumentalities, political subdivisions or
authorities. Such custodial receipts evidence ownership of future interest
payments, principal payments or both on certain notes or bonds issued by the
U.S. Government, its agencies, instrumentalities, political subdivisions or
authorities. These custodial receipts are known by
B-8
<PAGE>
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.
MUNICIPAL SECURITIES
====================
Balanced Fund may invest up to 5% of its net assets in municipal
securities. Municipal securities consist of bonds, notes and other instruments
issued by or on behalf of states, territories and possessions of the United
States (including the District of Columbia) and their political subdivisions,
agencies or instrumentalities, the interest on which is exempt from regular
federal income tax. Municipal securities are often issued to obtain funds for
various public purposes. Municipal securities also include "private activity
bonds" or industrial development bonds, which are issued by or on behalf of
public authorities to obtain funds for privately operated facilities, such as
airports and waste disposal facilities, and, in some cases, commercial and
industrial facilities.
The yields and market values of municipal securities are determined
primarily by the general level of interest rates, the creditworthiness of the
issuers of municipal securities and economic and political conditions affecting
such issuers. Due to their tax exempt status, the yields and market prices of
municipal securities may be adversely affected by changes in tax rates and
policies, which may have less effect on the market for taxable fixed income
securities. Moreover, certain types of municipal securities, such as housing
revenue bonds, involve prepayment risks which could affect the yield on such
securities.
Investments in municipal securities are subject to the risk that the issuer
could default on its obligations. Such a default could result from the
inadequacy of the sources or revenues from which interest and principal payments
are to be made or the assets collateralizing such obligations. Revenue bonds,
including private activity bonds, are backed only by specific assets or revenue
sources and not by the full faith and credit of the governmental issuer.
MORTGAGE-BACKED SECURITIES
==========================
GENERAL CHARACTERISTICS. Each Fund (other than CORE U.S. Equity, CORE
Large Cap Growth, CORE Small Cap Equity and CORE International Equity Funds) may
invest in mortgage-backed securities. 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, multifamily (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, multifamily 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, if a Fund purchases mortgage-backed securities
at a premium, a faster than expected prepayment rate will reduce both the market
value and the yield to maturity from those which were anticipated. A prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity and market value. Conversely, if a Fund purchases mortgage-
backed securities at a discount, faster than expected prepayments will increase,
while slower
B-9
<PAGE>
than expected prepayments will reduce yield to maturity and market values. To
the extent that a Fund invests in mortgage-backed securities, the Advisers may
seek to manage these potential risks by investing in a variety of mortgage-
backed securities and by using certain hedging techniques.
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"), collateralized mortgage obligations and stripped
mortgage-backed securities. A Fund is permitted to invest in other types of
mortgage-backed securities that may be available in the future to the extent
consistent with its investment policies and objective.
A Fund's investments in mortgage-backed securities may include securities
issued or guaranteed by the U.S. Government or one of its agencies, authorities,
instrumentalities or sponsored enterprises, such as the Government National
Mortgage Association ("Ginnie Mae"), the Federal National Mortgage Association
("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac").
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate
instrumentality of the United States. Ginnie Mae is authorized to guarantee the
timely payment of the principal of and interest on certificates that are based
on and backed by a pool of mortgage loans insured by the Federal Housing
Administration ("FHA Loans"), or guaranteed by the Veterans Administration ("VA
Loans"), or by pools of other eligible mortgage loans. In order to meet its
obligations under any guaranty, Ginnie Mae is autho rized to borrow from the
United States Treasury in an unlimited amount.
FANNIE MAE CERTIFICATES. Fannie Mae is a stockholder-owned corporation
chartered under an act of the United States 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 conven tional Mortgage Loans (i.e., not
insured or guaranteed by any U.S. Government agency) or Mortgage Loans that are
either insured by the Federal Housing Administration ("FHA") or guaranteed by
the Veterans Administration ("VA"). However, the Mortgage Loans in Fannie Mae
Pools are primarily conventional Mortgage Loans. The lenders originating and
servicing the Mortgage Loans are subject to certain eligibility requirements
established by Fannie Mae.
Fannie Mae has certain contractual responsibilities. With respect to each
Pool, Fannie Mae is obligated to distribute scheduled monthly installments of
principal and interest after Fannie Mae's servicing and guaranty fee, whether or
not received, to Certificate holders. Fannie Mae also is obligated to distrib-
ute 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. 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
participation 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
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of all principal of the related mortgage loans, without any offset or deduction,
but does not, generally, guarantee the timely payment of scheduled principal.
The obligations of Freddie Mac under its guaranty of Freddie Mac Certificates
are obligations solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed rate mortgage 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
multifamily 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 and
undivided interests in whole loans and participations comprising another Freddie
Mac Certificate group.
MORTGAGE PASS-THROUGH SECURITIES. Each Fund (other than CORE U.S. Equity,
CORE Large Cap Growth, CORE Small Cap Equity and CORE International Equity
Funds) may invest in both government guaranteed and privately issued mortgage
pass-through securities ("Mortgage Pass-Throughs"); that is, 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 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.
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-
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holders under the agreements pursuant to which such certificates are issued. A
rating organization's ratings take into consideration the credit quality of the
related mortgage pool, including any credit support providers, structural and
legal aspects associated with such certificates, and the extent to which the
payment stream on such mortgage pool is adequate to make payments required by
such certificates. A rating organization's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans. In addition, the rating assigned by a rating
organization to a certificate does not address the remote possibility that, in
the event of the insolvency of the issuer of certificates where a subordinated
interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization,
payments on such certificates may be affected.
CREDIT ENHANCEMENT. Credit support falls generally into two categories:
(i) liquidity protection and (ii) protection against losses resulting from
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pools of
mortgages, the provision of a reserve fund, or a combination thereof, to ensure,
subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such credit support can be provided by among other things, payment
guarantees, letters of credit, pool insurance, subordination, or any combination
thereof.
SUBORDINATION; SHIFTING OF INTEREST; RESERVE FUND. In order to achieve
ratings on one or more classes of Mortgage Pass-Throughs, one or more classes of
certificates may be subordinate certificates which provide that the rights of
the subordinate certificate-holders to receive any or a specified portion of
distributions with respect to the underlying mortgage loans may be subordinated
to the rights of the senior certificate-holders. If so structured, the
subordination feature may be enhanced by distributing to the senior certificate-
holders on certain distribution dates, as payment of principal, a specified
percentage (which generally declines over time) of all principal payments
received during the preceding prepayment period ("shifting interest credit
enhancement"). This will have the effect of accelerating the amortization of
the senior certificates while increasing the interest in the trust fund
evidenced by the subordinate certificates. Increasing the interest of the
subordinate certificates relative to that of the senior certificates is intended
to preserve the availability of the subordination provided by the subordinate
certificates. In addition, because the senior certificate-holders in a shifting
interest credit enhancement structure are entitled to receive a percentage of
principal prepayments which is greater than their proportionate interest in the
trust fund, the rate of principal prepayments on the mortgage loans will have an
even greater effect on the rate of principal payments and the amount of interest
payments on, and the yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a
reserve fund may be established relating to such certificates (the "Reserve
Fund"). The Reserve Fund may be created with an initial cash deposit by the
originator or servicer and augmented by the retention of distributions otherwise
available to the subordinate certificate-holders or by excess servicing fees
until the Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate-holders of the full
amount of scheduled monthly payments of principal and interest due them and will
protect the senior certificate-holders against certain losses; however, in
certain circumstances the Reserve Fund could be depleted and 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
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certificates or, to the extent specified, in the Reserve Fund will generally be
used to offset the amount of any losses realized with respect to the mortgage
loans ("Realized Losses"). Realized Losses remaining after application of such
amounts will generally be applied to reduce the ownership interest of the
subordinate certificates in the mortgage pool. If the subordinated amount has
been reduced to zero, Realized Losses generally will be allocated pro rata among
--------
all certificate-holders in proportion to their respective outstanding interests
in the mortgage pool.
ALTERNATIVE CREDIT ENHANCEMENT. As an alternative, or in addition to the
credit enhancement afforded by subordination, credit enhancement for Mortgage
Pass-Throughs may be provided by mortgage insurance, hazard insurance, by the
deposit of cash, certificates of deposit, letters of credit, a limited guaranty
or by such other methods as are acceptable to a rating agency. In certain
circumstances, such as where credit enhancement is provided by guarantees or a
letter of credit, the security is subject to credit risk because of its exposure
to an external credit enhancement provider.
VOLUNTARY ADVANCES. Generally, in the event of delinquencies in payments
on the mortgage loans underlying the Mortgage Pass-Throughs, the servicer agrees
to make advances of cash for the benefit of certificate-holders, but only to the
extent that it determines such voluntary advances will be recoverable from
future payments and collections on the mortgage loans or otherwise.
OPTIONAL TERMINATION. Generally, the servicer may, at its option with
respect to any certificates, repurchase all of the underlying mortgage loans
remaining outstanding at such time as the aggregate outstanding principal
balance of such mortgage loans is less than a specified percentage (generally 5-
10%) of the aggregate outstanding principal balance of the mortgage loans as of
the cut-off date specified with respect to such series.
MULTIPLE CLASS MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE
OBLIGATIONS. A Fund may invest in multiple class securities including
collateralized mortgage obligations ("CMOs") and REMIC Certificates. These
securities may be issued by U.S. Government agencies and instrumentalities such
as Fannie Mae or Freddie Mac 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 mortgages or participation 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
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<PAGE>
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 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 class ("PAC") certificates, which are parallel pay REMIC
Certificates that generally require that specified amounts of principal be
applied on each payment date to one or more classes or REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments of
the Mortgage Assets are then required to be applied to one or more other classes
of the Certificates. The scheduled principal payments for the PAC Certificates
generally have the highest priority on each payment date after interest due has
been paid to all classes entitled to receive interest currently. Shortfalls, if
any, are added to the amount payable on the next payment date. The PAC
Certificate payment schedule is taken into account in calculating the final
distribution date of each class of PAC. In order to create PAC tranches, one or
more tranches generally must be created that absorb most of the volatility in
the underlying mortgage assets. These tranches tend to have market prices and
yields that are much more volatile than other PAC classes.
STRIPPED MORTGAGE-BACKED SECURITIES. The Balanced and Real Estate
Securities Funds may invest in stripped mortgage-backed securities ("SMBS"),
which are derivative multiclass mortgage securities. Although the market for
such securities is increasingly liquid, certain SMBS may not be readily
marketable and will be considered illiquid for purposes of the Fund's limitation
on investments in illiquid securities. The market value of the class consisting
entirely of principal payments generally is unusually volatile in response to
changes in interest 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.
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INVERSE FLOATING RATE SECURITIES
================================
Balanced Fund may invest up to 5% of its net assets in leveraged inverse
floating rate debt instruments ("inverse floaters"). The interest rate on an
inverse floater 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 degree of leverage inherent in inverse floaters is
associated with greater volatility in their market values. 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 the
Fund's 15% limitation on investments in such securities.
ASSET-BACKED SECURITIES
=======================
Asset-backed securities represent participation in, or are secured by and
payable from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property, receivables
from revolving credit (credit card) agreements and other categories of
receivables. Such assets are securitized through the use of trusts and special
purpose corporations. Payments or distributions of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution unaffiliated
with the trust or corporation, or other credit enhancements may be present.
Like mortgage-backed securities, asset-backed 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.
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. To the
extent that a Fund invests in asset-backed securities, the values of such Fund's
portfolio securities will vary with changes in market interest rates generally
and the differentials in yields among various kinds of asset-backed securities.
Asset-backed securities present certain additional risks that are not
presented by mortgage-backed securities because asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to mortgage assets. Credit card receivables are generally unsecured
and the debtors on such receivables are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set-off certain amounts owed on the credit cards, thereby reducing the
balance due. Automobile receivables generally are secured, but by automobiles
rather than residential real property. Most issuers of automobile receivables
permit the loan servicers to retain possession of the underlying obligations.
If the servicer were to sell these obligations to 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.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
==================================================
Each Fund may purchase and sell futures contracts and may also purchase and
write options on futures contracts. CORE U.S. Equity, CORE Large Cap Growth and
CORE Small Cap Equity Funds may only enter into such transactions with respect
to the S&P 500 Index, for the CORE U.S. Equity Fund and a representative index
in the case of the CORE Large Cap Growth and CORE Small Cap Equity
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Funds. The other Funds may purchase and sell futures contracts based on various
securities (such as U.S. Government securities), securities indices, foreign
currencies and other financial instruments and indices. Each Fund will engage in
futures and related options transactions, 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 Commodity Futures Trading Commission ("CFTC").
All futures contracts entered into by a Fund are traded 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
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 through the sale of futures contracts to offset a decline in the value of
its current portfolio securities. When rates are falling or 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. Similarly, each Fund (other than CORE U.S. Equity, CORE
Large Cap Growth and CORE Small Cap Equity Funds) can sell futures contracts on
a specified currency to protect against a decline in the value of such currency
and its portfolio securities which are quoted or denominated in such currency.
Each Fund (other than CORE U.S. Equity, CORE Large Cap Growth and CORE Small Cap
Equity Funds) can purchase futures contracts on foreign currency to establish
the price in U.S. dollars of a security quoted or denominated in such currency
that such Fund has acquired or expects to acquire.
Positions taken in the futures market are not normally held to maturity,
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While each Fund will usually liquidate futures contracts on
securities or currency in this manner, a Fund may instead make or take delivery
of the underlying securities or currency whenever it appears economically
advantageous for the Fund to do so. A clearing corporation associated with the
exchange on which futures 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, rate of return or currency exchange rate on portfolio securities or
securities that a Fund owns or proposes to acquire. A Fund may, for example,
take a "short" position in the futures market by selling futures contracts to
seek to hedge against an anticipated rise in interest rates or a decline in
market prices or (other than CORE U.S. Equity, CORE Large Cap Growth and CORE
Small Cap Equity Funds) foreign currency rates that would adversely affect the
dollar value of such Fund's portfolio securities. Similarly, each Fund (other
than CORE U.S. Equity, CORE Large Cap Growth and CORE Small Cap Equity Funds)
may sell futures contracts on a currency in which its portfolio securities are
quoted or denominated or in one currency to seek to hedge against fluctuations
in the value of securities quoted or denominated in a different currency if
there is an established historical pattern of correlation between the two
currencies. If, in the opinion of the applicable 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, a 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 a Fund enter into a greater or lesser number of futures contracts or
by attempting to achieve only a partial hedge against price changes affecting a
Fund's securities portfolio. When hedging of this character is successful, any
depreciation in the value of portfolio securities will be substantially offset
by appreciation in the value of the futures position. On the other hand, any
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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 such
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 or rates 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, 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, a Fund
becomes obligated to purchase a futures contract if the option is exercised,
which may have a value lower than the exercise price. Thus, the loss incurred
by a Fund in writing options on futures is potentially unlimited and may exceed
the amount of the premium received. A Fund 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 financial
instrument. 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 transactions and
will engage in related options transactions only for bona fide hedging as
defined in the regulations of the CFTC or to seek to increase total return to
the extent permitted by such regulations. A 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 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 the
Fund owns, or futures contracts will be purchased to protect the 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 quoted or denominated in the related
currency) in the cash market at the time when the futures or options 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 literal compliance with the bona fide hedging
definition, a CFTC regulation permits a Fund to elect to comply with a different
test. Under this test the aggregate initial margin and premiums required to
establish positions in futures contracts and options on futures to seek to
increase total return may not exceed 5% of the net asset value of such Fund's
portfolio, after taking into account
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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. A Fund will engage
in transactions in currency forward contracts futures contracts and, for a Fund
permitted to do so, related options transactions only to the extent such
transactions are consistent with the requirements of the Code for maintaining
its qualification as a regulated investment company for federal income tax
purposes (see "Taxation").
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
segregate with its custodian cash or liquid assets in an amount equal to the
underlying value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
unanticipated changes in interest rates, 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.
Perfect correlation between a Fund's futures positions and portfolio
positions will be difficult to achieve because no futures contracts based on
individual equity or corporate fixed-income securities are currently available.
The only futures contracts available to hedge a Fund's portfolio are various
futures on U.S. Government securities, securities indices and foreign
currencies. In addition, it is not possible for a Fund 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.
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 (other than CORE U.S. Equity
and CORE Large Cap Growth Funds). A call option written by a Fund obligates
such 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 such
Fund will own the securities subject to the option as long as the option is
outstanding or such Fund will use the other methods described below. A Fund's
purpose in writing covered call options is to realize greater income than would
be realized on portfolio securities transactions alone. However, 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 would obligate such Fund to purchase
specified securities from the option holder at a specified price if the option
is exercised at any time before the expiration date. All put options written by
a Fund would be covered, which means that such Fund would have deposited with
its custodian cash or liquid assets with a value at least equal to the exercise
price of the put option. The purpose of writing such options is to generate
additional income for the Fund. However, in return for the option premium, each
Fund accepts the risk that it may be required to purchase the underlying
securities at a price in excess of the securities' market value at the time of
purchase.
Call and put options written by a Fund will also be considered to be
covered to the extent that the Fund's liabilities under such options are wholly
or partially offset by its rights under call and put options purchased by the
Fund.
B-18
<PAGE>
In addition, a written call option or put option may be covered by
maintaining cash or liquid assets (either of which may be quoted or denominated
in any currency) in a segregated account, by entering into an offsetting forward
contract and/or by purchasing an offsetting option which, by virtue of its
exercise price or otherwise, reduces a Fund's net exposure on its written option
position.
A 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 payments and does not involve the actual
purchase or sale of securities. In addition, securities index options are
designed to reflect price fluctuations in a group of securities or segment of
the securities market rather than price fluctuations in a single security.
A Fund 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 its custodian) upon conversion or exchange of other
securities in its portfolio. A Fund may cover call and put options on a
securities index by maintaining cash or liquid assets with a value equal to the
exercise price in a segregated account with its custodian.
A Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
PURCHASING OPTIONS. Each Fund (other than the CORE U.S. Equity and CORE
Large Cap Growth Funds) may purchase put and call options on any securities in
which it may invest or options on any securities index composed of securities in
which it may invest. A Fund would also be able to 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
in the market value of securities of the type in which it may invest. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified securities at a specified price during the option period.
A Fund would ordinarily realize a gain if, during the option period, the value
of such securities exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise such a Fund would realize either no gain or a loss
on the purchase of the call option.
A Fund would normally purchase put options in anticipation of a decline in
the market value of securities in its portfolio ("protective puts") or in
securities in which it may invest. 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 more than cover the premium and transaction costs; otherwise
such a 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 the underlying portfolio
securities.
A Fund would purchase put and call options on securities indices for the
same purposes as it would purchase options on individual securities. For a
description of options on securities indices, see "Writing Covered Options"
above.
B-19
<PAGE>
YIELD CURVE OPTIONS. Balanced Fund, with respect to up to 5% of its net
assets, may enter into options on the yield "spread" or differential between two
securities. Such transactions are referred to as "yield curve" options. In
contrast to other types of options, a yield curve option is based on the
difference between the yields of designated securities, rather than the prices
of the individual securities, and is settled through cash payments.
Accordingly, a yield curve option is profitable to the holder if this
differential widens (in the case of a call) or narrows (in the case of a put),
regardless of whether the yields of the underlying securities increase or
decrease.
Balanced Fund may purchase or write yield curve options for the same
purposes as other options on securities. For example, Balanced 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.
Balanced Fund may also purchase or write yield curve options in an effort to
increase its current income if, in the judgment of the Adviser, Balanced 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 risk of loss even if the yield of one of the
underlying securities remains constant, if the spread moves in a direction or to
an extent which was not anticipated.
Yield curve options written by the Balanced Fund will be "covered." A call
(or put) option is covered if the Balanced 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 assets sufficient to cover
the Balanced Fund's net liability under the two options. Therefore, the
Balanced Fund's liability for such a covered option is generally limited to the
difference between the amount of the Balanced Fund's liability under the option
written by the Balanced Fund less the value of the option held by the Balanced
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 an options exchange will exist for any particular
exchange-traded option or at any particular time. If a Fund is unable to effect
a closing purchase transaction with respect to covered options it has written,
the Fund will not be able to sell the underlying securities or dispose of assets
held in a segregated account until the options expire or are exercised.
Similarly, if a Fund is unable to effect a closing sale transaction with respect
to options it has purchased, it will have to exercise the options in order to
realize any profit and will incur transaction costs upon the purchase or sale of
underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening 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.
B-20
<PAGE>
Each Fund may purchase and sell both options that are traded on U.S. and
foreign exchanges and options traded over-the-counter with broker-dealers who
make markets in these options. The ability to terminate over-the-counter
options is more limited than with exchange-traded options and may involve the
risk that broker-dealers participating in such transactions will not fulfill
their obligations. Until such time as the staff of the Securities and Exchange
Commission ("SEC") changes its position, each Fund 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 the formula.
Transactions by each Fund in options on securities and indices will be
subject to limitations established by each of the exchanges, boards of trade or
other trading facilities governing the maximum number of options in each class
which may be written or purchased by a single investor or group of investors
acting in concert. Thus, the number of options which a Fund may write or
purchase may be affected by options written or purchased by other investment
advisory clients of the Advisers. An exchange, board of trade or other trading
facility may order the liquidation of positions found to be in excess of these
limits, and it may impose certain other sanctions.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of protective
puts for hedging purposes depends in part on the Adviser's ability to predict
future price fluctuations and the degree of correlation between the options and
securities markets.
REAL ESTATE INVESTMENT TRUSTS
=============================
Each Fund may invest in shares of REITs. The Real Estate Securities Fund
expects that a substantial portion of its total assets will be invested in
REITs. REITs are pooled investment vehicles which invest primarily in income
producing real estate or real estate related loans or interest. REITs are
generally classified as equity REITs, mortgage REITs or a combination of equity
and mortgage REITs. Equity REITs invest the majority of their assets directly
in real property and derive income primarily from the collection of rents.
Equity REITs can also realize capital gains by selling properties that have
appreciated in value. Mortgage REITs invest the majority of their assets in
real estate mortgages and derive income from the collection of interest
payments. Like regulated investment companies such as the Funds, REITs are not
taxed on income distributed to shareholders provided they comply with certain
requirements under the Code. A Fund will indirectly bear its proportionate
share of any expenses paid by REITs in which it invests in addition to the
expenses paid by a Fund.
Investing in REITs involves certain unique risks. Equity REITs may be
affected by changes in the value of the underlying property owned by such REITs,
while mortgage REITs may be affected by the quality of any credit extended.
REITs are dependent upon management skills, are not diversified (except to the
extent the Code requires), and are subject to the risks of financing projects.
REITs are subject to heavy cash flow dependency, default by borrowers, self-
liquidation, and the possibilities of failing to qualify for the exemption from
tax for distributed income under the Code and failing to maintain their
exemptions from the Investment Company Act of 1940, as amended (the "Act").
REITs (especially mortgage REITs) are also subject to interest rate risks.
WARRANTS AND STOCK PURCHASE RIGHTS
==================================
Each Fund may invest up to 5% of its net assets, calculated at the time of
purchase, in warrants or rights (other than those acquired in units or attached
to other securities) which entitle the holder to buy equity securities at a
specific price for a specific period of time. A Fund will invest in warrants
and rights only if such equity securities are deemed appropriate by the Adviser
for investment by the Fund. CORE
B-21
<PAGE>
U.S. Equity, CORE Large Cap Growth, CORE Small Cap Equity and CORE International
Equity Funds have no present intention of acquiring warrants or rights. Warrants
and rights have no voting rights, receive no dividends and have no rights with
respect to the assets of the issuer.
B-22
<PAGE>
FOREIGN SECURITIES
==================
Investments in foreign securities may offer potential benefits not
available from investments solely in U.S. dollar-denominated or quoted
securities of domestic issuers. Such benefits may include the opportunity to
invest in foreign issuers that appear, in the opinion of the applicable Adviser,
to offer better opportunity for long-term growth of capital and income than
investments in U.S. securities, the opportunity to invest in foreign countries
with economic policies or business cycles different from those of the United
States and the opportunity to reduce fluctuations in portfolio value by taking
advantage of foreign stock markets that do not necessarily move in a manner
parallel to U.S. markets.
Investing in foreign securities involves certain special considerations,
including those set forth below, which are not typically associated with
investing in U.S. dollar-denominated or quoted securities of U.S. issuers.
Investments in foreign securities usually involve currencies of foreign
countries. Accordingly, any Fund that invests in foreign securities 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. Balanced, CORE International Equity, International Equity,
Emerging Markets Equity and Asia Growth Funds may be subject to currency
exposure independent of their securities positions.
Currency exchange rates may fluctuate significantly over short periods of
time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or anticipated changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates
also can be affected unpredictably by intervention by U.S. or foreign
governments or central banks or the failure to intervene or by currency controls
or political developments in the United States or abroad.
Since foreign issuers generally are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. companies, there may be less publicly
available information about a foreign company than about a U.S. company. Volume
and liquidity in most foreign securities markets are less than in the United
States and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Fixed commissions on
foreign securities exchanges are generally higher than negotiated commissions on
U.S. exchanges, although each Fund endeavors to achieve the most favorable net
results on its portfolio transactions. There is generally less government
supervision and regulation of foreign securities exchanges, brokers, dealers and
listed and unlisted companies than in the United States.
Foreign markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when some of a Fund's assets are uninvested and no return is earned on
such assets. The inability of a 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 the Fund due to subsequent declines in
value of the portfolio securities or, if the 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 affect a 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, resource self-sufficiency and
balance of payments position.
Each Fund may invest in foreign securities which take the form of sponsored
and unsponsored American Depository Receipts ("ADRs") and Global Depository
Receipts ("GDRs") and (except for CORE
B-23
<PAGE>
U.S. Equity, CORE Large Cap Growth and CORE Small Cap Equity Funds) may also
invest in European Depository Receipts ("EDRs") or other similar instruments
representing securities of foreign issuers (together, "Depository Receipts").
ADRs represent the right to receive securities of foreign issuers deposited
in a domestic bank or a correspondent bank. ADRs are traded on domestic
exchanges or in the U.S. over-the-counter market and, generally, are in
registered form. EDRs and GDRs are receipts evidencing an arrangement with a
non-U.S. bank similar to that for ADRs and are designed for use in the non-U.S.
securities markets. EDRs and GDRs are not necessarily quoted in the same
currency as the underlying security.
To the extent a Fund acquires Depository Receipts through banks which do
not have a contractual relationship with the foreign issuer of the security
underlying the Depository Receipts to issue and service such Depository Receipts
(unsponsored), there may be an increased possibility that the Fund would not
become aware of and be able to respond to corporate actions such as stock splits
or rights offerings involving the foreign issuer in a timely manner. In
addition, the lack of information may result in inefficiencies in the valuation
of such instruments.
Each Fund (except CORE U.S. Equity, CORE Large Cap Growth and CORE Small
Cap Equity Funds) may invest in countries with emerging economies or securities
markets. Political and economic structures in many of such countries may be
undergoing significant evolution and rapid development, and such countries may
lack the social, political and economic stability characteristic of more
developed countries. Certain of such countries may have in the past failed to
recognize private property rights and have at times nationalized or expropriated
the assets of private companies. As a result, the risks described above,
including the risks of nationalization or expropriation of assets, may be
heightened. See "Investing in Emerging Markets, including Asia," below.
A Fund (other than CORE U.S. Equity, CORE Large Cap Growth and CORE Small
Cap Equity Funds) may invest in securities of issuers domiciled in a country
other than the country in whose currency the instrument is denominated or
quoted. The Funds may also invest in securities quoted or denominated in the
European Currency Unit ("ECU"), which is a "basket" consisting of specified
amounts of the currencies of certain of the member states of the European
Community. The specific amounts of currencies comprising the ECU may be
adjusted by the Council of Ministers of the European Community from time to time
to reflect changes in relative values of the underlying currencies. In
addition, the Funds may invest in securities quoted or denominated in other
currency "baskets."
INVESTING IN EMERGING MARKETS, INCLUDING ASIA. CORE International Equity,
International Equity, Asia Growth and Emerging Markets Equity Funds are intended
for long-term investors who can accept the risks associated with investing
primarily in equity and equity-related securities of foreign issuers, including
Emerging Countries issuers (in the case of Emerging Markets Equity and
International Equity Funds) and Asian Companies (as defined in the Prospectus)
(in the case of Asia Growth Fund), as well as the risks associated with
investments quoted or denominated in foreign currencies. Balanced, Growth and
Income, CORE International Equity, Small Cap Equity, Mid Cap Equity and Capital
Growth Funds may invest, to a lesser extent, in equity and equity-related
securities of foreign issuers; including Emerging Countries issuers. In
addition, certain of Balanced, CORE International Equity, International Equity,
Emerging Markets Equity and Asia Growth Fund's potential investment and
management techniques entail special risks. Asia Growth Fund concentrates on
companies that the Advisers believe are taking full advantage of the region's
growth and that have the potential for long-term capital appreciation. The
Advisers believe that Asia offers an attractive investment environment and that
new opportunities will continue to emerge in the years ahead.
B-24
<PAGE>
The pace of change in many Emerging Countries, and in particular those in
Asia, over the last 10 years has been rapid. Accelerating economic growth in
the region has combined with capital market development, high government
expenditure, increasing consumer wealth and taxation policies favoring company
expansion. As a result, stock market returns in many Emerging Countries have
been relatively attractive. See "Risk Factors" in the Prospectus.
Each of the securities markets of the Emerging Countries is less liquid and
subject to greater price volatility and has a smaller market capitalization than
the U.S. securities markets. Issuers and securities markets in such countries
are not subject to as extensive and frequent accounting, financial and other
reporting requirements or as comprehensive government regulations as are issuers
and securities markets in the U.S. In particular, the assets and profits
appearing on the financial statements of Emerging Country issuers may not
reflect their financial position or results of operations in the same manner as
financial statements for U.S. issuers. Substantially less information may be
publicly available about Emerging Country issuers than is available about
issuers in the United States.
Certain of the Emerging Country securities markets are marked by a high
concentration of market capitalization and trading volume in a small number of
issuers representing a limited number of industries, as well as a high
concentration of ownership of such securities by a limited number of investors.
The markets for securities in certain Emerging Countries are in the earliest
stages of their development. Even the markets for relatively widely traded
securities in Emerging Countries may not be able to absorb, without price
disruptions, a significant increase in trading volume or trades of a size
customarily undertaken by institutional investors in the securities markets of
developed countries. Additionally, market making and arbitrage activities are
generally less extensive in such markets, which may contribute to increased
volatility and reduced liquidity of such markets. The limited liquidity of
Emerging Country markets may also affect a Fund's ability to accurately value
its portfolio securities or to acquire or dispose of securities at the price and
time it wishes to do so or in order to meet redemption requests.
Transaction costs, including brokerage commissions or dealer mark-ups, in
Emerging Countries may be higher than in the United States and other developed
securities markets. In addition, existing laws and regulations are often
inconsistently applied. As legal systems in Emerging Countries develop, foreign
investors may be adversely affected by new or amended laws and regulations. In
circumstances where adequate laws exist, it may not be possible to obtain swift
and equitable enforcement of the law.
Foreign investment in the securities markets of several of the Asian
countries is restricted or controlled to varying degrees. These restrictions
may limit a Fund's investment in certain of the Asian countries and may increase
the expenses of the Fund. Certain Emerging Countries require governmental
approval prior to investments by foreign persons or limit investment by foreign
persons to only a specified percentage of an issuer's outstanding securities or
a specific class of securities which may have less advantageous terms (including
price) than securities of the company available for purchase by nationals. In
addition, the repatriation of both investment income and capital from several of
the Emerging Countries is subject to restrictions such as the need for certain
governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of the operation of the Balanced, CORE International Equity,
International Equity, Emerging Markets Equity and Asia Growth Funds. A Fund may
be required to establish special custodial or other arrangements before
investing in certain emerging countries.
Each of the Emerging Countries may be subject to a greater degree of
economic, political and social instability than is the case in the United
States, Japan and most Western European countries. Such instability may result
from, among other things, the following: (i) authoritarian governments or
military involvement in political and economic decision making, including
changes or attempted changes in governments through extra-constitutional means;
(ii) popular unrest associated with demands for improved political, economic or
social conditions; (iii) internal insurgencies; (iv) hostile relations with
neighboring
B-25
<PAGE>
countries; and (v) ethnic, religious and racial disaffection or conflict. Such
economic, political and social instability could disrupt the principal financial
markets in which the Funds may invest and adversely affect the value of the
Funds' assets.
The economies of Emerging Countries may differ unfavorably from the U.S.
economy in such respects as growth of gross domestic product, rate of inflation,
capital reinvestment, resources, self-sufficiency and balance of payments. Many
Emerging Countries have experienced in the past, and continue to experience,
high rates of inflation. In certain countries inflation has at times
accelerated rapidly to hyperinflationary levels, creating a negative interest
rate environment and sharply eroding the value of outstanding financial assets
in those countries. The economies of many Emerging Countries are heavily
dependent upon international trade and are accordingly affected by protective
trade barriers and the economic conditions of their trading partners. In
addition, the economies of some Emerging Countries are vulnerable to weakness in
world prices for their commodity exports.
A Fund's income and, in some cases, capital gains from foreign stocks and
securities will be subject to applicable taxation in certain of the countries in
which it invests, and treaties between the U.S. and such countries may not be
available in some cases to reduce the otherwise applicable tax rates. See
"Taxation."
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 a Fund is uninvested and no return is
earned on such assets. The inability of a Fund to make intended security
purchases or sales due to settlement problems could result either in losses to
the Fund due to subsequent declines in value of the portfolio securities or, if
the Fund has entered into a contract to sell the securities, could result in
possible liability to the purchaser.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Growth and Income, Mid Cap
Equity, Capital Growth and Small Cap Equity Funds may enter into forward foreign
currency exchange contracts for hedging purposes. Balanced, CORE International
Equity, International Equity, Emerging Markets Equity and Asia Growth Funds 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 a Fund may either accept or make
delivery of the currency specified in the contract or, at or prior to maturity,
enter into a closing transaction involving the purchase or sale of an offsetting
contract. Closing transactions with respect to forward contracts are usually
effected with the currency trader who is a party to the original forward
contract.
A Fund may enter into forward foreign currency exchange contracts in
several circumstances. First, when a Fund enters into a contract for the
purchase or sale of a security denominated or quoted in a foreign currency, or
when a Fund anticipates the receipt in a foreign currency of dividend or
interest payments on such a security which it holds, the Fund may desire to
"lock in" the U.S. dollar price of the security or the U.S. dollar equivalent of
such dividend or interest payment, as the case may be. By entering into a
forward contract for the purchase or sale, for a fixed amount of dollars, of the
amount of foreign currency involved in the underlying transactions, the Fund
will attempt to protect itself against an
B-26
<PAGE>
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 U.S. dollars, the
amount of foreign currency approximating the value of some or all of such Fund's
portfolio securities quoted or denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of 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 U.S. dollar value of only a portion of a Fund's foreign
assets.
Balanced, CORE International Equity, International Equity, Emerging Markets
Equity and Asia Growth Funds may engage in cross-hedging by using forward
contracts in one currency to hedge against fluctuations in the value of
securities quoted or denominated in a different currency if GSAM or GSAMI
determines that there is a pattern of correlation between the two currencies.
Balanced, CORE International Equity, International Equity, Emerging Markets
Equity and Asia Growth Funds may also purchase and sell forward contracts to
seek to increase total return when GSAM or GSAMI 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 Fund's portfolio.
A Fund's custodian will place cash or liquid assets into a segregated
account of such 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 Balanced,
CORE International Equity, International Equity, Emerging Markets Equity and
Asia Growth Funds forward contracts entered into to seek to increase total
return. If the value of the securities placed in the segregated account
declines, additional cash or liquid assets will be placed in the account on a
daily basis so that the value of the account will equal the amount of a 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.
While a Fund will enter into forward contracts to reduce currency exchange
rate risks, transactions in such contracts involve certain other risks. Thus,
while the Fund may benefit from such transactions, unanticipated changes in
currency prices may result in a poorer overall performance for the 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 quoted or
denominated in a particular currency and forward contracts entered into by such
Fund. Such imperfect correlation may cause a Fund to sustain losses which will
prevent the Fund from achieving a complete hedge or expose the Fund to risk of
foreign exchange loss.
Markets for trading foreign forward currency contracts offer less
protection against defaults than is available when trading in currency
instruments on an exchange. 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 or force the Fund to cover its
commitments for purchase or resale, if any, at the current market price.
B-27
<PAGE>
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS. Each Fund (except
CORE U.S. Equity, CORE Large Cap Growth and CORE Small Cap Equity Funds) may
write covered put and call options and purchase put and call options on foreign
currencies for the purpose of protecting against declines in the U.S. dollar
value of portfolio securities and against increases in the U.S. dollar cost of
securities to be acquired. As with other kinds of option transactions, however,
the writing of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received. If and when a Fund seeks to
close out an option, the Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against exchange rate fluctuations; however, in the event of exchange rate
movements adverse to a Fund's position, the Fund may forfeit the entire amount
of the premium plus related transaction costs. Options on foreign currencies to
be written or purchased by a Fund will be traded on U.S. and foreign exchanges
or over-the-counter.
Balanced, CORE International Equity, International Equity, Emerging Markets
Equity and Asia Growth Funds may use options on currency to cross-hedge, which
involves writing or purchasing options on one currency to hedge against changes
in exchange rates for a different currency with a pattern of correlation. In
addition, Balanced, International Equity, Emerging Markets Equity and Asia
Growth Funds 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 quoted or denominated in that currency do not present
attractive investment opportunities and are not included in the Fund's
portfolio.
A call option written by a Fund obligates a 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 would
obligate a 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.
For a description of how to cover written put and call options, see "Written
Covered Options" above.
A Fund may terminate its obligations under a call or put option by
purchasing an option identical to the one it has 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 options purchased by the Fund.
A Fund would normally purchase call options on foreign currency in
anticipation of an increase in the U.S. dollar value of currency in which
securities to be acquired by a Fund are quoted or denominated. The purchase of
a call option would entitle the 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.
A Fund would normally purchase put options in anticipation of a decline in
the U.S. dollar value of currency in which securities in its portfolio are
quoted or denominated ("protective puts"). The purchase of a put option would
entitle a 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
B-28
<PAGE>
and losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying currency or portfolio
securities.
In addition to using options for the hedging purposes described above,
Balanced, CORE International Equity, International Equity, Emerging Markets
Equity and Asia Growth Funds may use options on currency to seek to increase
total return. Balanced, CORE International Equity, International Equity,
Emerging Markets Equity and Asia Growth Funds may write (sell) covered put and
call options on any currency in order to realize greater income than would be
realized on portfolio securities transactions alone. However, in writing
covered call options for additional income, Balanced, CORE International Equity,
International Equity, Emerging Markets Equity and Asia Growth Funds may forego
the opportunity to profit from an increase in the market value of the
underlying currency. Also, when writing put options, Balanced, CORE
International Equity, International Equity, Emerging Markets Equity and Asia
Growth Funds accept, in return for the option premium, the risk that they may be
required to purchase the underlying currency at a price in excess of the
currency's market value at the time of purchase.
Balanced, CORE International Equity, International Equity, Emerging Markets
Equity and Asia Growth Funds would normally purchase call options to seek to
increase total return in anticipation of an increase in the market value of a
currency. Balanced, CORE International Equity, International Equity, Emerging
Markets Equity and Asia Growth Funds 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 Balanced, CORE
International Equity, International Equity, Emerging Markets Equity and Asia
Growth Funds would realize either no gain or a loss on the purchase of the call
option. Put options may be purchased by a Fund for the purpose of benefiting
from a decline in the value of currencies which it does not own. 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.
SPECIAL RISKS ASSOCIATED WITH OPTIONS ON CURRENCY. An exchange traded
options position may be closed out only on an options exchange which provides a
secondary market for an option of the same series. Although a Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange will exist for any particular option, or at any particular time.
For some options no secondary market on an exchange may exist. In such event,
it might not be possible to effect closing transactions in particular options,
with the result that a Fund would have to exercise its options in order to
realize any profit and would incur transaction costs upon the sale of underlying
securities pursuant to the exercise of put options. If a Fund as a covered call
option writer is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying currency (or security quoted
or denominated in that currency) until the option expires or it delivers the
underlying currency upon exercise.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Options Clearing Corporation inadequate, and thereby result in the
institution by an exchange of special procedures which may interfere with the
timely execution of customers' orders.
A Fund may purchase and write over-the-counter options to the extent
consistent with its limitation on investments in illiquid securities. Trading
in over-the-counter options is subject to the risk that the other party will be
unable or unwilling to close out options purchased or written by a Fund.
B-29
<PAGE>
The amount of the premiums which a Fund may pay or receive may be adversely
affected as new or existing institutions, including other investment companies,
engage in or increase their option purchasing and writing activities.
CURRENCY SWAPS, MORTGAGE SWAPS, INDEX SWAPS AND INTEREST RATE SWAPS, CAPS,
==========================================================================
FLOORS AND COLLARS
==================
The Balanced, CORE International Equity, International Equity, Emerging
Markets Equity and Asia Growth Funds may, with respect to up to 5% of their net
assets, enter into currency swaps for both hedging purposes and to seek to
increase total return. In addition, the Balanced and Real Estate Securities
Funds may, with respect to 5% of its net assets, enter into mortgage, index and
interest rate swaps and other interest rate swap arrangements such as rate caps,
floors and collars, for hedging purposes or to seek to increase total return.
Currency swaps involve the exchange by a Fund with another party of their
respective rights to make or receive payments in specified currencies. 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. Index swaps involve the exchange by a Fund with another party of the
respective amounts payable with respect to a notional principal amount at
interest rates equal to two specified indices. 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.
A Fund will enter into interest rate, mortgage and index swaps only on a
net basis, which means that the two payment streams are netted out, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate, index 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, index and mortgage swaps is limited to the
net amount of interest payments that the Fund is contractually obligated to
make. If the other party to an interest rate, index or mortgage swap defaults,
the Fund's risk of loss consists of the net amount of interest payments that the
Fund is contractually entitled to receive. In contrast, currency swaps usually
involve the delivery of a gross payment stream in one designated currency in
exchange for the gross payment stream in another designated currency.
Therefore, the entire payment stream under a currency swap is subject to the
risk that the other party to the swap will default on its contractual delivery
obligations. To the extent that the net amount payable under an interest rate,
index or mortgage swap and the entire amount of the payment stream payable by a
Fund under a currency swap or an interest rate floor, cap or collar is held in a
segregated account consisting of cash or liquid assets 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
restrictions.
A Fund will not enter into swap transactions unless the unsecured
commercial paper, senior debt or claims paying ability of the other party
thereto is considered to be investment grade by the Adviser.
The use of interest rate, mortgage, index 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 an 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. The staff of the SEC currently take
the position that swaps, caps, floors and collars are illiquid and thus subject
to a Fund's 15% limitation on investments in illiquid securities.
B-30
<PAGE>
LENDING OF PORTFOLIO SECURITIES
===============================
Each Fund may lend portfolio securities. Under present regulatory
policies, such loans may be made to institutions such as brokers or dealers and
would be required to be secured continuously by collateral in cash, cash
equivalents or U.S. Government securities maintained on a current basis at an
amount at least equal to the market value of the securities loaned. A Fund
would be required to have 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
would continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities loaned and would also receive 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 a Fund
would call the loan in anticipation of an important vote to be taken among
holders of the securities or the giving or withholding of their consent on a
material matter affecting the investment. As with other extensions of credit
there are risks of delay in recovering, or even loss of rights in, the
collateral should the borrower of the securities fail financially. However, the
loans would be made only to firms deemed by the Advisers to be of good standing,
and when, in the judgment of the Advisers, the consideration which can be
earned currently from securities loans of this type justifies the attendant
risk. If the Advisers determine to make securities loans, it is intended that
the value of the securities loaned would not exceed one-third of the value of
the total assets of a Fund.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
==============================================
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. A Fund will purchase
securities on a when-issued basis or purchase or sell securities on a forward
commitment basis only with the intention of completing the transaction and
actually purchasing or selling the securities. If deemed advisable as a matter
of investment strategy, however, a Fund may dispose of or negotiate a commitment
after entering into it. A Fund may realize a capital gain or loss in connection
with these transactions. For purposes of determining a Fund's duration, the
maturity of when-issued or forward commitment securities will be calculated from
the commitment date. A Fund is required to hold and maintain in a segregated
account with the Fund's custodian until three days prior to the settlement date,
cash and liquid assets in an amount sufficient to meet the purchase price.
Alternatively, a 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.
INVESTMENT IN UNSEASONED COMPANIES
==================================
Each Fund may invest up to 5% of its net assets, calculated at the time of
purchase, in companies (including predecessors) which have operated less than
three years, except that this limitation does not apply to debt securities which
have been rated 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.
B-31
<PAGE>
OTHER INVESTMENT COMPANIES
==========================
A Fund reserves the right to invest up to 5% of its net assets in the
securities of other investment companies but may not 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 an 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
the Fund invests in a money market fund for which an Adviser or any of its
affiliates acts as adviser, the advisory and administration fees payable by the
Fund to an 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.
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 is maintained by a 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 a Fund
or as being collateral for a loan by a 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, a 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 a Fund, the Advisers
seek 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), a 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, a Fund, 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-32
<PAGE>
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Trust as
fundamental policies that cannot be changed without the affirmative vote of the
holders of a majority (as defined in the Act) of the outstanding voting
securities of the affected Fund. The investment objective of each Fund and all
other investment policies or practices of each Fund are considered by the Trust
not to be fundamental and accordingly may be changed without shareholder
approval. See "Investment Objectives and Policies" in the Prospectus. For
purposes of the Act, "majority" means the lesser of (a) 67% or more of the
shares of the Trust or a Fund present at a meeting, if the holders of more than
50% of the outstanding shares of the Trust or a Fund are present or represented
by proxy, or (b) more than 50% of the shares of the Trust or a Fund. For
purposes of the following 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, a Fund. With respect to the Funds'
fundamental investment restriction no. 3, asset coverage of at least 300% (as
defined in the Act), inclusive of any amounts borrowed, must be maintained at
all times.
A Fund may not:
(1) make any investment inconsistent with the Fund's classification
as a diversified company under the Investment Company Act of
1940, as amended (the "Act"). This restriction does not, however,
apply to any Fund classified as a non-diversified company under
the Act.
(2) invest 25% or more of its total assets in the securities of one
or more issuers conducting their principal business activities in
the same industry (other than the Goldman Sachs Real Estate
Securities Fund, which will invest at least 25% or more of its
total assets in the real estate industry) (excluding the U.S.
Government or any of its agencies or instrumentalities).
(3) borrow money, except (a) the Fund may borrow from banks (as
defined in the Act) or through reverse repurchase agreements in
amounts up to 33-1/3% of its total assets (including the amount
borrowed), (b) the Fund may, to the extent permitted by
applicable law, borrow up to an additional 5% of its total assets
for temporary purposes, (c) the Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and
sales of portfolio securities, (d) the Fund may purchase
securities on margin to the extent permitted by applicable law
and (e) the Fund may engage transactions in mortgage dollar rolls
which are accounted for as financings.
(4) make loans, except through (a) the purchase of debt obligations
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 as permitted
by applicable law.
(5) underwrite securities issued by others, except to the extent that
the sale of portfolio securities by the Fund may be deemed to be
an underwriting.
(6) purchase, hold or deal in real estate, although a Fund may
purchase and sell securities that are secured by real estate or
interests therein, securities of real estate investment trusts
and mortgage-related securities and may hold and sell real estate
acquired by a Fund as a result of the ownership of securities.
B-33
<PAGE>
(7) invest in commodities or commodity contracts, except that the
Fund may invest in currency and financial instruments and
contracts that are commodities or commodity contracts.
(8) issue senior securities to the extent such issuance would violate
applicable law.
Each Fund may, notwithstanding any other fundamental investment restriction
or policy, invest some or all of its assets in a single open-end investment
company or series thereof with substantially the same investment objective,
restrictions and policies as the Fund.
In addition to the fundamental policies mentioned above, the Trustees have
adopted the following non-fundamental policies which can be changed or amended
by action of the Trustees without approval of shareholders.
A Fund may not:
(a) Invest in companies for the purpose of exercising control or
management.
(b) Invest 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.
(c) Purchase additional securities if the Fund's borrowings (excluding
covered mortgage dollar rolls) exceed 5% of its net assets.
(d) Make short sales of securities, except short sales against the box.
B-34
<PAGE>
MANAGEMENT
Information pertaining to the Trustees and officers of the Trust is set
forth below. Trustees and officers deemed to be "interested persons" of the
Trust for purposes of the Act are indicated by an asterisk.
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
Ashok N. Bakhru, 53 Chairman Executive Vice President- Finance and
1325 Ave. of Americas & Trustee Administration and Chief Financial Officer,
New York, NY 10019 Coty Inc. (since April 1996); President,
ABN Associates (June 1994 through March
1996); Senior Vice President of Scott
Paper Company until June 1994; Director
of Arkwright Mutual Insurance Company;
Trustee of International House of
Philadelphia; Member of Cornell
University Council; Trustee of the Walnut
Street Theater.
*David B. Ford, 51 Trustee Managing Director, Goldman Sachs (since 1996);
One New York Plaza General Partner, Goldman Sachs (1986-1996);
New York, NY 10004 Co-Head of Goldman Sachs Asset Management
(since December 1994).
*Douglas C. Grip, 35 Trustee Vice President, Goldman Sachs (since May 1996);
One New York Plaza & President President, MFS Retirement Services Inc., of
New York, NY 10004 Massachusetts Financial Services (prior thereto).
*John P. McNulty, 44 Trustee Managing Director, Goldman Sachs (since 1996);
One New York Plaza General Partner of Goldman Sachs (1990-1994
New York, NY 10004 and 1995-1996); Co-Head of Goldman Sachs Asset
Management (since November 1995); Limited Partner
of Goldman Sachs (1994 to November 1995).
Mary P. McPherson, 60 Trustee President of Bryn Mawr College (since 1978);
Taylor Hall Director of Josiah Macy, Jr, Foundation (since
Bryn Mawr, PA 19010 1977); Director of the Philadelphia Contributionship
(since 1985); Director of Amherst College
(since 1986); Director of Dayton Hudson
Corporation (since 1988); Director of the
Spencer Foundation (since 1993); and member
of PNC Advisory Board (since 1993).
</TABLE>
B-35
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
*Alan A. Shuch, 48 Trustee Limited Partner, Goldman Sachs (since 1994);
One New York Plaza Director and Vice President of Goldman Sachs
New York, NY 10004 Funds Management Inc. (from April 1990 to
November 1994); President and Chief Operating
Officer, GSAM (from September 1988 to November 1994).
Jackson W. Smart, 66 Trustee Chairman, Executive Committee, First
One Northfield Plaza # 218 Commonwealth, Inc. (a managed dental care
Northfield, IL 60093 company, since January 1996); Chairman and Chief
Executive Officer, MSP Communications Inc. (a company
engaged in radio broadcasting) (since November 1988),
Director, Federal Express Corporation (since 1976),
Evanston Hospital Corporation (since 1980), First
Commonwealth, Inc. (since 1988) and North American
Private Equity Group (a venture capital fund).
William H. Springer, 67 Trustee Vice Chairman and Chief Financial and
701 Morningside Drive Administrative Officer, (February 1987 to June
Lake Forest, IL 60045 1991) of Ameritech (a telecommunications holding company;
Director, Walgreen Co. (a retail drug store business);
Director of Baker, Fentress & Co. (a closed-end,
non-diversified management investment company)
(April 1992 to present).
Richard P. Strubel, 57 Trustee Managing Director, Tandem Partners, Inc.
70 West Madison St. Ste 1400 (since 1990); President and Chief Executive Officer,
Chicago, IL 60602 Microdot, Inc. (a diversified manufacturer of fastening
systems and connectors) (January 1984 to October 1994).
*Scott M. Gilman, 37 Treasurer Director, Mutual Funds Administration,
One New York Plaza Goldman Sachs Asset Management (since April 1994);
New York, NY 10004 Assistant Treasurer, Goldman Sachs Funds Management, Inc.
(since March 1993); Vice President, Goldman Sachs
(since March 1990).
*John M. Perlowski, 32 Assistant Vice President, Goldman Sachs (since July 1995);
One New York Plaza Treasurer Director, Investors Bank and Trust, November 1993
New York, NY 10004 to July 1995); Audit Manager of Arthur Andersen LLP (prior thereto).
*Pauline Taylor, 50 Vice Vice President of Goldman Sachs (since June
4900 Sears Tower President 1992); Director Shareholder Servicing
Chicago, IL 60606 (since June 1992).
</TABLE>
B-36
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
*John W. Mosior, 58 Vice Vice President, Goldman Sachs and Manager
4900 Sears Tower President of Shareholder Servicing of GSAM (since
Chicago, IL 60606 November 1989).
*Nancy L. Mucker, 47 Vice Vice President, Goldman Sachs (since April
4900 Sears Tower President 1985); Manager of Shareholder Servicing of
Chicago, IL 60606 GSAM since November 1989).
*Michael J. Richman, 36 Secretary Associate General Counsel of Goldman Sachs Asset
85 Broad Street Management (since February 1994);
New York, NY 10004 Vice President and Assistant General Counsel
of Goldman Sachs (since June 1992); Counsel
to the Funds Group, GSAM (since June 1992);
Partner, Hale and Dorr (September 1991 to
June 1992).
*Howard B. Surloff, 31 Assistant Assistant General Counsel and Vice President,
85 Broad Street Secretary Goldman Sachs (since November 1993 and May
New York, NY 10004 1994 respectively); Counsel to the Funds Group,
Goldman Sachs Asset Management (since November 1993);
Associate of Shereff Friedman, Hoffman & Goodman (prior thereto).
*Valerie A. Zondorak, 31 Assistant Vice President, Goldman Sachs (since March
85 Broad Street Secretary 1997); Counsel to the Funds Group, Goldman
New York, New York 10004 Sachs Asset Management (since March 1997);
Associate of Shereff Friedman, Hoffman &
Goodman (prior thereto).
*Steven E. Hartstein, 33 Assistant Legal Products Analyst, Goldman Sachs (June
85 Broad Street Secretary 1993 to present); Funds Compliance Officer,
New York, NY 10004 Citibank Global Asset Management (August 1991
to June 1993).
*Deborah Farrell, 25 Assistant Administrative Assistant, Goldman Sachs since
85 Broad Street Secretary January 1994. Formerly at Cleary Gottlieb, Steen
New York, NY 10004 and Hamilton.
*Kaysie P. Uniacke, 36 Assistant Vice President and Senior Portfolio Manager,
One New York Plaza Secretary Goldman Sachs Asset Management (since 1988).
New York, NY 10004
</TABLE>
B-37
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
*Elizabeth D.
Anderson, 2 7 Assistant Portfolio Manager, GSAM (since April 1996);
One New York Plaza Secretary Junior Portfolio Manager, Goldman Sachs
New York, NY 10004 Asset Management (since 1993); Funds Trading
Assistant, GSAM (1993-1995); Compliance Analyst,
Prudential Insurance (1991-1993).
</TABLE>
As of March 24, 1997, the Trustees and officers of the Trust as a group
owned less than 1% of the outstanding shares of beneficial interest of each
Fund.
The Trust pays each Trustee, other than those who are "interested persons"
of Goldman Sachs, a fee for each Trustee meeting attended and an annual fee.
Such Trustees are also reimbursed for travel expenses incurred in connection
with attending such meetings.
B-38
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust (or its predecessors) for the one-year
period ended January 31, 1997:
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits from Goldman Sachs
Aggregate Accrued as Mutual Funds
Compensation Part of (including the
Name of Trustee from the Funds*** Funds' Expenses Funds)*
- ---------------------- ------------------ --------------- ------------------
<S> <C> <C> <C>
Paul C. Nagel, Jr.** $3,775 $0 $62,450
Ashok N. Bakhru 3,969 0 69,299
Marcia L. Beck 0 0 0
David B. Ford 0 0 0
Douglas C. Grip 0 0 0
Alan A. Shuch 0 0 0
Jackson W. Smart 3,388 0 58,954
William H. Springer 3,388 0 58,954
Richard P. Strubel 3,388 0 58,954
</TABLE>
______________
* The Goldman Sachs Mutual Funds consisted of 29 mutual funds on January
31, 1997.
** Retired as of June 30, 1996.
*** Effective May 1, 1997, the Funds were reorganized from series of
Goldman Sachs Equity Portfolios, Inc. (the "Corporation") into the
Trust. The amounts shown in the column reflect compensation paid to
the Trustees by the Corporation.
B-39
<PAGE>
MANAGEMENT SERVICES
===================
As stated in the Funds' Prospectus, GSFM, One New York Plaza, New York, New
York, a Delaware limited partnership and an affiliate of Goldman Sachs, 85 Broad
Street, New York, New York, serves as investment adviser to CORE U.S. Equity and
Capital Growth Funds. GSAM, One New York Plaza, New York, New York, a separate
operating division of Goldman Sachs, serves as investment adviser to Balanced,
Growth and Income, CORE Large Cap Growth, CORE Small Cap Equity, CORE
International Equity, Real Estate Securities, Mid Cap Equity and Small Cap
Equity Funds. GSAMI, 133 Peterborough Court, London, England, EC4A 2BB serves
as investment adviser to International Equity, Emerging Markets Equity and Asia
Growth Funds. See "Management" in the Funds' Prospectus for a description of the
applicable Adviser's duties to the Funds.
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 also 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 U.S. and in Beijing,
Frankfurt, George Town, Hong Kong, London, Madrid, Mexico City, Milan, Montreal,
Osaka, Paris, Sao Paulo, 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, the Goldman Sachs Global Investment Research Department covers
approximately 1,700 companies, including approximately 1,000 U.S. corporations
in 60 industries. The in-depth information and analyses generated by Goldman
Sachs' research analysts are available to the Advisers. For more than a decade,
Goldman Sachs has been among the top-ranked firms in Institutional Investor's
annual "All-America Research Team" survey. In addition, many of Goldman Sachs'
economists, securities analysts, portfolio strategists and credit analysts have
consistently been highly ranked in respected industry surveys conducted in the
U.S. and abroad. Goldman Sachs is also among the leading investment firms using
quantitative analytics (now used by a growing number of investors) to structure
and evaluate portfolios.
In managing the Funds, the Advisers have access to Goldman Sachs' economics
research. The Economics Research Department conducts economic, financial and
currency markets research which analyzes economic trends and interest and
exchange rate movement 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 Institutional Investor's
annual "All British Research Team Survey" in the following categories:
Economics (U.K.) 1986-1993; Economics/International 1989-1993; and Currency
Forecasting 1986-1993. In addition, the team has also 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; and
Currency Movements 1986-1993.
In allocating assets among foreign countries and currencies for the Funds
which can invest in foreign securities (in particular, the CORE International
Equity, International Equity, Emerging Markets Equity and Asia Growth Funds),
the Advisers will have access to the Global Asset Allocation Model. The
B-40
<PAGE>
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 the expectations of Goldman
Sachs' research professionals to produce an optimal currency and asset
allocation for the level of risk suitable for a Fund given its investment
objectives and criteria.
Each Fund's management agreement provides that the Advisers may render
similar services to others as long as the services provided by the Advisers
thereunder are not impaired thereby.
The CORE Small Cap Equity, CORE International Equity and Real Estate
Securities Funds management agreements were initially approved by the Trustees,
including a majority of the non-interested Trustees (as defined below) who are
not parties to the management agreement, on July 22, 1997. The CORE Large Cap
Growth and Emerging Markets Equity Funds management agreements were initially
approved by the Trustees, including a majority of the non-interested Trustees
(as defined below) who are not parties to the management agreement, on April 23,
1997. The other Funds' management agreements were most recently approved by the
Trustees, including a majority of the Trustees who are not parties to the
management agreement or "interested persons" (as such term is defined in the
Act) of any party thereto (the "non-interested Trustees"), on April 23, 1997.
These arrangements were most recently approved by the shareholders of each Fund
(other than CORE Large Cap Growth, CORE Small Cap Equity, CORE International
Equity, Real Estate Securities and Emerging Markets Equity Funds) on April 21,
1997. The sole shareholder of the CORE Large Cap Growth Fund approved these
arrangements on April 30, 1997. Each management agreement will remain in effect
until June 30, 1998 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, and
(b) the vote of a majority of the non-interested Trustees, cast in person at a
meeting called for the purpose of voting on such approval. Each management
agreement will terminate automatically if assigned (as defined in the Act) and
is terminable at any time without penalty by the Trustees or by vote of a
majority of the outstanding voting securities of the affected Fund on 60 days'
written notice to the Adviser and by the Adviser on 60 days' written notice to
the Trust.
Pursuant to the management agreements the Advisers are entitled to receive
the fees listed below, payable monthly of such Fund's average daily net assets.
In addition, the Advisers voluntarily agreed to limit its management fee to an
annual rate also listed below:
<TABLE>
<CAPTION>
Management Management
With Fee Without Fee
Fund Limitations Limitations
- ---- ------------ ------------
<S> <C> <C>
GSAM
Balanced Fund 0.65% 0.65%
Growth and Income Fund 0.70% 0.70%
CORE Large Cap Growth Fund 0.60% 0.75%
CORE Small Cap Equity Fund ____% ____%
CORE International Equity Fund ____% ____%
Mid Cap Equity Fund 0.75% 0.75%
Small Cap Equity Fund 1.00% 1.00%
Real Estate Securities Fund ____% ____%
</TABLE>
B-41
<PAGE>
<TABLE>
<S> <C> <C>
GSFM
CORE U.S. Equity Fund 0.75% 0.59%
Capital Growth Fund 1.00% 1.00%
GSAMI
International Equity Fund 1.00% 0.89%
Emerging Markets Equity Fund 1.20% 1.10%
Asia Growth Fund 1.00% 0.86%
</TABLE>
GSAM, GSFM and GSAMI may discontinue or modify the above limitations in the
future at their discretion, although they have no current intention to do so.
Prior to May 1, 1997, the Funds then in operation had separate investment
advisory (and subadvisory, in the case of the International Equity Fund) and
administration agreements. Effective May 1, 1997, the services under such
agreements were combined in the management agreement. The services required to
be performed for the Funds and the combined advisory (and subadvisory, in the
case of the International Equity Fund) and administration fees payable by the
Funds under the former advisory (and subadvisory, in the case of the
International Equity Fund) and administration agreements are identical to the
services and fees under the management agreement.
For the last three fiscal years the amounts of the combined investment
advisory (and subadvisory, in the case of the International Equity Fund) and
administration fees incurred by each Fund then in existence were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
============= ============= =============
<S> <C> <C> <C>
Balanced Fund $ 402,183 $ 193,041 $ 8,858
Growth and Income Fund 3,541,318 2,225,553 790,893
CORE U.S. Equity Fund 1,667,381/3/ 817,563/3/ 693,383/2/
CORE Large Cap Growth Fund/1/ N/A N/A N/A
CORE Small Cap Equity Fund/1/ N/A N/A N/A
CORE International Equity Fund/1/ N/A N/A N/A
Capital Growth Fund 8,697,265 9,335,745 8,724,828
Mid Cap Equity Fund/4/ 964,945 489,043 N/A
International Equity Fund 4,124,076/3/ 2,794,872/2/ 3,186,509/2/
Small Cap Equity Fund 2,130,703 2,908,839 3,385,899
Emerging Market Equity Fund/1/ N/A N/A N/A
Asia Growth Fund 2,221,857/3/ 1,563,641/2/ 553,084/2/
Real Estate Securities Fund/1/ N/A N/A N/A
</TABLE>
- ----------------------------
1 Not Operational.
2 Does not give effect to the agreement (which was not in effect during such
fiscal years) by GSFM, GSAM and GSAMI to limit management fees to 0.59%,
0.89% and 0.86%, respectively of CORE U.S. Equity, International Equity and
Asia Growth Fund's average daily net assets.
3 Gives effect to the agreement (which was in effect as of June 15, 1995) by
GSFM to limit management fees to 0.59%, 0.89% and 0.86%, respectively, of
the CORE U.S. Equity, International Equity and Asia Growth Fund's average
daily net assets. For the fiscal year ended January 31, 1996, had
limitations not been in effect, CORE U.S. Equity Fund would have paid
$1,019,639 in investment management fees. For the fiscal year ended
January 31, 1997, had limitations not been in effect, CORE U.S. Equity,
International Equity and Asia Growth Funds
B-42
<PAGE>
would have paid $2,119,552, $4,638,203 and $2,583,555, respectively, in
investment management fees.
4 Commenced operations on August 1, 1995.
Under the Management Agreement, each Adviser also: (i) supervises all non-
advisory operations of each Fund that it advisers; (ii) provides personnel to
perform such executive, administrative and clerical services as are reasonably
necessary to provide effective administration of each Fund; (iii) arranges for
at each Fund's expense (a) the preparation of all required tax returns, (b) the
preparation and submission of reports to existing shareholders, (c) the periodic
updating of prospectuses and statements of additional information and (d) the
preparation of reports to be filed with the SEC and other regulatory
authorities; (iv) maintains each Fund's records; and (v) provides office space
and all necessary office equipment and services.
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.
Goldman Sachs and its affiliates, including, without limitation, the
Advisers and their advisory affiliates, have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
objectives similar to those of the Funds and/or which engage in transactions in
the same types of securities, 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 both 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 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 the Advisers and/or their
affiliates are performing services or when position limits have been reached.
In connection with their management of the Funds, the Advisers may have
access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf of the Funds in
accordance with such analysis and models. In addition, neither Goldman Sachs
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information
B-43
<PAGE>
for the purpose of managing the Funds. The proprietary activities or portfolio
strategies of Goldman Sachs and its affiliates or the activities or strategies
used for accounts managed by them or other customer accounts could conflict with
the transactions and strategies employed by the Advisers in 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.
The investment activities of Goldman Sachs and its affiliates for their
proprietary accounts and accounts under their management may also limit the
investment opportunities for the Fund in certain emerging markets in which
limitations are imposed upon the aggregate amount of investment, in the
aggregate or individual issuers, by affiliated foreign investors.
An investment policy committee which may include partners of Goldman Sachs
and its affiliates may develop general policies regarding a Fund's activities
but will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any
such member of an investment policy committee will have direct or indirect
interests in the activities of Goldman Sachs and its affiliates in securities
and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Advisers are also principals or employees of Goldman Sachs or their affiliated
entities. As a result, the performance by these principals and employees of
their obligations to such other entities may be a consideration of which
investors in the Funds should be aware.
Each Adviser may enter into transactions and invest in currencies or
instruments on behalf of a Fund 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 a Fund, and such party may have
no incentive to assure that the Funds obtain the best possible prices or terms
in connection with the transactions. Goldman Sachs and its affiliates may also
create, write or issue derivative instruments for customers of Goldman Sachs or
its affiliates, the underlying securities or instruments of which may be those
in which a Fund invests 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 transactions with other clients of Goldman Sachs or its
affiliates where such other clients have interests adverse to those of the
Funds. At times, these activities may cause departments of the Firm to give
advice to clients that may cause these clients to take actions adverse to the
interests of the client. To the extent affiliated transactions are permitted,
the Funds will deal with Goldman Sachs and its affiliates on an arms-length
basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
B-44
<PAGE>
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of a Fund in order to increase the assets
of the Fund. Increasing a Fund's assets may enhance investment flexibility and
diversification and may contribute to economies of scale that tend to reduce the
Fund's expense ratio. Goldman Sachs reserves the right to redeem at any time
some or all of the shares of a Fund acquired for its own account. A large
redemption of shares of a Fund by Goldman Sachs could significantly reduce the
asset size of the Fund, which might have an adverse effect on the Fund's
investment flexibility, portfolio diversification and expense ratio. Goldman
Sachs will consider the effect of redemptions on a Fund and other shareholders
in deciding whether to redeem its shares.
It is possible that a Fund's holdings will include securities of entities
for which Goldman Sachs performs investment banking services as well as
securities of entities in which Goldman Sachs makes a market. From time to
time, Goldman Sachs' activities may limit the Funds' flexibility in purchases
and sales of securities. When Goldman Sachs is engaged in an underwriting or
other distribution of securities of an entity, the Advisers may be prohibited
from purchasing or recommending the purchase of certain securities of that
entity for the Funds.
DISTRIBUTOR AND TRANSFER AGENT
==============================
Goldman Sachs serves as the exclusive distributor of shares of the Funds
pursuant to a "best efforts" arrangement as provided by a distribution agreement
with the Trust on behalf of each Fund. Pursuant to the distribution agreement,
after the Prospectus 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 may enter into sales agreements with certain
investment dealers and other financial service firms (the "Authorized Dealers")
to solicit subscriptions for Class A, Class B and Class C Shares of the Funds.
Goldman Sachs receives a portion of the sales charge imposed on the sale, in the
case of Class A Shares, or redemption in the case of Class B and Class C Shares,
of such Fund shares. No Class B Shares were outstanding during the fiscal years
ended January 31, 1995 and 1996. No Class C Shares were outstanding during the
fiscal years ended January 31, 1995, 1996 and 1997.
Goldman Sachs retained the following commissions on sales of Class A and
Class B Shares during the following periods:
<TABLE>
<CAPTION>
1997 1996 1995
========== ======== ========
<S> <C> <C> <C>
Balanced Fund $ 94,000 $ 28,000 $ 14,000
Growth and Income Fund 555,000 771,000 361,000
CORE U.S. Equity Fund 380,000 108,000 58,000
CORE Large Cap Growth Fund/1/ N/A N/A N/A
CORE Small Cap Equity Fund/1/ N/A N/A N/A
CORE International Equity Fund/1/ N/A N/A N/A
Capital Growth Fund 323,000 523,000 815,000
International Equity Fund 1,563,000 211,000 660,000
Small Cap Equity Fund 219,000 202,000 868,000
Emerging Market Equity Fund/1/ N/A N/A N/A
Asia Growth Fund 1,397,000 507,000 829,000
Real Estate Securities Fund/1/ N/A N/A N/A
</TABLE>
______________________________
B-45
<PAGE>
1 Not operational.
Goldman Sachs serves as the Trust's transfer agent. Under its transfer
agency agreement with the Trust, Goldman Sachs has undertaken with the Trust 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 sub-custodian 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 agent and the assumption by Goldman Sachs of
the expenses related thereto. For the last three fiscal years the amounts paid
to Goldman Sachs by each Fund then in existence for transfer agency services
performed were as follows:
<TABLE>
<CAPTION>
Class A & B Class A Class A
1997 1996 1995
=========== ======== ========
<S> <C> <C> <C>
Balanced Fund $148,576 $ 72,067 $ 20,000
Growth and Income Fund 870,527 542,671 262,158
CORE U.S. Equity Fund 319,246 103,682 151,230
CORE Large Cap Growth Fund/1/ N/A N/A N/A
CORE Small Cap Equity Fund/1/ N/A N/A N/A
CORE International Equity Fund/1/ N/A N/A N/A
Capital Growth Fund 908,310 549,844 694,014
International Equity Fund 586,243 129,313 481,169
Small Cap Equity Fund 511,883 254,292 600,618
Emerging Markets Equity Fund/1/ N/A N/A N/A
Asia Growth Fund 385,114 192,097 120,000
Real Estate Securities Fund/1/ N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
Institutional Shares Service Shares Institutional Shares
1997 1997 1996
==================== ============== ====================
<S> <C> <C> <C>
Balanced Fund/1/ $ N/A $ N/A $ N/A
Growth and Income Fund 15 488 N/A
CORE U.S. Equity Fund/2/ N/A N/A 11,571
CORE Large Cap Growth Fund/1/ N/A N/A N/A
CORE Small Cap Equity Fund/1/ N/A N/A N/A
CORE International Equity Fund/1/ N/A N/A N/A
Capital Growth Fund/1/ N/A N/A N/A
Mid Cap Equity Fund/3/ 51,464 N/A 26,082
International Equity Fund/2/ N/A N/A N/A
Small Cap Equity Fund/1/ N/A N/A N/A
Emerging Markets Equity Fund/1/ N/A N/A N/A
Asia Growth Fund/2/ N/A N/A N/A
Real Estate Securities Fund/1/ N/A N/A N/A
</TABLE>
___________________________
B-46
<PAGE>
1 Not operational.
2 Contractually set to 0.
3 Commenced operations on August 1, 1995.
The Trust's distribution and transfer agency agreements each provide
that Goldman Sachs may render similar services to others so long as the services
Goldman Sachs provides thereunder are not impaired thereby. Such agreements
also provide that the Trust will indemnify Goldman Sachs against certain
liabilities.
EXPENSES
========
Except as set forth in the Prospectus under "Management," the Trust is
responsible for the payment of its expenses. The expenses include, without
limitation, the fees payable to the Advisers, the fees and expenses payable to
the Trust's custodian and subcustodians, 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 and auditing fees and
expenses (including the cost of legal and certain accounting services rendered
by employees of GSAM, GSAMI and Goldman Sachs with respect to the Trust),
expenses of preparing and setting in type prospectuses, statements of additional
information, proxy material, reports and notices and the printing and
distributing of the same to the Trust's shareholders and regulatory authorities,
any expenses assumed by a Fund pursuant to its distribution, authorized dealer,
service and administration plans, 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.
The Adviser to the Balanced, Growth and Income, CORE U.S. Equity, CORE
Large Cap Growth, CORE Small Cap Equity, CORE International Equity, Real Estate
Securities, Mid Cap Equity, International Equity, Emerging Markets Equity and
Asia Growth Funds has voluntarily agreed to reduce or limit certain "Other
Expenses" of such Funds (excluding management, distribution, authorized dealer,
administration and service fees, taxes, interest and brokerage fees and
litigation, indemnification and other extraordinary expenses, and in the case of
each Fund other than Balanced and CORE Large Cap Growth Funds, transfer agency
fees) to the extent such expenses exceed 0.10%, 0.11%, 0.06%, 0.05%, ___%, ___%,
___%, 0.06%, 0.20%, 0.16% and 0.24% per annum of such Funds' average daily net
assets, respectively. Such reductions or limits, if any, are calculated monthly
on a cumulative basis and may be discontinued or modified by the applicable
Adviser in its discretion at any time.
Fees and expenses of legal counsel, registering shares of a 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 applicable Adviser's costs
of performing certain accounting services not being provided by a Fund's
Custodian.
For the last three fiscal years the amounts of certain "Other
Expenses" of each Fund then in existence that were reduced or otherwise limited
were as follows:
B-47
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
======== ======== ========
<S> <C> <C> <C>
Balanced Fund $319,552 $192,405 $ 95,906
Growth and Income Fund 0 0 106,725
CORE U.S. Equity Fund 104,833 110,581 N/A
CORE Large Cap Growth Fund/1/ N/A N/A N/A
CORE Small Cap Equity Fund/1/ N/A N/A N/A
CORE International Equity Fund/1/ N/A N/A N/A
Capital Growth Fund N/A N/A N/A
Mid Cap Equity Fund/2/ 72,441 85,515 N/A
International Equity Fund 144,265 N/A N/A
Small Cap Equity Fund N/A N/A N/A
Emerging Markets Equity Fund/1/ N/A N/A N/A
Asia Growth Fund 50,407 0 35,905
Real Estate Securities Fund/1/ N/A N/A N/A
</TABLE>
________________________________
1 Not operational.
2 Commenced operations on August 1, 1995.
CUSTODIAN AND SUB-CUSTODIANS
============================
State Street, P.O. Box 1713, Boston, Massachusetts 02105, is the custodian
of the Trust's portfolio securities and cash. State Street also maintains the
Trust's accounting records. State Street may appoint sub-custodians from time
to time to hold certain securities purchased by the Trust and to hold cash for
the Trust.
INDEPENDENT PUBLIC ACCOUNTANTS
==============================
Arthur Andersen, LLP, independent public accountants, One International
Place, 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 AND BROKERAGE
The Advisers are responsible for decisions to buy and sell securities for
the Funds, the selection of brokers and dealers to effect the transactions and
the negotiation of brokerage commissions, if any. Purchases and sales of
securities on a securities exchange are effected through brokers who charge a
commission for their services. Orders may be directed to any broker including,
to the extent and in the manner permitted by applicable law, Goldman Sachs.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of a security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
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<PAGE>
In placing orders for portfolio securities of a Fund, the Advisers are
generally required to give primary consideration to obtaining the most favorable
price and efficient execution under the circumstances. This means that an
Adviser will seek to execute each transaction at a price and commission, if any,
which provides the most favorable total cost or proceeds reasonably attainable
in the circumstances. As permitted by Section 28(e) of the Securities Exchange
Act of 1934, the Fund may pay a broker which provides brokerage and research
services to the Fund an amount of disclosed commission in excess of the
commission which another broker would have charged for effecting that
transaction. Such practice is subject to a good faith determination by the
Trustees that such commission is reasonable in light of the services provided
and to such policies as the Trustees may adopt from time to time. While the
Advisers generally seek reasonably competitive spreads or commissions, a Fund
will not necessarily be paying the lowest spread or commission available. Within
the framework of this policy, the Advisers will consider research and investment
services provided by brokers or dealers who effect or are parties to portfolio
transactions of a Fund, the Advisers and their affiliates, or their other
clients. Such research and investment services are those which brokerage houses
customarily provide to institutional investors and include research reports on
particular industries and companies, economic surveys and analyses,
recommendations as to specific securities and other products or services (e.g.,
quotation equipment and computer related costs and expenses), advice concerning
the value of securities, the advisability of investing in, purchasing or selling
securities, the availability of securities or the purchasers or sellers of
securities, furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy and performance of
accounts, effecting securities transactions and performing functions incidental
thereto (such as clearance and settlement) and providing lawful and appropriate
assistance to the Advisers in the performance of their decision-making
responsibilities. Such services are used by the Advisers in connection with all
of their investment activities, and some of such services obtained in connection
with the execution of transactions for a Fund may be used in managing other
investment accounts. Conversely, brokers furnishing such services may be
selected for the execution of transactions of such other accounts, whose
aggregate assets are far larger than those of a Fund, and the services furnished
by such brokers may be used by the Advisers in providing management services for
the Trust.
In circumstances where two or more broker-dealers offer comparable prices
and execution capability, preference may be given to a broker-dealer which has
sold shares of the Fund as well as shares of other investment companies or
accounts managed by the Advisers. This policy does not imply a commitment to
execute all portfolio transactions through all broker-dealers that sell shares
of the Fund.
On occasions when an Adviser deems the purchase or sale of a security to be
in the best interest of a Fund as well as its other customers (including any
other fund or other investment company or advisory account for which such
Adviser acts as investment adviser or subadviser), the Adviser, to the extent
permitted by applicable laws and regulations, may aggregate the securities to be
sold or purchased for the Fund with those to be sold or purchased for such other
customers in order to obtain the best net price and most favorable execution
under the circumstances. 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 equitable and
consistent with its fiduciary obligations to such Fund and such other customers.
In some instances, this procedure may adversely affect the price and size of the
position obtainable for a Fund.
Commission rates in the U.S. are established pursuant to negotiations with
the broker based on the quality and quantity of execution services provided by
the broker in the light of generally prevailing rates. The allocation of orders
among brokers and the commission rates paid are reviewed periodically by the
Trustees.
Subject to the above considerations, the Advisers may use Goldman Sachs as
a broker for a Fund. In order for Goldman Sachs to effect any portfolio
transactions for each Fund, the commissions, fees or
B-49
<PAGE>
other remuneration received by Goldman Sachs must be reasonable and fair
compared to the commissions, fees or other remuneration paid to other brokers in
connection with comparable transactions involving similar securities being
purchased or sold on a securities exchange during a comparable period of time.
This standard would allow Goldman Sachs to receive no more than the remuneration
which would be expected to be received by an unaffiliated broker in a
commensurate arm's-length transaction. Furthermore, the Trustees, including a
majority of the Trustees who are not "interested" Trustees, have adopted
procedures which are reasonably designed to provide that any commissions, fees
or other remuneration paid to Goldman Sachs are consistent with the foregoing
standard. Brokerage transactions with Goldman Sachs are also subject to such
fiduciary standards as may be imposed upon Goldman Sachs by applicable law.
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<PAGE>
For the past three fiscal years, each Fund in existence paid brokerage
commissions as follows:
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons Paid Research
=========== ================== =================== ===========
<S> <C> <C> <C> <C>
Fiscal Year Ended
January 31, 1997:
Balanced Fund $ 62,072 $ 5,112 (8%)/1/ $ 1,057,742(15%)/2/ $ 0
Growth and Income Fund 779,396 77,587(10%)/1/ 13,310,208(9%)/2/ 0
CORE U.S. Equity Fund 279,620 0(0%)/1/ 6,706,824(0%)/2/ 0
CORE Large Cap Growth Fund/ 3/ N/A N/A N/A N/A
CORE Small Cap Equity Fund/ 3/ N/A N/A N/A N/A
CORE International Equity Fund/ 3/ N/A N/A N/A N/A
Capital Growth Fund 1,460,140 304,052(21%)/1/ 29,920,578(1%)/2/ 42,039
Mid Cap Equity Fund 364,294 22,134(6%)/1/ 6,655,100(7%)/2/ 0
International Equity Fund 1,529,436 0(0%) 48,059,958(0%)/2/ 0
Small Cap Equity Fund 758,205 36,087(5%)/1/ 16,439,842(1%)/2/ 0
Emerging Markets Equity Fund/3/ N/A N/A N/A N/A
Asia Growth Fund 1,554,313 50,624(3%)/1/ 102,609,295(4%)/2/ 0
Real Estate Securities Fund/ 3/ N/A N/A N/A N/A
</TABLE>
B-51
<PAGE>
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons Paid Research
=========== ================ ====================== ===========
<S> <C> <C> <C> <C>
Fiscal Year Ended
January 31, 1996:
Balanced Fund $ 56,860 $ 7,391(13%)/1/ $ 29,697,202(13%)/2/ $0
Growth and Income Fund 841,605 71,218(8%)/1/ 425,040,430(9%)/2/ 0
CORE U.S. Equity Fund 121,424 0(0%)/1/ 148,427,497(0%)/2/ 0
CORE Large Cap Growth Fund/3 / N/A N/A N/A N/A
CORE Small Cap Equity Fund/ 3/ N/A N/A N/A N/A
CORE International Equity Fund/ 3/ N/A N/A N/A N/A
Capital Growth Fund 1,979,949 284,660(14%)/1/ 1,034,755,196(11%)/2/ 0
Mid Cap Equity Fund 315,212 40,935(13%)/1/ 142,547,552(11%)/2/ 0
International Equity Fund 1,260,992 13,629(1%)/1/ 359,700,166(1%)/2/ 0
Small Cap Equity Fund 690,234 72,980(11%)/1/ 170,616,044(6%)/2/ 0
Emerging Markets Equity Fund/3 / N/A N/A N/A N/A
Asia Growth Fund 1,676,525 3,778(0%)/1/ 247,662,049(2%)/2/ 0
Real Estate Securities Fund/ 3/ N/A N/A N/A N/A
</TABLE>
B-52
<PAGE>
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons Paid Research
=========== ================ ==================== ===========
<S> <C> <C> <C> <C>
Fiscal Year Ended
January 31, 1995:
Balanced Fund $ 9,652 $ 1,522(16%)/1/ $ 7,216,224(10%)/2/ $0
Growth and Income Fund 637,080 77,404(12%)/1/ 468,165,610(7%)/2/ 0
CORE U.S. Equity Fund 119,192 0(0%)/1/ 99,616,396(0%)/2/ 0
CORE Large Cap Growth Fund/3/ N/A N/A N/A N/A
CORE Small Cap Equity Fund/ 3/ N/A N/A N/A N/A
CORE International Equity Fund/ 3/ N/A N/A N/A N/A
Capital Growth Fund 1,427,413 273,076(19%)/1/ 786,135,073(13%)/2/ 0
Mid Cap Equity Fund N/A N/A N/A N/A
International Fund 1,799,525 0(0%)/1/ 546,364,113(0%)/2/ 0
Small Cap Equity Fund 555,667 23,137(4%)/1/ 392,235,715(2%)/2/ 0
Emerging Markets Equity Fund/3/ N/A N/A N/A N/A
Asia Growth Fund 1,002,148 67,754(7%)/1/ 171,880,775(2%)/2/ 0
Real Estate Securities Fund/ 3/ N/A N/A N/A N/A
</TABLE>
- ----------------------------
1 Percentage of total commissions paid.
2 Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
3 Not operational.
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<PAGE>
During the fiscal year ended January 31, 1997, the Trust acquired and sold
securities of its regular broker-dealers: all brokers below and JP Morgan. As
of January 31, 1997, the Trust held the following amounts of securities of its
regular broker/dealers, as defined in Rule 10b-1 under the Act, or their parents
($ in thousands):
<TABLE>
<CAPTION>
Fund Broker/Dealer Amount
- ------------------------ ---------------- -------
<S> <C> <C>
Balanced Fund Bear Stearns $ 6,679
Lehman Brothers 2,098
Chase Securities 490
Growth and Income Fund Chase Securities $ 6,003
Lehman Brothers 11,099
Bear Stearns 19,457
Core US Equity Fund Chase Securities 1,193
Smith Barney 6,439
Merrill Lynch 4,423
Morgan Stanley 2,188
Salomon Brothers 4,249
Bear Stearns 2,614
Lehman Brothers 659
Capital Growth Fund Bear Stearns 13,286
Lehman Brothers 3,349
Mid Cap Equity Fund Lehman Brothers 2,151
Bear Stearns 2,977
Small Cap Equity Fund Bear Stearns 12,052
Lehman Brothers 3,038
</TABLE>
NET ASSET VALUE
Under the Act, the Trustees are responsible for determining in good
faith the fair value of securities of each Fund. In accordance with procedures
adopted by the Trustees, the net 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 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 the Prospectus).
In the event that the New York Stock Exchange or the national
securities exchange on which stock options are traded adopt different trading
hours on either a permanent or temporary basis, the Trustees will reconsider the
time at which net asset value is computed. In addition, each Fund may compute
its net asset value as of any time permitted pursuant to any exemption, order or
statement of the SEC or its staff.
Portfolio securities of the Fund for which accurate market quotations
are available are valued as follows: (a) securities listed on any U.S. or
foreign stock exchange or on the National Association of
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<PAGE>
Securities Dealers Automated Quotations System ("NASDAQ") will be valued at the
last sale price on the exchange or system in which they are principally traded,
on the valuation date. If there is no sale on the valuation day, securities
traded principally: (i) on a U.S. exchange or NASDAQ will be valued at the mean
between the closing bid and asked prices; and (ii) on a foreign exchange will be
valued at the last sale price (also referred to as the close price). The last
sale price for securities traded principally on a foreign exchange will be
determined as of the close of the London Stock Exchange or, for securities
traded on exchanges located in the Asia Pacific region, noon London time; (b)
debt securities will be valued using a pricing service approved by the Trustees
if such prices are believed by the investment adviser to accurately represent
market value; (c) overnight repurchase agreements will be valued by the
investment adviser at cost; (d) term repurchase agreements (i.e., those whose
maturity exceeds seven days) and interest rate swaps, caps, collars and floors
will be valued at the average of the bid quotations obtained daily from at least
two dealers or, for term repurchase agreements, recognized counterparties; (e)
debt securities with a remaining maturity of 60 days or less are valued by the
investment adviser at amortized cost, which the Trustees have determined to
approximate fair value; (e) spot and forward foreign currency exchange contracts
will be valued using a pricing service such as Reuters then calculating the mean
between the last bid and asked quotations supplied by certain independent
dealers in such contracts; (g) exchange-traded options and futures contracts
will be valued by the custodian bank at the last sale price on the exchange
where such contracts and options are principally traded; and (h) over-the-
counter options will be valued by an independent unaffiliated broker identified
by the portfolio manager/trader and contacted by the custodian bank; and (i) all
other securities, including those for which a pricing service supplies no
exchange quotation or a quotation that is believed by the portfolio
manager/trader to be inaccurate; will be valued at fair value as stated in the
valuation procedures which were approved by the Board of Trustees. For all
brokers used in this process, the custodian bank will send a letter to the
broker furnishing the quotation. If accurate quotations are not readily
available, such contracts will be valued by an independent unaffiliated broker
identified by the portfolio manager/trader and contacted by the custodian bank.
If broker quotes are used, the portfolio manager/trader will identify one
independent unaffiliated broker from whom the custodian bank will obtain prices
daily and another independent unaffiliated broker from whom the custodian bank
will obtain quotes at least weekly. The custodian bank will promptly notify the
portfolio manager/trader and a member of the GSAM Valuation Committee or a
designee thereof of any deviations equal to or greater than 3% between the
weekly quote and the daily quotes for the date that the weekly quotes were
obtained. The investment adviser will promptly provide instructions to the
custodian bank. For all brokers used in this process, the custodian bank will
send a letter to the broker furnishing the quotation.
Generally, trading in securities on European and Far Eastern
securities exchanges and on over-the-counter markets is substantially completed
at various times prior to the close of business on each Business Day in New York
(i.e., a day on which the New York Stock Exchange is open for trading). In
addition, European or Far Eastern securities trading generally or in a
particular country or countries may not take place on all Business Days in New
York. Furthermore, trading takes place in various foreign markets on days which
are not Business Days in New York and days on which the Funds' net asset values
are not calculated. Such calculation does not take place contemporaneously with
the determination of the prices of the majority of the portfolio securities used
in such calculation. Events affecting the values of portfolio securities that
occur between the time their prices are determined and the close of regular
trading on the New York Stock Exchange will not be reflected in a Fund's
calculation of net asset values unless the Trustees deem that the particular
event would materially affect net asset value, in which case an adjustment will
be made.
The proceeds received by each Fund and each other series of the Trust
from the issue or sale of its shares, and all net investment income, realized
and unrealized gain and proceeds thereof, subject only to the rights of
creditors, will be specifically allocated to such Fund and constitute the
underlying assets of that Fund or series. The underlying assets of each Fund
will be segregated on the books of account, and will be charged with the
liabilities in respect of such Fund and with a share of the general
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<PAGE>
liabilities of the Trust. Expenses of the Trust with respect to the Funds and
the other series of the Trust are generally allocated in proportion to the net
asset values of the respective Funds or series except where allocations of
direct expenses can otherwise be fairly made.
PERFORMANCE INFORMATION
A Fund may from time to time quote or otherwise use total return,
yield and/or distribution rate information in advertisements, shareholder
reports or sales literature. Average annual total return and yield are computed
pursuant to formulas specified by the SEC.
Yield is computed by dividing net investment income earned during a
recent thirty-day period by the product of the average daily number of shares
outstanding and entitled to receive dividends during the period and the maximum
public offering price per share on the last day of the relevant period. The
results are compounded on a bond equivalent (semi-annual) basis and then
annualized. 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.
The 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 or maximum public offering price 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 at the beginning of the
period, and then calculating the annual compounded rate of return which would
produce that amount, assuming a redemption at the end of the period. This
calculation assumes a complete redemption of the investment. It also assumes
that all dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period.
Year-by-year total return and cumulative total return for a specified
period are each derived by calculating the percentage rate required to make a
$1,000 investment (made at the maximum public offering price 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
indicates the total return (capital changes plus reinvestment of all
distributions) on a hypothetical investment of $1,000 in a Fund for the periods
indicated.
Occasionally statistics may be used to specify Fund 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.
From time to time the Trust may publish an indication of a Fund's past
performance as measured by independent sources such as (but not limited to)
Lipper Analytical Services, Inc., Morningstar Mutual Funds, Weisenberger
Investment Companies Service, Donoghue's Money Fund Report, Micropal, Barron's,
Business Week, Consumer's Digest, Consumer's Report, Investors Business Daily,
The New York Times, Kiplinger's Personal Finance Magazine, Changing Times,
Financial World, Forbes, Fortune, Money, Personal Investor, Sylvia Porter's
Personal Finance and The Wall Street Journal. The Trust may also
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<PAGE>
advertise information which has been provided to the NASD for publication in
regional and local newspapers. In addition, the Trust may from time to time
advertise a Fund's performance relative to certain indices and benchmark
investments, including: (a) the Lipper Analytical Services, Inc. Mutual Fund
Performance Analysis, Fixed Income Analysis and Mutual Fund Indices (which
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) Donoghues' Money Fund Report (which provides industry averages
for 7-day annualized and compounded yields of taxable, tax-free and U.S.
Government money funds); (k) the Hambrecht & Quist Growth Stock Index; (l) the
NASDAQ OTC Composite Prime Return; (m) the Russell Midcap Index; (n) the Russell
2000 Index - Total Return; (o) Russell 1000 Growth Index-Total Return; (p) the
Value-Line Composite-Price Return; (q) the Wilshire 4500 Index; (r) the FT-
Actuaries Europe and Pacific Index, and (s) historical investment data supplied
by the research departments of Goldman Sachs, Lehman Brothers, First Boston
Corporation, Morgan Stanley including (EAFE), and the Morgan Stanley Capital
International Combined Asia ex Japan Free Index, the Morgan Stanley Capital
International Emerging Markets Free Index, Salomon Brothers, Merrill Lynch,
Donaldson Lufkin and Jenrette or other providers of such data; (t) the FT-
Actuaries Europe and Pacific Index; (u) CDA/Wiesenberger Investment Companies
Services or Wiesenberger Investment Companies Service; (v) The Goldman Sachs
Commodities Index; and (w) information produced by Micropal, Inc.. The
composition of the investments in such indices and the characteristics of such
benchmark investments are not identical to, and in some cases are very different
from, those of the Fund's portfolio. These indices and averages are generally
unmanaged and the items included in the calculations of such indices and
averages may not be identical to the formulas used by a Fund to calculate its
performance figures.
Information used in advertisements and materials furnished to present
and prospective investors may include statements or illustrations relating to
the appropriateness of certain types of securities and/or mutual funds to meet
specific financial goals. Such information may address:
. cost associated with aging parents;
. funding a college education (including its actual and estimated cost);
. health care expenses (including actual and projected expenses);
. long-term disabilities (including the availability of, and coverage
provided by, disability insurance);
. retirement (including the availability of social security benefits, the
tax treatment of such benefits and statistics and other information
relating to maintaining a particular standard of living and outliving
existing assets);
. asset allocation strategies and the benefits of diversifying among asset
classes;
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<PAGE>
. the benefits of international and emerging market investments;
. the effects of inflation on investing and saving;
. the benefits of establishing and maintaining a regular pattern of
investing and the benefits of dollar-cost averaging; and
. measures of portfolio risk, including but not limited to, alpha, beta and
standard deviation.
The Trust 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 (common stocks, small
company stocks, long-term government bonds, treasury bills and
certificates of deposit) over time. However, the characteristics of
these securities are not identical to, and may be very different from,
those of a Fund's portfolio;
. the dollar and non-dollar based returns of various market indices (i.e.,
Morgan Stanley Capital International EAFE Index, FT-Actuaries Europe &
Pacific Index and the Standard & Poor's Index of 500 Common Stocks) over
varying periods of time;
. total stock market capitalizations of specific countries and regions on a
global basis;
. performance of securities markets of specific countries and regions; and
. value of a dollar amount invested in a particular market or type of
security over different periods of time.
In addition, the Trust 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.
{CORE Small Cap?] The CORE Large Cap Growth Fund was organized on May 1,
1997 and has no operating or performance history prior thereto. However, in
accordance with interpretive positions expressed by the staff of the SEC, the
Fund has adopted the adjusted performance record of a separate account managed
by the Advisers for periods prior to the Funds' commencement of operations which
converted into Class A Shares as of the commencement date. Any quotation of
performance data of this Fund relating to this period will include the adjusted
performance record of the applicable separate account. The performance record of
the separate account quoted by the Fund have been adjusted downward based on the
expenses applicable to Class A Shares (the class into which the separate account
transferred) to reflect the expenses expected to be incurred by the Fund as
stated in the expense table in the Prospectus. These expenses include any sales
charges and asset-based charges (i.e., fees under Distribution and Authorized
Dealer Service Plans) imposed and other operating expenses. Total return
quotations will be calculated pursuant to SEC approved methodology. Prior to May
1, 1997, the separate account was a separate investment advisory account under
discretionary management by the Adviser and had substantially similar investment
objectives, policies and strategies as the Fund. Unlike the Fund, the separate
account was not registered as an investment company under the Act and therefore
was not subject to certain investment restrictions and operational requirements
that are imposed on investment companies by the Act. If the separate account had
been registered as an investment company under the Act, the separate account's
performance may have been adversely affected by such restrictions and
requirements. On May 1, 1997, the separate account transferred a portion of its
assets to the Fund in exchange for Fund shares. The performance record of each
other class has been linked to the
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<PAGE>
performance of the separate account (based on Class A expenses) and the Class A
performance for any periods prior to commencement of operations of a class of
shares.
B-59
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Assuming no voluntary
waiver of fees and no
expense reimbursements
-----------------------
Assumes Assumes Assumes Assumes
5.5% sales no sales 5.5% sales no sales
Fund Class Time Period charge charge charge charge
- ------------------------- ------------- ---------------------------------- ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund A 10/12/94-1/31/97 - Since inception 17.41% 20.32% 15.50% 18.27%
Balanced Fund A 2/1/96-1/31/97 - One year 12.07% 18.59% 11.22% 17.69%
Balanced Fund B 5/1/96-1/31/97 - Since inception* N/A 16.22% N/A 15.79%
Growth and Income A 2/5/93-1/31/97 - Since inception 17.31% 18.98% 16.50% 18.17%
Growth and Income A 2/1/96-1/31/97 - One year 21.39% 28.42% 21.13% 28.14%
Growth and Income B 5/1/96-1/31/97 - Since inception* N/A 22.23% N/A 22.23%
Growth and Income Institutional 6/3/96-1/31/97 - Since inception* N/A 20.77% N/A 20.77%
Growth and Income Service 3/6/96-1/31/97 - Since inception* N/A 23.87% N/A 23.87%
CORE U.S. Equity A 5/24/91-1/31/97 - Since inception 13.54% 14.67% 13.25% 14.38%
CORE U.S. Equity A 2/1/92-1/31/97 - Five year 13.99% 15.29% 13.70% 15.00%
CORE U.S. Equity A 2/1/96-1/31/97 - One year 16.98% 23.75% 16.69% 23.44%
CORE U.S. Equity B 5/1/96-1/31/97 - Since inception* N/A 18.59% N/A 18.47%
CORE U.S. Equity Institutional 6/15/95-1/31/97 - Since inception N/A 28.04% N/A 27.74%
CORE U.S. Equity Institutional 2/1/96-1/31/97 - One year N/A 24.63% N/A 24.39%
CORE U.S. Equity Service 6/7/96-1/31/97 - Since inception* N/A 15.92% N/A 15.71%
CORE Small Cap Equity __ ___ __ __% __ __%
CORE Large Cap Growth A 11/1/91-1/31/97 - Since inception 18.46% 19.78% 17.30% 18.61%
CORE Large Cap Growth A 2/1/92-1/31/97 - Five year 17.53% 18.85% 16.38% 17.68%
CORE Large Cap Growth A 2/1/96-1/31/97 - One year 27.09% 34.54% 25.85% 33.23%
Capital Growth A 4/20/90-1/31/97 - Since inception 15.57% 16.54% 15.24% 16.21%
Capital Growth A 2/1/92-1/31/97 - Five year 15.42% 16.73% 15.14% 16.44%
</TABLE>
B-60
<PAGE>
<TABLE>
<CAPTION>
Assuming no voluntary
waiver of fees and no
expense reimbursements
----------------------
Assumes Assumes Assumes Assumes
5.5% sales no sales 5.5% sales no sales
Fund Class Time Period charge charge charge charge
- ------------------------ ------------- ---------------------------------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Capital Growth A 2/1/96-1/31/97 - One year 19.04% 25.97% 18.75% 25.66%
Capital Growth B 5/1/96-1/31/97 - Since inception* N/A 19.39% N/A 19.39%
Mid Cap Equity Institutional 8/1/95-1/31/97 - Since inception N/A 21.65% N/A 21.55%
Mid Cap Equity Institutional 2/1/96-1/31/97 - One year N/A 25.63% N/A 25.55%
International Equity A 12/1/92-1/31/97 - Since inception 9.66% 11.15% 9.40% 10.90%
International Equity A 2/1/96-1/31/97 - One year 7.26% 13.48% 7.05% 13.26%
International Equity B 5/1/96-1/31/97 - Since inception* N/A 2.83% N/A 2.75%
International Equity Institutional 2/7/96-1/31/97 - Since inception* N/A 12.53% N/A 12.38%
International Equity Service 3/6/96-1/31/97 - Since inception* N/A 10.42% N/A 10.28%
Small Cap A 10/22/92-1/31/97- Since inception 12.12% 13.61% 11.79% 13.28%
Small Cap A 2/1/96-1/31/97 - One year 20.27% 27.28% 19.98% 26.97%
Small Cap B 5/1/96-1/31/97 - Since inception* N/A 5.39% N/A 5.39%
Asia Growth A 7/8/94-1/31/97 - Since inception 4.46% 6.78% 4.15% 6.47%
Asia Growth A 2/1/96-1/31/97 - One year -6.44% -1.01% -6.59% -1.17%
Asia Growth B 5/1/96-1/31/97 - Since inception * N/A -6.02% N/A -6.06%
Asia Growth Institutional 2/2/96-1/31/97 - Since inception * N/A -1.09% N/A -1.24%
- --------------------------
</TABLE>
All returns are average annual total returns.
* Represents an aggregate total return (not annualized) since this class has
not completed a full twelve months of operations.
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<PAGE>
From time to time, advertisements or information may include a
discussion of certain attributes or benefits to be derived by an investment in
the Fund. Such advertisements or information may include symbols, headlines or
other material which highlight or summarize the information discussed in more
detail in the communication.
The Trust may from time to time summarize the substance of discussions
contained in shareholder reports in advertisements and publish the adviser's
views as to markets, the rationale for a Fund's investments and discussions of a
Fund's current asset allocation.
In addition, from time to time, advertisements or information may
include a discussion of asset allocation models developed by GSAM and/or its
affiliates, certain attributes or benefits to be derived from asset allocation
strategies and the Goldman Sachs mutual funds that may be offered as investment
options for the strategic asset allocations. Such advertisements and
information may also include GSAM's current economic outlook and domestic and
international market views to suggest periodic tactical modifications to current
asset allocation strategies. Such advertisements and information may include
other materials which highlight or summarize the services provided in support of
an asset allocation program.
A Fund's performance data will be based on historical results and will
not be intended to indicate future performance. A Fund's total return and yield
will vary based on 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.
Total return will be calculated separately for each class of shares in
existence. Because each class of shares may be subject to different expenses,
total return with respect to each class of shares of a Fund will differ.
SHARES OF THE TRUST
The Funds were reorganized from series of a Maryland corporation as
part of Goldman Sachs Trust, a Delaware business trust, by a Declaration of
Trust dated January 28, 1997, on April 30, 1997.
The Act requires that where more than one class or series of shares
exists, each class or series must be preferred over all other classes or series
in respect of assets specifically allocated to such class or series. The
Trustees also have authority to classify and reclassify any series of shares
into one or more classes of shares. As of the date of this Additional
Statement, the Trustees have classified the shares of the Mid Cap Equity Fund
into two classes: Institutional and Service Shares. Balanced, Capital Growth,
Small Cap Equity, Growth and Income, CORE U.S. Equity, CORE Large Cap Growth,
CORE Small Cap Equity, CORE International Equity, Real Estate Securities,
International Equity, Emerging Markets Equity and Asia Growth Funds have been
classified into five classes: Institutional Shares, Service Shares, Class A
Shares, Class B Shares and Class C Shares.
Each Institutional Share, Service Share, Class A Share, Class B Share
and Class C Share of a Fund represents a proportionate interest in the assets
belonging to the applicable class of the Fund. All expenses of a Fund are borne
at the same rate by each class of shares, except that fees under Service Plans
are borne exclusively by Service Shares, fees under Distribution and Authorized
Dealer Service Plans are borne exclusively by Class A, Class B or Class C Shares
and transfer agency fees are borne at different rates by Class A, Class B or
Class C Shares than Institutional and Service Shares. The Trustees may
determine in the future that it is appropriate to allocate other expenses
differently between classes of shares and may do so to the extent consistent
with the rules of the SEC and positions of the
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<PAGE>
Internal Revenue Service. Each class of shares may have different minimum
investment requirements and be entitled to different shareholder services.
Currently, shares of a class may only be exchanged for shares of the same or an
equivalent class of another fund. See "Exchange Privilege" in the Prospectus.
Institutional Shares may be purchased at net asset value without a
sales charge 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.
Service Shares may be purchased at net asset value without a sales
charge for accounts held in the name of an institution that, directly or
indirectly, provides certain account administration and shareholder liaison
services to its customers, including maintenance of account records and
processing orders to purchase, redeem and exchange Service Shares. Service
Shares bear the cost of account administration fees at the annual rate of up to
0.50% of the average daily net assets of the Fund attributable to Service
Shares.
Class A Shares are sold, with an initial sales charge of up to 5.5%,
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 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
the 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.
Class C Shares of the Funds are sold subject to a contingent deferred
sales charge of up to 1.0% 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 C 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 C Shares. Class C
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 C Shares.
It is possible that an institution or its affiliate may offer
different classes of shares (i.e., Institutional, Service, Class A Shares, Class
B Shares and Class C Shares) to its customers and thus receive different
compensation with respect to different classes of shares of each Fund.
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 the
same amount, except for differences caused by the differences in expenses
discussed above. 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, shares are fully paid and non-assessable. In the event
of liquidation, shareholders are entitled to share pro rata in the net assets of
the applicable class of the relevant Fund available for
B-63
<PAGE>
distribution to such shareholders. All shares entitle their holders to one vote
per share, are freely transferable and have no preemptive, subscription or
conversion rights.
As of August 1, 1997, [State Street Bank & Trust Company as Trustee
(GS Profit Sharing Master Trust), Attn. Louis Pereira, P.O. Box 1992, Boston, MA
02105-1992, was recordholder of 97.88% of Mid Cap Equity Fund's outstanding
shares; Trukan and Co., Attn: K. Ufford, P.O. Box 3699, Wichita, KS 67201-3699,
was recordholder of 6.80% of Balanced Fund's outstanding shares; Frontier Trust
Co. Inc. Trustee (FBO Dade County Public Schools), Attn: Agnes R. McMurray,
Fringe Benefits Management Co., 1720 S. Gadsden St., Tallahassee, FL 32301-5547,
was recordholder of 6.80% of Balanced Fund's outstanding shares; and State
Street Bank & Trust Company as Trustee (Goldman Sachs Employees' Pension Plan),
Attn: Louis Pereria, P.O. Box 1992, Boston, MA 02105-1992, was recordholder of
5.10% of the Small Cap Equity Fund's outstanding shares.]
Rule 18f-2 under the Act provides that any matter required to be
submitted by the provisions of the Act or applicable state law, or otherwise, to
the holders of the outstanding voting securities of an investment company such
as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each class or
series affected by such matter. Rule 18f-2 further provides that a class or
series shall be deemed to be affected by a matter unless the interests of each
class or series in the matter are substantially identical or the matter does not
affect any interest of such class or series. However, Rule 18f-2 exempts the
selection of independent public accountants, the approval of principal
distribution contracts and the election of directors from the separate voting
requirements of Rule 18f-2.
The Trust is not required to hold annual meetings of shareholders and
does not intend to hold such meetings. In the event that a meeting of
shareholders is held, each share of the Trust will be entitled, as determined by
the Trustees, either to one vote for each share or to one vote for each dollar
of net asset value represented by such shares on all matters presented to
shareholders including the elections of Trustees (this method of voting being
referred to as "dollar based voting"). However, to the extent required by the
Act or otherwise determined by the Trustees, series and classes of the Trust
will vote separately from each other. Shareholders of the Trust do not have
cumulative voting rights in the election of Trustees. Meetings of shareholders
of the Trust, or any series or class thereof, may be called by the Trustees,
certain officers or upon the written request of holders of 10% or more of the
shares entitled to vote at such meetings. The shareholders of the Trust will
have voting rights only with respect to the limited number of matters specified
in the Declaration of Trust and such other matters as the Trustees may determine
or may be required by law.
The Declaration of Trust provides for indemnification of Trustees,
officers and agents of the Trust unless the recipient is adjudicated (i) to be
liable by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such person's office or (ii)
not to have acted in good faith in the reasonable belief that such person's
actions were in the best interest of the Trust. The Declaration of Trust
provides that, if any shareholder or former shareholder of any series is held
personally liable solely by reason of being or having been a shareholder and not
because of the shareholder's acts or omissions or for some other reason, the
shareholder or former shareholder (or heirs, executors, administrators, legal
representatives or general successors) shall be held harmless from and
indemnified against all loss and expense arising form such liability. The Trust,
acting on behalf of any affected series, must, upon request by such shareholder,
assume the defense of any claim made against such shareholder for any act or
obligation of the series and satisfy any judgment thereon from the assets of the
series.
The Declaration of Trust permits the termination of the Trust or of
any series or class of the Trust (i) by a majority of the affected shareholders
at a meeting of shareholders of the Trust, series or class;
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<PAGE>
or (ii) by a majority of the Trustees without shareholder approval if the
Trustees determine that such action is in the best interest of the Trust or its
shareholders. The factors and events that the Trustees may take into account in
making such determination include (i) the inability of the Trust or any
successor series or class to maintain its assets at an appropriate size; (ii)
changes in laws or regulations governing the Trust, series or class or affecting
assets of the type in which it invests; or (iii) economic developments or trends
having a significant adverse impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder
approval to cause the Trust, or any series thereof, to merge or consolidate with
any corporation, association, trust or their organization or sell or exchange
all or substantially all of the property belonging to the Trust or any series
thereof. In addition, the Trustees, without shareholder approval, may adopt a
master-feeder structure by investing all or a portion of the assets of a series
of the Trust in the securities of another open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration
of Trust without a shareholder vote. However, shareholders of the Trust have the
right to vote on any amendment (i) that would affect the voting rights of
shareholder, (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). Series Trustees
may, but are not required to, serve as Trustees of the Trust or any other series
or class of the Trust. The Series Trustees have, to the exclusion of any other
Trustees of the Delaware Trust, all the powers and authorities of Trustees under
the Trust Instrument with respect to any other series or class.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Delaware Law, the shareholders of the Funds are not generally
subject to liability for the debts or obligations of the Trust. Similarly,
Delaware law provides that a series of the Trust will not be liable for the
debts or obligations of any other series of the Trust. However, no similar
statutory or other authority limiting business trust shareholder liability
exists in other states. As a result, to the extent that a Delaware business
trust or a shareholder is subject to the jurisdiction of courts of such other
states, the courts may not apply Delaware law and may thereby subject the
Delaware business trust shareholders to liability. To guard against this risk,
the Declaration of Trust contains an express disclaimer of shareholder liability
for acts or obligations of a Fund. Notice of such disclaimer will normally be
given in each agreement, obligation or instrument entered into or executed by a
series or the Trustees. The Declaration of Trust provides for indemnification
by the relevant Fund for all loss suffered by a shareholder as a result of an
obligation of the series. The Declaration of Trust also provides that a series
shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the series and satisfy any judgment
thereon. In view of the above, the risk of personal liability of shareholders
of a Delaware business trust is remote.
In addition to the requirements under Delaware law, the Declaration of
Trust provides that shareholders of a series may bring a derivative action on
behalf of the series only if the following conditions are met: (a) shareholders
eligible to bring such derivative action under Delaware law who hold at least
10% of the outstanding shares of the series, or 10% of the outstanding shares of
the class to which such action relates, shall join in the request for the
Trustees to commence such action; and (b) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and to
investigate the basis and to employ other advisers in considering the merits of
the request and shall require an undertaking by the shareholders making such
request to reimburse the series for the expense of any such advisers in the
event that the Trustees determine not to bring such action.
B-65
<PAGE>
The Declaration of Trust further provides that the Trustees will not
be liable for error of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
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 each Fund of the Trust. 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
each Fund. The summary is based on the laws in effect on the date of this
Additional Statement, which are subject to change.
GENERAL
=======
Each Fund is a separate taxable entity. CORE Large Cap Growth, CORE
Small Cap Equity, CORE International Equity, Real Estate Securities and Emerging
Markets Equity Funds each intend to elect and each other Fund has elected to be
treated and intends 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 gross
income for its taxable year 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) such Fund derive less than 30% of its 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 stocks or securities (the "short-short test"); and (c) such 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 such Fund's total (gross) assets
is comprised of cash, cash items, U.S. Government securities, securities of
other regulated investment companies and other securities limited in respect of
any one issuer to an amount not greater in value than 5% of the value of such
Fund's total assets and to not more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
(gross) assets is invested in the securities of any one issuer (other than U.S.
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 a 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 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. For purposes of the 90% gross income test, income that a Fund
earns from equity interests in certain entities that are not treated as
corporations (e.g., partnerships or trusts) for U.S. tax purposes will generally
have the same character for such Fund as in the hands of such an entity;
consequently, a Fund may be required to limit its equity investments in
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<PAGE>
such entities that earn fee income, rental income, or other nonqualifying
income. 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 a 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 or swap contracts for purposes
other than hedging currency risk with respect to securities in a Fund's
portfolio or anticipated to be acquired may not qualify as "directly-related"
under these tests.
If a Fund complies with such provisions, then in any taxable year in
which such Fund distributes, in compliance with the Code's timing and other
requirements, at least 90% of its "investment company taxable income" (which
includes dividends, taxable interest, taxable accrued original issue discount
and market discount income, income from securities lending, any net short-term
capital gain in excess of net long-term capital loss, certain net realized
foreign exchange gains 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 (if any) over certain
disallowed deductions, such Fund (but not its shareholders) will be relieved of
federal income tax on any income of the Fund, including long-term capital gains,
distributed to shareholders. However, if a Fund retains any investment company
taxable income or "net capital gain" (the excess of net long-term capital gain
over net short-term capital loss), it will be subject to a tax at regular
corporate rates on the amount retained. If the Fund retains any net capital
gain, the Fund may designate the retained amount as undistributed capital gains
in a notice to its shareholders who, if subject to U.S. federal income tax on
long-term capital gains, (i) will be required to include in income for federal
income tax purposes, as long-term capital gain, their shares of such
undistributed amount, and (ii) will be entitled to credit their proportionate
shares of the tax paid by the Fund against their U.S. federal income tax
liabilities, if any, and to claim refunds to the extent the credit exceeds such
liabilities. For U.S. federal income tax purposes, the tax basis of shares
owned by a shareholder of the Fund will be increased by an amount equal under
current law to 65% of the amount of undistributed net capital gain included in
the shareholder's gross income. Each Fund intends to distribute for each
taxable year to its shareholders all or substantially all of its investment
company taxable income, 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 the CORE International Equity, International
Equity, Emerging Markets Equity or Asia Growth Funds and may therefore make it
more difficult for such a Fund to satisfy the distribution requirements
described above, as well as the excise tax distribution requirements described
below. However, each 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, and its distributions to
shareholders will be taxable as ordinary dividends to the extent of its current
and accumulated earnings and profits.
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 capital gains over its capital losses (generally computed on the basis of
the one-year period ending on October 31 of such year), and all taxable ordinary
income and the excess of capital gains over capital losses for the previous year
that were not distributed for such year and on which the Fund paid no federal
income tax. For federal income tax purposes, dividends declared by a Fund in
October, November or December to shareholders of record on a specified date in
such a month and paid during January of the following year are taxable to such
shareholders as if received on December 31 of the year declared. The Funds
anticipate that they will generally make timely distributions of income and
capital gains in compliance with these requirements so that they will generally
not be required to pay the excise tax. For federal income tax purposes, each
Fund is permitted to carry forward a net capital loss in any year to offset its
own capital gains, if any, during the eight years following the year of the
loss. Asia Growth Fund had approximately $184,000, $5,487,000 and $9,825,000 at
January 31,
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<PAGE>
1997 of capital loss carry forwards expiring in 2002, 2003, and 2004,
respectively, for federal tax purposes. These amounts are available to be
carried forward to offset future capital gains to the extent permitted by the
Code and applicable tax regulations.
Gains and losses on the sale, lapse, or other termination of options
and futures contracts, options thereon and certain forward contracts (except
certain foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gains 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.
These provisions may require a Fund to recognize income or gains without a
concurrent receipt of cash. Any gain or loss recognized on actual or deemed
sales of these futures contracts, forward contracts, or options will (except for
certain foreign currency options, forward contracts, and futures contracts) be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. As a result of certain hedging transactions entered into by a Fund, the
Fund may be required to defer the recognition of losses on futures contracts,
forward contracts, and options or underlying securities or foreign currencies to
the extent of any unrecognized gains on related positions held by such Fund and
the characterization of gains or losses as long-term or short-term may be
changed. 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. The short-short test described above may limit a
Fund's ability to use options, forward contracts, and futures transactions as
well as its ability to engage in short sales. Moreover, application of certain
requirements for qualification as a regulated investment company and/or these
tax rules to certain investment practices, such as dollar rolls, or certain
derivatives such as interest rate swaps, floors, caps and collars and currency,
mortgage or index swaps may be unclear in some respects, and a Fund may
therefore be required to limit its participation in such transactions. Certain
tax elections may be available to a Fund 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 and instruments that may affect the
amount, timing and character of income, gain or loss recognized by a Fund.
Under these rules, foreign exchange gain or loss realized 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 foregoing 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 a 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.
A Fund's investment in zero coupon securities, deferred interest
securities, certain structured securities or other securities bearing original
issue discount or, if a Fund elects to include market discount in income
currently, market discount, as well as any "mark to market" gain from 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 obtain cash to enable it to
distribute this income or gain, maintain its qualification as a regulated
investment company and avoid federal income or excise taxes, the Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold.
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<PAGE>
Each Fund (other than CORE U.S. Equity, CORE Large Cap Growth and CORE
Small Cap Equity Funds) anticipates that it will be subject to foreign taxes on
its income (possibly including, in some cases, capital gains) from foreign
securities. Tax conventions between certain countries and the U.S. may reduce
or eliminate such taxes in some cases. If, as may occur for CORE International
Equity, International Equity, Emerging Markets Equity and Asia Growth Funds,
more than 50% of a Fund's total assets at the close of any taxable year consists
of stock or securities of foreign corporations, the Fund may file an election
with the Internal Revenue Service pursuant to which shareholders of the 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 the 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 by such
shareholders, and (ii) treat such respective pro rata portions as foreign income
taxes paid by them.
If the CORE International Equity, International Equity, Emerging
Markets Equity and Asia Growth Funds make this election, its respective
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 foreign
taxes paid by a Fund, although such shareholders will be required to include
their shares of such taxes in gross income if the election is made.
If a shareholder chooses to take credit for the foreign taxes deemed
paid by such shareholder as a result of any such election by CORE International
Equity, International Equity, Emerging Markets Equity or Asia Growth Funds, 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 a 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 CORE International Equity, International Equity, Emerging Markets Equity and
Asia Growth Funds may not be able to claim a credit for the full amount of their
proportionate share of the foreign taxes paid by such Fund even if the election
is made by such a 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 the CORE International Equity, International
Equity, Emerging Markets Equity or Asia Growth Funds files the election
described above, its shareholders will be notified of the amount of (i) each
shareholder's pro rata share of qualified foreign taxes paid by a Fund and (ii)
the portion of Fund dividends which represents income from each foreign country.
The other Funds will not be entitled to elect to pass foreign taxes and
associated credits or deductions through to their shareholders because they will
not satisfy the 50% requirement described above. If a Fund cannot or does not
make this election, it may deduct such taxes in computing the amount it is
required to distribute.
If a Fund acquires stock (including, under proposed regulations, an
option to acquire stock such as is inherent in a convertible bond) in certain
foreign corporations that receive at least 75% of their annual gross income from
passive sources (such as interest, dividends, rents, royalties or capital gain)
or hold at least 50% of their assets in investments producing such passive
income ("passive foreign investment companies"), the 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 stock in such companies,
even if all income or gain actually received by the Fund is timely distributed
to its shareholders. The Fund would not
B-69
<PAGE>
be able to pass through to its shareholders any credit or deduction for such a
tax. In some cases, elections may be available that would ameliorate these
adverse tax consequences, but such elections would require the Fund to include
certain amounts as income or gain (subject to the distribution requirements
described above) without a concurrent receipt of cash. Each 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.
Investments in lower-rated securities may present special tax issues
for a Fund to the extent actual or anticipated defaults may be more likely with
respect to such securities. Tax rules are not entirely clear about issues such
as when a Fund may cease to accrue interest, original issue discount, or market
discount; when and to what extent deductions may be taken for bad debts or
worthless securities; how payments received on obligations in default should be
allocated between principal and income; and whether exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by a Fund, in the event it invests in such securities, in order to
seek to eliminate or minimize any adverse tax consequences.
TAXABLE U.S. SHAREHOLDERS - DISTRIBUTIONS
=========================================
For U.S. federal income tax purposes, distributions by a Fund, whether
reinvested in additional shares or paid in cash, generally will be taxable to
shareholders who are subject to tax. 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
they would have received had they elected to receive cash and will have a cost
basis in each share received equal to such amount divided by the number of
shares received.
Distributions from investment company taxable income for the year will
be taxable as ordinary income. Distributions designated as derived from a
Fund's dividend income, if any, that would be eligible for the dividends
received deduction if such Fund were not a regulated investment company may be
eligible, for the dividends received deduction for corporations. 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
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. Because eligible
dividends are limited to those a Fund receives from U.S. domestic corporations,
it is unlikely that a substantial portion of the distributions made by CORE
International Equity, International Equity, Asia Growth and Emerging Markets
Equity Funds will qualify for the dividends-received deduction. The entire
dividend, including the deducted amount, is considered in determining the
excess, if any, of a corporate shareholder's adjusted current earnings over its
alternative minimum taxable income, which may increase its liability for the
federal alternative minimum tax, and the dividend may, if it is treated as an
"extraordinary dividend" under the Code, reduce such shareholder's tax basis in
its shares of a Fund. Capital gain dividends (i.e., dividends from net capital
gain) if designated as such in a written notice to shareholders mailed not later
than 60 days after a Fund's taxable year closes, will be taxed to shareholders
as long-term capital gain regardless of how long shares have been held by
shareholders, but are not eligible for the dividends received deduction for
corporations. Distributions, if any, that are in excess of a Fund's current and
accumulated earnings and profits will first reduce a shareholder's tax basis in
his shares and, after such basis is reduced to zero, will generally constitute
capital gains to a shareholder who holds his shares as capital assets.
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.
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<PAGE>
TAXABLE U.S. SHAREHOLDERS - SALE OF SHARES
==========================================
When a shareholder's shares are sold, redeemed or otherwise disposed
of in a transaction that is treated as a sale for tax purposes, 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, 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, subject to the rules
described below. Shareholders should consult their own tax advisers with
reference to their particular circumstances to determine whether a redemption
(including an exchange) or other disposition of Fund shares is properly treated
as a sale for tax purposes, as is assumed in this discussion. If a shareholder
receives 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 a sale or redemption of
such shares, 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. All or a portion of any sales load paid upon the purchase of shares
of a Fund will not be taken into account in determining gain or loss on the
redemption or exchange of such shares within 90 days after their purchase to the
extent the redemption proceeds are reinvested, or the exchange is effected,
without payment of an additional sales load pursuant to the reinvestment or
exchange privilege. The load not taken into account will be added to the tax
basis of the newly-acquired 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 such Fund. If disallowed, the loss will be reflected in an adjustment
to the basis of the shares acquired.
Each Fund may be required to withhold, as "backup withholding,"
federal income tax at a rate of 31% from dividends (including capital gain
dividends) and share redemption and exchange proceeds to individuals and other
non-exempt shareholders who fail to furnish such Fund with a correct taxpayer
identification number ("TIN") certified under penalties of perjury, or if the
Internal Revenue Service or a broker notifies the Fund that the payee is subject
to backup withholding as a result of failing to properly report interest or
dividend income to the Internal Revenue Service or that the TIN furnished by the
payee to the Fund is incorrect, or if (when required to do so) the payee fails
to certify under penalties of perjury that it is not subject to backup
withholding. A Fund may refuse to accept an application that does not contain
any required TIN or certification that the TIN provided is correct. If the
backup withholding provisions are applicable, any such dividends and proceeds,
whether paid in cash or reinvested in additional 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.
NON-U.S. SHAREHOLDERS
=====================
The discussion above relates solely to U.S. federal income tax law as
it applies to "U.S. persons" subject to tax under such law. Shareholders who, as
to the United States, are not "U.S. persons," (i.e., are nonresident aliens,
foreign corporations, fiduciaries of foreign trusts or estates, foreign
partnerships or other non-U.S. investors) generally will be subject to U.S.
federal withholding tax at the rate of 30% on distributions treated as ordinary
income unless the tax is reduced or eliminated pursuant to a tax treaty or the
dividends are effectively connected with a U.S. trade or business of the
shareholder. In the latter 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 non-U.S.
shareholder will not be subject to U.S. federal 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
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<PAGE>
year and certain other conditions are met. Non-U.S. shareholders may also be
subject to U.S. federal withholding tax on deemed income resulting from any
election by CORE International Equity, International Equity, Emerging Markets
Equity or Asia Growth Funds 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 capital gain realized by a non-U.S. shareholder 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 U.S., or in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the U.S. 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 an
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 the Funds.
STATE AND LOCAL
===============
Each Fund may be subject to state or local taxes in jurisdictions in
which such Fund may be deemed to be doing business. In addition, in those
states or localities which have income tax laws, the treatment of such Fund and
its shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in such 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.
FINANCIAL STATEMENTS
The audited financial statements and related Reports of Independent
Public Accountants, contained in the 1997 Annual Report of each of the Funds,
are incorporated herein by reference into this Additional Statement and attached
hereto.
OTHER INFORMATION
Each Fund will redeem shares solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Fund during any 90-day period for
any one shareholder. Each Fund, however, reserves the right to pay redemptions
exceeding $250,000 or 1% of the net asset value of the 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 the
Fund's net asset value per share. See "Net Asset Value." If a shareholder
receives redemption proceeds in kind, the shareholder should expect to incur
transaction costs upon the disposition of the securities received in the
redemption.
The right of a shareholder to redeem shares and the date of payment by
each 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
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<PAGE>
not reasonably practicable for such 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 such Fund.
The Prospectus 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 Prospectus. Certain
portions of the Registration Statement have been omitted from the Prospectus and
this Additional Statement pursuant to the rules and regulations of the SEC. The
Registration Statement including the exhibits filed therewith may be examined
at the office of the SEC in Washington, D.C.
Statements contained in the Prospectus 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 Prospectus and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
B-73
<PAGE>
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Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
The U.S. equity market rewarded investors with excellent returns once
again in the 12-month period ended January 31, 1997. Most European markets
achieved significant gains as well, with several outpacing the U.S., while the
performance of Asian markets varied widely. We are pleased to report that most
of the Goldman Sachs equity funds performed very well in this generally
favorable global equity environment.
U.S. Stocks Continued to Climb Amid Heightened Volatility
The U.S. stock market surged to record levels during the period under
review, rising an impressive 26.3% (as measured by the Standard & Poor's 500
stock index). During 1996, the market advanced in a "staircase" pattern, where
notable gains are achieved within a relatively short time and are followed by a
period of choppy trading. For example, after a run-up from January through
mid-February, market volatility notably increased, as investor sentiment
vacillated between two contradictory concerns. With some economic news,
investors feared that the economy was growing too quickly, making higher
inflation a possibility, while other news caused them to worry that the economy
was slowing, putting earnings at risk. In May, investors briefly overcame their
fears and sent the market higher, but their concerns quickly re-emerged and
caused the market to settle into another choppy trading range that culminated in
a sharp sell-off in July.
By August, sentiment significantly improved when data indicated that
earnings growth was more resilient than generally expected and inflation
remained under control. Thus reassured, investors propelled stocks to record
highs during the second half of the period, with the Dow Jones Industrial
Average crossing the 6000 mark for the first time by mid-October. The ascent
continued through the end of the period, with the Dow climbing to 7000 by
mid-February 1997.
Though small-cap stocks led the market during the first half of the
year, the post-July rally was dominated by large-cap, growth companies.
Furthermore, the rally was very narrowly focused, with a handful of large-cap
stocks (primarily in the technology, finance and pharmaceutical sectors)
contributing substantially to the S&P 500 index's performance for the period.
After a Weak Start, Economic Growth Rebounded, Then Moderated
When the period began, lackluster consumer spending and the General
Motors strike restrained economic growth, but the economy still advanced faster
than expected, with first-quarter real GDP growth of 2.0% (annualized). Momentum
accelerated even more dramatically during the second quarter, as industrial
activity, automobile sales and home sales all showed significant improvement. As
a result, second-quarter real GDP rose a robust 4.7% (annualized), its highest
rate in two years.
The economy's torrid growth cooled markedly during the third quarter
with an annualized real GDP growth of 2.1%, largely due to lackluster consumer
spending and a widening U.S. trade deficit. This slowdown proved to be
temporary, however, as the economy strengthened from October through December.
Fourth-quarter real GDP
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Table of Contents
<S> <C>
Introduction/Market Overview............................................. 1
Goldman Sachs Balanced Fund.............................................. 4
Goldman Sachs Select Equity Fund......................................... 14
Goldman Sachs Growth and Income Fund..................................... 22
Goldman Sachs Capital Growth Fund........................................ 28
Goldman Sachs Small Cap Equity Fund...................................... 34
Goldman Sachs International Equity Fund.................................. 40
Goldman Sachs Asia Growth Fund........................................... 48
Financial Statements..................................................... 56
Notes to Financial Statements............................................ 64
Financial Highlights..................................................... 74
- --------------------------------------------------------------------------------
</TABLE>
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1
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
growth was revised to 3.9% (annualized), reflecting a narrowing trade deficit,
rising consumer spending and accelerating manufacturing activity. Despite firm
growth, underlying inflation remained surprisingly mild. For all of 1996,
consumer prices rose only 2.9%. In January 1997, most indicators suggested that
the economy would continue to advance.
The U.S. Federal Reserve cut the Federal funds rate by 25 basis
points in January 1996, just prior to the start of the period, in response to
generally poor year-end economic conditions. Though stronger than expected
growth shifted investor expectations from further Federal Reserve interest rate
cuts to potential tightening, the Fed then left rates unchanged. As of January
31, 1997, the Federal funds rate remained at 5.25%.
The Dollar Resumed Its Climb Against the Yen and the Mark Following a Brief July
Slide
During the period under review, the dollar continued to strengthen,
rising to a 47-month high against the yen and a 31-month high against the mark.
Though the dollar declined briefly in July along with the U.S. stock market, it
quickly rebounded in August and continued to rally through the end of the
period. The dollar's climb was reflective of several developments, including the
relative strength of the U.S. economy, reductions in the budget deficit and
controlled inflation. Despite the run-up, Goldman Sachs' economists do not
expect a major impact on U.S. growth in 1997, nor do they anticipate a major
decrease in exports, as the dollar's effect on U.S. trade flows is relatively
small and stretched out over time. Furthermore, domestic demand in Canada and
Mexico, which together accounted for nearly one-third of U.S. exports in 1996,
is expected to rise.
The International Market Environment: European Equities Performed Well, Japan
Declined Sharply and Asian Markets Were Mixed Amid Increased Volatility
During the period under review, most global economies experienced
modest growth, but long-awaited recoveries in Europe and Japan fell short of
expectations. In Europe, several major economies, such as Germany and France,
continued to be plagued by weaker than expected manufacturing activity and
record-high unemployment, while others, such as the U.K., clearly accelerated.
In contrast to the mixed economic conditions, most European equity markets
performed very well, buoyed by healthy corporate profits. Though the Japanese
economy strengthened, equities declined due to concerns regarding the
sustainability of earnings growth as well as fears that the newly elected
government would delay deregulation. In January 1997, the already weak Japanese
market sold off sharply when the government announced an austerity program that
was expected to curb growth. In other Asian countries, key elections heightened
political uncertainty throughout the region and a marked slowdown in economic
growth increased volatility.
Outlook in the U.S.: Economic Growth Is Expected to Continue to Strengthen
Goldman Sachs' economists expect first-quarter real GDP growth to
slow to just under 2.0% (annualized) due to a widening trade deficit. However,
this slowdown should not be interpreted as any change in economic fundamentals,
as underlying demand remains firm and consumer confidence, income and employment
trends continue to support consumer spending. The favorable economic environment
of moderate growth and low inflation appears likely to persist in the near term,
which could translate to a seventh year of profit growth for U.S. corporations
in 1997 and another good year for U.S. equities, though not likely as strong as
last year. As always, equity performance can be affected by changes in the
economic environment, such as higher than expected inflation, which could lead
to a Fed tightening by midyear, or an unforeseen faltering of economic growth.
After the outstanding performance of the past two years, it is
important to maintain realistic expectations from your equity investments. As
increased volatility during 1996 demonstrated, equities can go down as well as
up. Over the long run, however, stocks have historically outperformed other
asset classes, rewarding investors committed to a long-term investment horizon.
- --------------------------------------------------------------------------------
2
<PAGE>
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A Major Addition to Our Active Equity Management Team
We are pleased to announce that we have recently acquired Liberty
Investment Management, a Tampa, Florida-based investment advisory firm with an
impressive 16-year track record. Liberty's Chief Investment Officer, Herbert
Ehlers, and his portfolio management team have assumed primary responsibility
for the Goldman Sachs Capital Growth Fund, which they will manage using a
"growth at a reasonable price" investment style. The Liberty group adds both
breadth and depth to the Goldman Sachs U.S. Active Equity team, and we look
forward to working with them.
In conclusion, thank you for making the Goldman Sachs equity funds part of
your long-term financial plan.
Sincerely,
/s/ David B. Ford /s/ John P. McNulty
David B. Ford John P. McNulty
Co-Head, Co-Head,
Goldman Sachs Goldman Sachs
Asset Management Asset Management
March 3, 1997
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3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Balanced Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Balanced Fund seeks to provide investors with a
combination of long-term growth of capital and current income by investing in a
diversified portfolio that includes both equity and fixed income securities.
Under normal market conditions, the fund is expected to maintain an asset mix of
45% to 65% in equity securities, with the remainder (at a minimum 25%) in fixed
income securities. The fund's portfolio management team will review the fund's
asset mix on a regular basis and adjust it to reflect changes in the economic
environment.
Stocks are selected using a value style, identifying those judged to
be inexpensive relative to their expected long-term earnings and ability to pay
dividends. We also consider the degree to which a company's management is
committed to increasing value for shareholders.
In the fixed income portion of the portfolio, we actively manage the
portfolio within a risk-controlled framework. We seek to minimize interest rate
risk relative to the portfolio's benchmark, and focus on seeking to add value
through sector selection, security selection and yield curve strategies.
Performance Review: Equity, Fixed Income and Asset Allocation Contributed to
Strong Results
<TABLE>
<CAPTION>
Fund Total Return
(based on net Benchmark
asset value) Total Return+
------------ -------------
<S> <C> <C>
Class A (1/31/96 - 1/31/97)* 18.59% 15.51%
Class B (5/1/96 - 1/31/97)* 16.22% 14.99%
</TABLE>
* Class A and B share performance assumes reinvestment of all dividends and
distributions, a complete redemption at the net asset value at the end of the
period and no initial sales charge or contingent deferred sales charge.
Performance for Class B shares is a cumulative total return (not annualized)
from their inception through the end of the period.
+ The benchmark is a combination of the S&P 500 stock index (weighted at 55%)
and the Lehman Brothers Aggregate Bond Index (weighted at 45%).
We are pleased to report that during the period under review, the
fund's Class A and Class B shares outperformed the benchmark. In addition, the
fund's Class A shares ranked within the top 15% of the Lipper balanced fund
category (35th of 281) for the 12-month period ended January 31, 1997, according
to Lipper Analytical Services, Inc. (Please note that Lipper rankings do not
take sales charges into account and that past performance is not a guarantee of
future results. Class B shares were not ranked because they did not exist during
the full year.)
The equity and fixed income portions of the fund both performed
favorably, with equity investments contributing most to fund results. In
addition, our asset allocation decisions also benefited performance. During the
spring of 1996, we reduced the fund's equity weightings in favor of fixed income
investments, which worked in its favor when equities fell sharply in July. In
October, we increased the fund's equity weighting, just prior to a significant
rally in the stock market. As of January 31, 1997, the fund's asset mix based on
net assets was 54% in equities, 42% in fixed income and the remainder in cash
equivalents.
Best Performing Equity Investments Included Technology, Finance and Energy
Stocks
The fund's best performing stocks came from a wide range of
industries, particularly technology, finance and energy. Technology holdings
that performed well included Intel Corp., the dominant microprocessor
manufacturer, which we sold after it climbed sharply due to stronger than
expected personal computer sales and reached our target price, and Avnet, Inc.,
the second largest distributor of semiconductors and other electronic
components. In the financial sector, BankAmerica Corp. increased its focus on
aggressive capital management, and NationsBank Corp. began to realize the
benefits of cost cuts. Top-performing energy-related investments were Tosco
Corp., an oil refiner and distributor, which continued its ambitious acquisition
strategy, and Texaco Inc., which benefited from higher petroleum prices and a
successful restructuring program. Disappointing performers included three
companies that suffered from
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
overcapacity in their respective industries: Georgia-Pacific Corp. and Stone
Container Corp., both manufacturers of paper products, and Geon Corp., a
manufacturer of polyvinyl chloride.
One of the fund's new investments was Unicom Corp., an electric
utility that operates 12 nuclear units at six sites. Unicom generates excess
capital and, unlike many other electric utilities, has no utility power purchase
problems. We established a position after its stock price declined due to a
mandated increase in spending on operations and maintenance, an issue that
management believes will not impair the company's long-term prospects. During
the period, we sold several stocks after they appreciated and reached our price
targets, including Anheuser-Busch Co., Inc., the world's largest brewer, and
Greenpoint Financial Corp., a New York-based thrift.
<TABLE>
<CAPTION>
Top 10 Equity Holdings as of January 31, 1997
Percentage of
Total
Company Line of Business Net Assets
<S> <C> <C>
Aetna Inc. Healthcare 1.9%
Management
Tenet Healthcare Corp. Hospitals 1.9%
Cigna Corp. Insurance 1.7%
Lear Corp. Autoparts/Original 1.7%
Equipment
Brunswick Corp. Pleasure 1.7%
Boats/Marine
Engines
Goodyear Tire & Rubber Co. Tire and Rubber 1.6%
Products
Dean Witter Discover & Co. Financial Services 1.6%
Avnet, Inc. Electronic 1.5%
Components
Distributor
Philip Morris Companies, Tobacco and Food 1.5%
Inc. Products
Owens-Illinois, Inc. Packaging 1.5%
</TABLE>
Corporate and Emerging Market Debt Sectors Led the Fund's Fixed Income
Performance
The fixed income sectors that contributed most to the fund's
performance were its corporate bond holdings and emerging market debt
securities. Corporate bonds benefited when many companies reported positive
earnings growth throughout the period. Emerging market debt was one of the
fund's smaller allocations during the year but performed extremely well due to
positive emerging country credit trends and supportive cash flows resulting from
global investors' persistent search for incremental yield. In addition, the
fund's investments in the mortgage and asset-backed sectors also performed well,
reflecting healthy investor demand.
The fund's largest fixed income allocation was mortgage-backed
securities (MBS), which accounted for a 12.9% position in terms of total net
assets, up from 10.0% a year ago. The MBS sector fared particularly well during
the first half of the period, when interest rates rose and prepayment fears
abated. We gradually trimmed the fund's exposure in the corporate bond sector to
9.8%, down from 13.2% a year ago, as it became more fully valued. The fund's
asset-backed securities (ABS) weighting was 4.8%, and they continued to offer
incremental yield over similar duration Treasuries. U.S. Treasuries, with an
8.5% allocation, were used together with futures to manage the fund's interest
rate risk. Finally, 3.3% of the fund was invested in emerging market debt, where
we stressed higher credit, short-duration bonds, and 0.7% was invested in
government agency securities.
Outlook
We believe that, overall, the stock market is moderately overvalued
and is therefore unlikely to match the strong return it achieved in 1996.
However, it is important to note that even after last year's rally, the fund's
equity holdings continue to be attractively valued. We expect that our emphasis
on using extensive fundamental research to identify stocks selling below their
- --------------------------------------------------------------------------------
5
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Balanced Fund (continued)
- --------------------------------------------------------------------------------
intrinsic value will continue to serve us well in 1997's potentially more
challenging stock market environment.
We have a relatively cautious view of the fixed income markets in the
coming months due to a possible tightening by the Federal Reserve later in the
year, which would impact the prices of fixed income securities. In the MBS
market, the pace of mortgage prepayments remains stable, and we continue to
identify specific securities that present attractive investment opportunities.
We have a moderately optimistic view for the corporate sector, where we will
continue to emphasize short-duration bonds that offer attractive incremental
yield over Treasuries. Finally, we believe ABS still offer attractive value
relative to other similarly rated securities, and we expect new supply to
continue to be met with enthusiastic demand.
Going forward, we will continue to actively allocate the portfolio's
asset mix between the equity and fixed income sectors to take advantage of
changing market conditions throughout the coming year.
/s/ Ronald E. Gutfleish /s/ Jonathan A. Beinner
Ronald E. Gutfleish Jonathan A. Beinner
Senior Portfolio Manager, Co-Head,
U.S. Active Equity Value U.S. Fixed Income
/s/ G. Lee Anderson /s/ c. Richard Lucy
G. Lee Anderson C. Richard Lucy
Portfolio Manager, Co-Head,
U.S. Active Equity Value U.S. Fixed Income
/s/ Eileen A. Aptman /s/ Richard H. Buckholz
Eileen A. Aptman Richard H. Buckholz
Portfolio Manager, Portfolio Manager,
U.S. Active Equity Value U.S. Fixed Income
March 3, 1997
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Balanced Fund
January 31, 1997
- --------------------------------------------------------------------------------
The following graphs show the value as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's
benchmarks (the Standard and Poor's 500 index ("S&P 500") and the Lehman
Brothers Aggregate Bond Index (LBABI)) are shown for the appropriate time
periods. All performance data shown represents past performance and should not
be considered indicative of future performance which will fluctuate with changes
in market conditions. These performance fluctuations will cause an investor's
shares, when redeemed, to be worth more or less than their original cost.
<TABLE>
<CAPTION>
Class A
[LINE GRAPH APPEARS HERE]
GS Balanced GS Balanced
Class A Class A
(w/sales charge) (no sales charge) LBABI S&P 500
---------------- ----------------- ----- -------
<S> <C> <C> <C> <C>
10/12/94 9,450 10,000 10,000 10,000
1/31/95 9,532 10,087 10,233 10,184
1/31/96 12,211 12,922 11,966 14,123
1/31/97 14,488 15,331 12,357 17,842
<CAPTION>
Class B
[LINE GRAPH APPEARS HERE]
GS Balanced GS Balanced
Class B Class B
(no redemp. charge) (w/redemp. charge) LBABI S&P 500
------------------- ------------------ ----- -------
<S> <C> <C> <C> <C>
5/1/96 10,000 10,000 10,000 10,000
1/31/97 11,622 11,122 10,642 12,218
</TABLE>
---------------------------------------
Average Annual Total Return
---------------------------------------
One Year Since Inception/(a)/
------------------------------- ------------------ -------------------
Class A, no sales charge 18.59% 20.32%
------------------------------- ------------------ -------------------
Class A, w/sales charge 12.07% 17.41%
------------------------------- ------------------ -------------------
Class B, no redemption charge N/A 16.22%/(b)/
------------------------------- ------------------ -------------------
Class B, w/redemption charge N/A 11.22%/(b)/
------------------------------- ------------------ -------------------
/(a)/ Class A and B shares commenced operations October 12, 1994 and May 1,
1996, respectively.
/(b)/ An aggregate total return (not annualized) is shown instead of an average
annual total return since this class has not completed a full twelve
months of operations.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Balanced Fund
January 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks--53.0%
Airlines--1.8%
7,700 AMR Corp.* $ 619,850
32,600 Continental Airlines, Inc.* 908,725
- --------------------------------------------------------------------
1,528,575
- --------------------------------------------------------------------
Appliance Manufacturer--0.9%
28,600 Sunbeam Corp. 793,650
- --------------------------------------------------------------------
Auto/Original Equipment Manufacturer--1.7%
38,200 Lear Corp.* 1,427,725
- --------------------------------------------------------------------
Auto/Vehicle--1.0%
25,600 Ford Motor Co. 824,400
- --------------------------------------------------------------------
Banks--4.5%
10,300 BankAmerica Corp. 1,149,738
5,300 Chase Manhattan Corp. 490,250
9,400 Fleet Financial Group, Inc. 507,600
9,300 NationsBank Corp. 1,004,400
7,400 Republic Bank of New York Corp. 655,825
- --------------------------------------------------------------------
3,807,813
- --------------------------------------------------------------------
Chemicals-Commodity--1.1%
31,400 Geon Co. 588,750
7,600 Union Carbide Corp. 344,850
- --------------------------------------------------------------------
933,600
- --------------------------------------------------------------------
Defense--2.1%
17,900 McDonnell Douglas Corp. 1,203,775
6,200 Northrop Grumman Corp. 484,375
1,900 Thiokol Corp. 106,400
- --------------------------------------------------------------------
1,794,550
- --------------------------------------------------------------------
Department Stores--0.8%
13,900 Sears Roebuck & Co. 667,200
- --------------------------------------------------------------------
Electric Utilities--2.8%
5,500 CMS Energy Corp. 184,250
43,000 Long Island Lighting Co. 978,250
49,600 Unicom Corp. 1,171,800
- --------------------------------------------------------------------
2,334,300
- --------------------------------------------------------------------
Food--1.5%
40,200 Chiquita Brands International, Inc. 587,925
4,000 Unilever Inc. 658,000
- --------------------------------------------------------------------
1,245,925
- --------------------------------------------------------------------
Forest Products--1.1%
12,400 Georgia Pacific Corp. 912,950
- --------------------------------------------------------------------
Health Suppliers/Services--1.3%
23,300 Baxter International, Inc. 1,074,713
- --------------------------------------------------------------------
Healthcare Management--3.8%
20,400 Aetna Inc. 1,611,600
57,800 Tenet Healthcare Corp.* 1,560,600
- --------------------------------------------------------------------
3,172,200
- --------------------------------------------------------------------
Home Builders--1.8%
18,200 Centex Corp. 709,800
28,200 Lennar Corp. 750,825
- --------------------------------------------------------------------
1,460,625
- --------------------------------------------------------------------
Insurance-Life--2.5%
9,500 Cigna Corp. 1,440,438
11,700 Lincoln National Corp. 627,413
- --------------------------------------------------------------------
2,067,851
- --------------------------------------------------------------------
Insurance-Property and Casualty--1.6%
9,200 Allmerica Financial Corp. 336,950
16,100 Partner Re Holding Ltd. 571,550
12,700 Tig Holdings, Inc. 439,738
- --------------------------------------------------------------------
1,348,238
- --------------------------------------------------------------------
Integrated Oil--2.6%
8,100 Atlantic Richfield Co. 1,071,225
10,300 Texaco, Inc. 1,090,513
- --------------------------------------------------------------------
2,161,738
- --------------------------------------------------------------------
Logistics/Rail--1.0%
30,400 Canadian Pacific Ltd. 824,600
- --------------------------------------------------------------------
Logistics/Trucking--1.2%
39,600 Consolidated Freightways, Inc. 1,004,850
- --------------------------------------------------------------------
Oil Refining & Marketing--1.9%
12,800 Ashland Inc. 552,000
11,300 Tosco Corp. 1,000,050
- --------------------------------------------------------------------
1,552,050
- --------------------------------------------------------------------
Packaging--1.5%
52,500 Owens-Illinois Inc.* 1,246,875
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
8
<PAGE>
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Recreational Products--1.7%
55,500 Brunswick Corp. $ 1,394,438
- --------------------------------------------------------------------
Security and Commodity Brokers, Dealers and Services--0.5%
13,100 Lehman Brothers Holdings, Inc. 414,288
- --------------------------------------------------------------------
Semiconductors & Electronics--1.5%
20,700 Avnet Inc. 1,280,813
- --------------------------------------------------------------------
Software--0.5%
13,800 Autodesk Inc. 436,425
- --------------------------------------------------------------------
Specialty Finance--1.6%
34,200 Dean Witter Discover & Co. 1,303,875
- --------------------------------------------------------------------
Steel--1.0%
20,200 AK Steel Holding Corp. 813,050
- --------------------------------------------------------------------
Supermarkets--2.0%
56,300 Fleming Companies, Inc. 907,838
24,600 Supervalu, Inc. 759,525
- --------------------------------------------------------------------
1,667,363
- --------------------------------------------------------------------
Textiles--1.3%
27,500 Fruit of The Loom, Inc.* 1,103,438
- --------------------------------------------------------------------
Tire & Other Related Rubber Products--1.6%
24,000 Goodyear Tire & Rubber Co. 1,308,000
- --------------------------------------------------------------------
Tobacco--2.8%
4,200 Loews Corp. 415,275
10,700 Philip Morris Companies, Inc. 1,271,963
12,100 RJR Nabisco, Inc. 396,275
8,500 Universal Corp. 263,500
- --------------------------------------------------------------------
2,347,013
- --------------------------------------------------------------------
Total Common Stocks
(Cost $35,773,086) $44,253,131
====================================================================
Preferred Stocks--0.1%
Media Content--0.1%
63 Time Warner, Inc. 10.25% $ 69,064
- --------------------------------------------------------------------
Tobacco--0.0%
3,400 RJR Nabisco, Inc., class C 9.25% 22,525
- --------------------------------------------------------------------
Total Preferred Stocks
(Cost $84,320) $ 91,589
====================================================================
Rights--1.1%
Forest Products--0.7%
42,000 Stone Container Corp. * exp. 08/08/98 $ 567,000
Technology Capital Goods--0.4%
10,800 Teradyne, Inc.* exp. 03/26/00 333,450
- --------------------------------------------------------------------
Total Rights
(Cost $923,718) $ 900,450
====================================================================
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
====================================================================
<S> <C> <C> <C>
Fixed Income--41.5%
Asset-Backed Securities--4.8%
Airplanes Pass Through Trust Series 1, Class C
$ 100,000 8.15% 03/15/19 $ 102,655
Asset Securitization Corp., Series 1996, Class A1
250,000 6.88 11/13/26 249,609
Case Equipment Loan Trust, Series 1995-A, Class A
74,286 7.30 03/15/02 75,124
Chemical Bank Master Credit Card Trust, Series 1995-2, Class A
140,000 6.23 06/15/03 139,343
Chevy Chase Auto Receivables Trust Series 1995-2, Class A
74,323 5.80 06/15/02 74,137
Discover Card Master Trust 1994-2, Class A
70,000 5.83 10/16/04 70,613
Discover Card Master Trust 1996-2, Class A
110,000 5.70 07/18/05 110,550
Discover Card Master Trust 1996-4, Class A
740,000 5.86 10/16/13 751,329
Discover Card Master Trust 1996-4, Class B
420,000 6.03 10/16/13 424,460
Fasco Auto Trust, Series 1996-1
266,114 6.65 11/15/01 267,223
Fingerhut Master Trust, Series 1996-1, Class A
200,000 6.45 02/20/02 200,936
Navistar Financial Trust, Series 1995-A, Class A2
134,590 6.55 11/20/01 135,347
Navistar Financial Trust, Series 1995-b, Class A3
120,000 6.05 04/15/02 120,000
Sears Credit Account Master Trust, Series 1995-2, Class A
700,000 8.10 06/15/04 733,026
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
9
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Balanced Fund (continued)
January 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
====================================================================
<S> <C> <C> <C>
Asset-Backed Securities (continued)
Sears Credit Card Master Trust, Series 1995-3, Class A
$ 70,000 7.00% 10/15/04 $ 71,268
Standard Credit Card Master Trust, Series 1994-4, Class A
110,000 8.25 11/07/03 117,322
Standard Credit Card Master Trust, Series 1995-1, Class A
360,000 8.25 01/07/07 389,135
- --------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $4,019,726) $ 4,032,077
====================================================================
Corporate Bonds--9.8%
Finance Bonds--3.6%
BankAmerica Corp.
$ 500,000 7.75% 07/15/02 $ 520,600
Capital One Bank
200,000 8.33 02/10/97 200,056
250,000 8.13 02/27/98 254,825
Conseco Finance
120,000 8.70 11/15/26 122,912
Continental Bank
100,000 12.50 04/01/01 120,501
Countrywide Funding Corp.
100,000 6.08 07/14/99 99,368
150,000 8.00 12/15/26 147,029
Edison Mission Energy Funding Corp.
100,000 6.77 09/15/03 99,852
Fleet Mortgage Group, Inc.
250,000 6.50 06/15/00 248,888
Golden West Financial Corp.
200,000 10.25 12/01/00 223,894
Meditrust, Inc.
120,000 7.82 09/10/26 128,021
Mic Finance Trust
80,000 8.38 02/01/27 80,442
Olympic Financial Ltd.
95,000 13.00 05/01/00 107,350
PXRE Cap Trust
65,000 8.85 02/01/27 65,847
Signet Banking Corp.
$ 500,000 9.63% 06/01/99 $ 531,870
Washington Real Estate
55,000 7.13 08/13/03 54,745
- --------------------------------------------------------------------
Total Finance Bonds
(Cost $3,035,271) $ 3,006,200
====================================================================
Industrial Bonds--5.6%
360 Communications Co.
$ 195,000 7.13% 03/01/03 $ 193,518
Auburn Hills Trust
90,000 12.00 05/01/20 134,352
Blockbuster Entertainment
50,000 6.63 02/15/98 49,995
Chelsea GCA Realty
226,000 7.75 01/26/01 228,362
DVI Equipment Lease Trust
434,745 6.55 07/10/04 434,605
Ford Motor Credit Co.
40,000 8.38 01/15/00 42,038
General Motors Acceptance Corp.
170,000 7.13 05/10/00 173,087
210,000 5.63 02/05/01 202,810
H + T Master Trust, Class A2
220,000 8.18 08/15/02 220,000
K Mart Corp.
40,000 9.55 06/30/98 40,290
40,000 9.60 09/15/98 40,845
Loewen Group International
50,000 7.75 10/15/01 50,000
News America Holdings, Inc.
160,000 7.50 03/01/00 163,784
Northwest Airlines
217,076 8.97 01/02/15 226,558
NWA
68,025 8.26 03/10/06 71,149
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
10
<PAGE>
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
====================================================================
<S> <C> <C> <C>
Corporate Bonds (continued)
Industrial Bonds (continued)
Oryx Energy Co.
$ 245,000 9.50% 11/01/99 $ 259,252
RJR Nabisco Inc.
135,000 8.00 07/15/01 136,184
160,000 8.63 12/01/02 164,654
Rogers Cablesystems, Inc.
115,000 9.63 08/01/02 119,600
Tele-Communications, Inc.
295,000 6.19 09/15/03 292,956
125,000 9.65 10/01/03 133,951
20,000 6.82 09/15/10 19,899
Tenet Healthcare Corp.
60,000 9.63 09/01/02 65,100
Time Warner, Inc.
375,000 7.45 02/01/98 378,776
125,000 9.63 05/01/02 139,444
250,000 7.98 08/15/04 256,243
Tosco Corp.
110,000 7.00 07/15/00 110,793
U.S. Home Corp.
70,000 7.95 03/01/01 68,250
USI American Holdings Corp.
60,000 7.25 12/01/06 58,540
Viacom International
80,000 9.13 08/15/99 81,800
95,000 10.25 09/15/01 103,550
- --------------------------------------------------------------------
Total Industrial Bonds
(Cost $4,650,412) $ 4,660,385
====================================================================
Utility Bonds--0.6%
Arkla Inc.
$ 250,000 9.20% 12/18/97 $ 255,665
Central Maine Power Co.
100,000 7.38 01/01/99 100,138
160,000 7.45 08/30/99 159,134
- --------------------------------------------------------------------
Total Utility Bonds
(Cost $521,661) $ 514,937
====================================================================
- --------------------------------------------------------------------
====================================================================
Total Corporate Bonds
(Cost $8,207,344) $ 8,181,522
====================================================================
Government Bonds--1.2%
Australia Commonwealth
AUD1,000,000 7.50% 07/15/05 $ 769,138
Province of Quebec
$ 200,000 13.25 09/15/14 238,976
- --------------------------------------------------------------------
Total Government Bonds
(Cost $1,033,387) $ 1,008,114
====================================================================
Emerging Market Debt--3.3%
Argentina Bocan
$ 144,111 5.69% 04/01/01 $ 138,490
Asia Pulp and Paper International Finance Co.
100,000 7.26(a) 04/03/97 98,614
200,000 8.30 06/28/99 198,118
90,000 10.25 10/01/00 90,754
Banco De Commercio Exterior
30,000 8.63 06/02/00 30,979
BCO De Colombia
110,000 8.63 06/02/00 113,590
Bridas Corp.
170,000 12.50 11/15/99 181,433
Bridas Corp. Gtd Euro Medium
60,000 9.50 06/17/99 60,147
Corp. Andina de Fomento
160,000 7.25 04/30/98 161,774
Emp Ica Soc Contro
110,000 9.75 02/11/98 111,440
Empresa Col Petroleos
80,000 7.25 07/08/98 80,566
Financiera Energy Nacional
230,000 5.88 02/17/98 226,062
60,000 8.13 04/09/98 60,347
200,000 8.46 06/19/98 201,876
80,000 9.38 06/15/06 82,847
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
11
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Balanced Fund (continued)
January 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
====================================================================
<S> <C> <C> <C>
Emerging Market Debt (continued)
Grupo Industrial Durango
$ 120,000 12.00% 07/15/01 $ 127,978
Grupo Televisa
20,000 11.38 05/15/03 21,425
Imexsa Export Trust
100,000 10.13 05/31/03 104,190
Inst Fomento Industrial
290,000 8.38 07/29/01 295,707
PT Indah Kiat
50,000 8.88 11/01/00 49,518
Republic of Argentina
89,600 8.63 04/06/98 90,730
150,000 5.63 04/01/00 75,600
Sampoerna International
50,000 8.38 06/15/06 51,208
YPF Sociedad Anonima
111,483 7.50 10/26/02 113,132
- --------------------------------------------------------------------
Total Emerging Market Debt
(Cost $2,710,872) $ 2,766,525
====================================================================
Government Agency Obligations--0.7%
Federal National Mortgage Association
$ 520,000 8.50% 02/01/05 $ 545,917
- --------------------------------------------------------------------
Total Government Agency Obligations
(Cost $566,963) $ 545,917
====================================================================
Mortgage Backed Obligations--12.9%
Federal Home Loan Mortgage Corp.
$ 2,000,000 7.50% TBA-30yr/(b)/ $ 2,003,740
Federal National Mortgage Association
2,000,000 8.00 TBA-30yr/(b)/ 2,042,500
1,000,000 6.50 TBA-15yr/(b)(d)/ 990,930
95,702 8.50 09/01/06/(d)/ 100,068
119,291 8.50 03/01/07/(d)/ 124,733
677,419 8.50 03/01/10/(d)/ 707,985
1,000,000 3.50 05/25/19 869,370
====================================================================
Government National Mortgage Association
$ 1,000,000 7.50% TBA-30yr/(b)/ $ 1,002,180
963,086 7.50 05/15/23 969,404
1,005,709 7.00 07/15/23 990,311
1,000,000 7.00 08/15/23 984,690
- --------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $10,687,107) $10,785,911
====================================================================
Sovereign Credit--0.2%
State of Israel
$ 150,000 6.38% 12/15/05 $ 141,983
- --------------------------------------------------------------------
Total Sovereign Credit
(Cost $139,082) $ 141,983
====================================================================
U.S. Treasury Obligations--8.5%
United States Treasury Bonds
$ 470,000 12.00% 08/15/13/(d)/ $ 666,592
120,000 8.75 05/15/17/(d)/ 144,619
30,000 8.88 08/15/17 36,595
580,000 8.75 05/15/20 704,068
160,000 8.75 08/15/20/(d)/ 194,400
680,000 7.63 02/15/25 743,430
United States Treasury Notes
1,200,000 6.88 08/31/99 1,223,628
1,000,000 6.13 07/31/00 999,220
900,000 7.88 11/15/04 977,202
United States Treasury Principal Only Stripped Securities/(a)/
80,000 6.03/(a)/ 08/15/99 68,774
740,000 6.55/(a)/ 11/15/04/(d)/ 447,552
320,000 6.59/(a)/ 05/15/05 186,781
2,200,000 7.09/(a)/ 02/15/19 473,968
890,000 7.10/(a)/ 05/15/20 175,205
- --------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $7,102,563) $ 7,042,034
====================================================================
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
12
<PAGE>
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
====================================================================
<S> <C> <C> <C>
Yankee Bonds--0.1%
Korea Electric Power
$ 93,927 7.40% 04/01/16 $ 93,712
- --------------------------------------------------------------------
Total Yankee Bonds
(Cost $90,825) $ 93,712
====================================================================
Total Fixed Income
(Cost $34,557,869) $34,597,795
- --------------------------------------------------------------------
Short-Term Obligations--0.2%
Argentina Treasury Bill
$ 40,000 6.00%/(a)/ 02/14/97 $ 39,896
Banco Nacional de Com
50,000 10.63 06/23/97 51,291
Republic of Argentina
90,000 6.29(a) 05/16/97 88,166
- --------------------------------------------------------------------
Total Short-Term Obligations
(Cost $179,353) $ 179,353
====================================================================
Repurchase Agreement--11.0%
Joint Repurchase Agreement Account
$ 9,200,000 5.63% 02/03/97/(d)/ $ 9,200,000
- --------------------------------------------------------------------
Total Repurchase Agreement
(Cost $9,200,000) $ 9,200,000
====================================================================
Total Investments
(Cost $80,718,346)/(c)/ $89,222,318
====================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 9,461,225
Gross unrealized loss for investments in which
cost exceeds value (981,857)
- --------------------------------------------------------------------
Net unrealized gain $ 8,479,368
====================================================================
<CAPTION>
- --------------------------------------------------------------------
====================================================================
Futures contracts open at January 31, 1997 are as follows:
Number of
Contracts Settlement Unrealized
Type Long(e) Month Gain(Loss)
- ------------------------- ------------ --------------- -----------
<S> <C> <C> <C>
2-Year U.S. Treasury Note 5 March 1997 $(3,438)
10-Year U.S. Treasury Bond 15 March 1997 (25,500)
30-Year U.S. Treasury Bond 2 March 1997 (3,969)
S&P 500 Stock Index 4 March 1997 123,100
- -------------------------------------------------------------------
$90,193
- -------------------------------------------------------------------
</TABLE>
* Non-income producing security.
/(a)/ The interest rate disclosed for these securitites represents effective
yields to maturity.
/(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 aggregate cost for federal income tax purposes is $80,742,950.
/(d)/ Portions of these securities are being segregated as collateral for
futures contracts, TBA (To Be Assigned) securities, covered short sales
and/or mortgage dollar rolls.
/(e)/ Each 2-Year U.S. Treasury Note contract represents $200,000 in notional
par value. Each 10-Year and 30-Year U.S. Treasury Bond contract represents
$100,000 in notional par value. Each S&P 500 Stock Index represents
$50,000 in notional par value. The total net notional amount and market
value at risk are $2,900,000 and $4,463,969, 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 percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Select Equity Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Select Equity Fund is designed to provide investors with
a broadly diversified portfolio that can be used as a core holding on which to
build an investment program. The fund's investment objective is to provide
investors with long-term growth of capital and dividend income through
investment in a broadly diversified portfolio of predominantly large-cap and
blue-chip equity securities representing all major sectors of the U.S. economy.
The fund's mandate is to remain fully invested with industry diversification,
capitalization and risk characteristics similar to the aggregate U.S. stock
market as represented by the S&P 500 stock index. Therefore, the fund's relative
performance compared with the market comes almost exclusively from stock
selection within sectors. We believe the fund offers investors an attractive
combination of value and growth, without assuming more risk than the broad
market.
The fund employs a disciplined approach that combines fundamental
investment research provided by the Goldman Sachs Global Investment Research
Department with quantitative analysis generated by the Asset Management
Division's proprietary model. Our quantitative system evaluates each stock using
many different criteria including valuation measures, growth expectations,
earnings momentum and risk. It also objectively analyzes the impact of current
economic conditions on different types of stocks. Those stocks ranked highly by
both our quantitative model and by Goldman Sachs research are selected for the
fund's portfolio.
Performance Review: Quantitative Model Contributed to the Fund's Performance
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fund Total
Return S&P 500
(based on net Total
asset value) Return
----------- ------
<S> <C> <C>
Class A (1/31/96 -1/31/97)* 23.75% 26.25%
Class B (5/1/96 -1/31/97)* 18.59% 22.18%
Institutional (1/31/96 -1/31/97)* 24.63% 26.25%
Service (6/7/96 - 1/31/97)* 15.92% 18.36%
</TABLE>
- --------------------------------------------------------------------------------
* Class A, B, Institutional and Service share performance assumes reinvestment
of all dividends and distributions, a complete redemption at the net asset value
at the end of the period and no initial sales charge or contingent deferred
sales charge. Performance for Class B and Service shares is a cumulative total
return (not annualized) from their inception through the end of the period.
During the period, the fund achieved strong absolute returns, with most of
its gains occurring in the second half of the year. When the period began, the
fund performed well primarily due to successful stock selection. The Research
Department's qualitative ratings were particularly helpful early in the period,
when its analysis helped the fund steer clear of underperforming stocks. During
the latter half of the year, most of the fund's positive performance came from
the Asset Management Division's quantitative model.
Of the three themes considered by our quantitative model -- value, growth
and low-risk -- stocks with value-oriented features, such as low price/earnings
ratios, received the highest weighting during most of the period. This emphasis
did not work in the fund's favor during the second and third quarters of 1996,
when stocks with growth characteristics (strong near-term growth expectations
and high price/earnings multiples) outperformed value-oriented stocks. In the
fourth quarter, however, our emphasis on value proved to be extremely
successful, as stocks with value characteristics soared to record highs and
outperformed the other themes by a substantial margin. As a result of this
dramatic rebound, value emerged as the dominant investment style for the year.
Despite the positive results from our quantitative model, the fund
underperformed the index because it was
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
unable to keep pace with the dramatic outperformance of the largest 50 stocks,
which accounted for a significant portion of the market's gains. In addition,
the fund held a slightly higher cash position than usual as the volume of new
assets invested in the fund rapidly increased, particularly during the fourth
quarter, when the top 50 stocks surged. To address this issue, at the end of
1996 the fund instituted new procedures to ensure that cash balances will be
invested more rapidly. Furthermore, we expect that any future market advance
will broaden to include stocks beyond the top 50.
The fund's best performers were large-capitalization stocks from a wide
range of sectors, including banks (BankAmerica Corp. and NationsBank Corp.),
technology companies (Intel Corp., Microsoft Corp. and IBM Corp.), consumer
staples (Procter & Gamble Co.), electrical equipment (General Electric Co.) and
tobacco (Philip Morris Companies, Inc.).
Stocks that fell short of our expectations included some of the fund's
utility, telecommunication and oil investments such as Unicom Corp., Airtouch
Communications, Inc. and Tenneco, Inc.
Portfolio Composition: Model Increasingly Favored Stocks With Defensive
Characteristics
As of January 31, 1997, the fund held 141 stocks. While its sector
exposures were generally in line with the S&P 500 index, the fund was
overweighted in electric/gas (5.8% for the fund versus 3.3% for the S&P 500) and
energy (10.1% versus 8.0%) and underweighted in consumer nondurables (10.2%
versus 12.9%) and telecommunications (3.9% versus 6.3%). These over- and
underweightings, as shown in Table II, were the result of the fund's stock
selection process and were not a reflection of our economic forecast for
specific sectors.
During the first quarter of 1996, the Fund's quantitative model favored
growth characteristics (such as earnings momentum and price momentum) and put a
smaller, but still positive, weight on stocks with value or low-risk
characteristics (e.g., low beta and low "disappointment" risk). As the year
progressed, the fund's strategy became somewhat more defensive as our
quantitative model increased its weighting in value and low-risk themes. This
shift was triggered by a number of indicators that pointed toward emerging
excesses in the equity market: Low cash cushions held by equity mutual funds,
the increasing volatility of equity prices, the record-low dividend yields and
the divergence in returns between stocks and bonds.
As a result of our more defensive posture, over the past year we gradually
increased the fund's weighting in energy-related companies such as Texaco Inc.
and Atlantic Richfield Co., both newcomers to the fund's 10 largest holdings. We
also decreased the fund's exposure to consumer noncyclicals, which includes
food/agriculture companies (e.g., IBP, Inc. and Kellogg Co.).
As of the end of the period, the fund's major valuation characteristics
were more attractive than the benchmark. These included a lower price/earnings
ratio based on 1997 estimated earnings (15.9x versus 17.3x for the S&P 500) as
well as a lower price/book ratio (3.0x versus 3.4x). The fund achieved these
favorable valuation levels while maintaining growth and risk characteristics in
line with those of the S&P 500.
Table I: Top 10 Portfolio Holdings as of 1/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percentage of
Total Net
Company Line of Business Assets
<S> <C> <C>
General Electric Co. Electronics 2.9%
Intel Corp. Semiconductors 2.8%
and Electronics
Exxon Corp. Petroleum and 2.2%
Natural Gas
Microsoft Corp. Computer Software 2.1%
Texaco Inc. Petroleum and 2.0%
Natural Gas
Merck & Co., Inc. Pharmaceuticals 1.9%
Atlantic Richfield Co. Petroleum and 1.7%
Natural Gas
Bristol-Myers Squibb Co. Pharmaceuticals 1.7%
Philip Morris Companies, Tobacco and Food 1.7%
Inc. Products
Travelers Group, Inc. Financial Services 1.6%
</TABLE>
- --------------------------------------------------------------------------------
15
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Select Equity Fund (continued)
- --------------------------------------------------------------------------------
Table II: Sector Breakout as of 1/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percentage of
Percentage S&P 500
Industry Sectors of Portfolio Index Difference
<S> <C> <C> <C>
Finance 17.8% 16.2% 1.6%
Consumer Nondurables 10.2% 12.9% -2.7%
Energy 10.1% 8.0% 2.1%
Health 9.6% 10.4% -0.8%
Technology 9.3% 10.9% -1.6%
Basic Industry 7.9% 7.1% 0.8%
Capital Spending 6.5% 5.6% 0.9%
Electric/Gas 5.8% 3.3% 2.5%
Miscellaneous 4.4% 5.0% -0.6%
Retail 4.3% 3.6% 0.7%
Telecommunications 3.9% 6.3% -2.4%
Consumer Services 3.8% 4.8% -1.0%
Consumer Durables 2.6% 2.5% 0.1%
Aerospace 1.8% 2.0% -0.2%
Transportation 1.1% 1.4% -0.3%
Cash 1.0% 0.0% 1.0%
</TABLE>
- --------------------------------------------------------------------------------
Outlook
Goldman Sachs expects the U.S. equity market to continue to advance in
1997, although returns will likely be more modest than the unusually strong
results of 1995 and 1996. In addition, we expect equity gains to broaden beyond
the top 50 stocks. In 1997, we will continue to maintain a balanced approach by
considering risk, value and growth simultaneously.
However, the relative importance of avoiding riskier stocks has increased in the
current market environment, which is likely to result in greater emphasis on
defensive stocks with below-average price volatility, attractive valuations and
lower possibility of near-term earnings disappointments.
/s/ Robert C. Jones
Robert C. Jones
Senior Portfolio Manager,
Quantitative Equity
/s/ Kent A. Clark
Kent A. Clark
Portfolio Manager,
Quantitative Equity
/s/ Victor H. Pinter
Victor H. Pinter
Portfolio Manager,
Quantitative Equity
March 3, 1997
- --------------------------------------------------------------------------------
16
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Select Equity Fund
January 31, 1997
- --------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's benchmark
(the Standard and Poor's 500 Index ("S&P 500")) is shown for the appropriate
time periods. All performance data shown represents past performance and should
not be considered indicative of future performance which will fluctuate with
changes in market conditions. These performance fluctuations will cause an
investor's shares, when redeemed, to be worth more or less than their original
cost.
<TABLE>
<CAPTION>
Class A
[LINE GRAPH APPEARS HERE]
GS Select Eq GS Select Eq
Class A Class A
(w/sales charge) (no/sales charge) S&P 500
---------------- ---------------- -------
<S> <C> <C> <C>
5/24/91 9,450 10,000 10,000
1/31/92 10,112 10,701 11,092
1/31/93 10,548 11,162 12,266
1/31/94 12,144 12,851 13,846
1/31/95 12,009 12,708 13,919
1/31/96 16,654 17,617 19,306
1/31/97 20,613 21,813 24,390
<CAPTION>
Class B
[LINE GRAPH APPEARS HERE]
GS Select Eq GS Select Eq
Class B Class B
(no redemption charge) (w/redemption charge) S&P 500
---------------------- --------------------- -------
<S> <C> <C> <C>
5/1/96 10,000 10,000 10,000
1/31/97 11,859 11,359 12,218
<CAPTION>
Institutional
[LINE GRAPH APPEARS HERE]
GS Select Eq
Institutional Class S&P 500
------------------- -------
<S> <C> <C>
6/15/95 10,000 10,000
1/31/96 12,014 12,029
1/31/97 14,983 15,197
<CAPTION>
Service
[LINE GRAPH APPEARS HERE]
GS Select Eq
Serv. Class S&P 500
------------ -------
<S> <C> <C>
6/7/96 10,000 10,000
1/31/97 11,592 11,836
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------
Average Annual Total Return
------------------------------------------------
One Year Since Inception/(a)/
- --------------------------------------------------------------------------------
<S> <C> <C>
Class A, no sales charge 23.75% 14.67%
- --------------------------------------------------------------------------------
Class A, w/sales charge 16.98% 13.54%
- --------------------------------------------------------------------------------
Class B, no redemption charge N/A 18.59% /(b)/
- --------------------------------------------------------------------------------
Class B, w/redemption charge N/A 13.59% /(b)/
- --------------------------------------------------------------------------------
Institutional Class 24.63% 28.04%
- --------------------------------------------------------------------------------
Service Class N/A 15.92% /(b)/
- --------------------------------------------------------------------------------
</TABLE>
/(a)/ Class A, Class B, Institutional and Service shares commenced operations on
May 24, 1991, May 1, 1996, June 15, 1995 and June 7, 1996, respectively.
/(b)/ An aggregate total return (not annualized) is shown instead of an average
annual total return since these classes have not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
17
<PAGE>
Statement of Investments
Goldman Sachs Select Equity Fund
- --------------------------------------------------------------------
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
- --------------------------------------------------------------------
<S> <C> <C>
Common Stocks--97.3%
Aerospace--0.8%
43,600 United Technologies Corp. $ 3,041,100
- --------------------------------------------------------------------
Agency/Government--0.9%
93,800 Federal National Mortgage Assn. 3,705,100
- --------------------------------------------------------------------
Agriculture/Heavy Equipment--2.5%
25,100 Case Corp. 1,330,300
55,500 Caterpillar, Inc. 4,308,188
44,100 Conagra, Inc. 2,227,050
48,900 Tenneco, Inc. 1,956,000
- --------------------------------------------------------------------
9,821,538
- --------------------------------------------------------------------
Airlines--1.2%
19,700 AMR Corp.* 1,585,850
38,500 Delta Air Lines, Inc. 3,041,500
- --------------------------------------------------------------------
4,627,350
- --------------------------------------------------------------------
Alcohol--0.2%
21,600 Anheuser Busch Companies, Inc. 918,000
- --------------------------------------------------------------------
Appliance Manufacturer--1.0%
38,300 Emerson Electric Co. 3,782,125
- --------------------------------------------------------------------
Auto/Original Equipment Manufacturer--0.3%
23,100 Cummins Engine, Inc. 1,215,638
- --------------------------------------------------------------------
Auto/Vehicle--1.5%
25,200 Chrysler Corp. 878,850
32,200 Ford Motor Co. 1,034,425
70,700 General Motors Corp. 4,171,300
- --------------------------------------------------------------------
6,084,575
- --------------------------------------------------------------------
Bank Holding Companies--0.4%
26,000 Comerica, Inc. 1,485,250
- --------------------------------------------------------------------
Banks--6.0%
33,550 Banc One Corp. 1,522,331
48,000 Bank of New York, Inc. 1,758,000
46,400 BankAmerica Corp. 5,179,400
12,900 Chase Manhattan Corp. 1,193,250
25,800 Citicorp 3,002,475
28,500 First Bank System, Inc. 2,166,000
34,400 First Chicago Corp. 1,965,100
6,400 First Union Corp. 535,200
48,400 NationsBank Corp. 5,227,200
4,500 Wells Fargo & Company $ 1,371,375
- --------------------------------------------------------------------
23,920,331
- --------------------------------------------------------------------
Beverages--1.6%
41,900 Coca Cola Co. 2,424,963
115,300 Pepsico, Inc. 4,021,088
- --------------------------------------------------------------------
6,446,051
- --------------------------------------------------------------------
Business Services--0.2%
19,100 Automatic Data Processing, Inc. 790,263
- --------------------------------------------------------------------
Chemicals-Commodity--2.1%
46,000 Dow Chemicals Co. 3,547,750
20,600 Du Pont EI de Nemours 2,258,275
68,900 Monsanto Co. 2,609,588
- --------------------------------------------------------------------
8,415,613
- --------------------------------------------------------------------
Chemicals-Specialty--1.0%
37,800 Allied Signal, Inc. 2,655,450
27,700 Morton International, Inc. 1,125,313
- --------------------------------------------------------------------
3,780,763
- --------------------------------------------------------------------
Commercial Services--0.3%
32,500 Interim Services, Inc.* 1,178,125
- --------------------------------------------------------------------
Communications Services Companies--1.5%
75,500 Airtouch Communications, Inc.* 1,953,563
96,100 Sprint Corp. 3,916,075
- --------------------------------------------------------------------
5,869,638
- --------------------------------------------------------------------
Communications Technology--0.8%
37,403 Lucent Technologies, Inc. 2,029,113
15,200 Motorola Inc. 1,037,400
- --------------------------------------------------------------------
3,066,513
- --------------------------------------------------------------------
Computers--0.9%
65,200 Hewlett Packard Co. 3,431,150
- --------------------------------------------------------------------
Computers & Peripherals--3.7%
45,400 Cisco Systems, Inc.* 3,166,650
35,000 Compaq Computer Corp.* 3,040,625
20,300 Eastman Kodak Co. 1,761,025
33,400 International Business Machines 5,252,150
51,100 Sun Microsystems, Inc.* 1,622,425
- --------------------------------------------------------------------
14,842,875
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
- --------------------------------------------------------------------
<S> <C> <C>
Common Stocks (continued)
Construction/Environmental Services--0.2%
13,300 Armstrong World Industries, Inc. $ 944,300
- --------------------------------------------------------------------
Consumer Staples--3.4%
51,700 American Home Products Corp. 3,276,488
13,300 Clorox Co. 1,577,713
60,200 Gillette Co. 4,906,300
33,400 Procter & Gamble Co. 3,857,700
- --------------------------------------------------------------------
13,618,201
- --------------------------------------------------------------------
Defense--1.4%
5,400 Boeing Co. 578,475
17,700 McDonnell Douglas Corp. 1,190,325
18,500 Textron, Inc. 1,801,438
36,800 TRW, Inc. 1,867,600
- --------------------------------------------------------------------
5,437,838
- --------------------------------------------------------------------
Department Stores--3.2%
147,400 Dayton Hudson Corp. 5,545,925
38,000 Federated Dept. Stores, Inc.* 1,249,250
18,900 Mercantile Stores Co. 926,100
65,700 Sears Roebuck & Co. 3,153,600
72,100 Walmart Stores, Inc. 1,712,375
- --------------------------------------------------------------------
12,587,250
- --------------------------------------------------------------------
Electric Utilities--4.7%
76,300 Duke Power Co. 3,576,563
128,700 Edison International, Inc. 2,750,963
31,500 Empresa Nacional de Electric ADR 2,071,125
139,600 Niagara Mohawk Power* 1,413,450
57,700 Public Service Company of New Mexico 1,154,000
92,800 Texas Utilities Co. 3,758,400
156,300 Unicom Corp. 3,692,588
- --------------------------------------------------------------------
18,417,089
- --------------------------------------------------------------------
Electrical Equipment Manufacturer--2.9%
112,200 General Electric Co. 11,556,600
- --------------------------------------------------------------------
Financial Services--0.7%
53,300 Providian Corp. 2,871,538
- --------------------------------------------------------------------
Food Producers--0.5%
10,600 CPC International, Inc. 814,875
16,400 Ralston Purina Co. 1,289,450
- --------------------------------------------------------------------
2,104,325
- --------------------------------------------------------------------
Forest Products--2.6%
78,600 Avery Dennison Corp. 2,878,725
32,000 Champion International Corp. 1,340,000
32,600 Georgia Pacific Corp. 2,400,175
26,000 International Paper Co. 1,062,750
19,700 Mead Corp. 1,108,125
30,700 Weyerhaeuser Co. 1,396,850
- --------------------------------------------------------------------
10,186,625
- --------------------------------------------------------------------
Funeral Services--0.2%
29,600 Service Corp. International 858,400
- --------------------------------------------------------------------
Gas Distribution & Pipeline--1.2%
55,600 Columbia Gas Systems, Inc. 3,620,950
22,900 Panenergy Corp. 1,056,263
- --------------------------------------------------------------------
4,677,213
- --------------------------------------------------------------------
Health Suppliers/Services--1.3%
73,200 Johnson & Johnson 4,218,150
15,800 Medtronic Inc. 1,082,300
- --------------------------------------------------------------------
5,300,450
- --------------------------------------------------------------------
Healthcare Management--0.8%
55,800 Columbia HCA Healthcare 2,204,100
38,300 Manor Care, Inc. 976,650
- --------------------------------------------------------------------
3,180,750
- --------------------------------------------------------------------
Information Management--0.7%
114,100 Dun & Bradstreet Corp. 2,738,400
- --------------------------------------------------------------------
Insurance Brokers & Other Insurance--0.3%
24,600 Exel Insurance Ltd. 1,042,425
- --------------------------------------------------------------------
Insurance-Life--2.6%
29,100 American General Corp. 1,160,363
18,700 Cigna Corp. 2,835,388
122,933 Travelers Group, Inc. 6,438,616
- --------------------------------------------------------------------
10,434,367
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Select Equity Fund (continued)
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Insurance-Property and Casualty--2.2%
25,956 Allstate Corp. $ 1,706,607
36,850 American International Group, Inc. 4,463,456
68,500 Safeco Corp. 2,603,000
- --------------------------------------------------------------------
8,773,063
- --------------------------------------------------------------------
Integrated Oil--11.1%
22,100 Amoco Corp. 1,922,700
51,800 Atlantic Richfield Co. 6,850,550
84,300 Exxon Corp. 8,735,574
46,800 Kerr McGee Corp. 3,217,500
17,200 Mobil Corp. 2,257,500
52,000 Norsk Hydro ADR 2,925,000
32,000 Phillips Petroleum Co. 1,412,000
26,600 Royal Dutch Petroleum ADR 4,615,100
75,700 Texaco, Inc. 8,014,738
97,300 Unocal Corp. 4,098,763
- --------------------------------------------------------------------
44,049,425
- --------------------------------------------------------------------
Investment Brokers & Managers--2.7%
52,500 Merrill Lynch Co. 4,423,125
38,300 Morgan Stanley Group, Inc. 2,187,888
76,900 Salomon, Inc. 4,248,725
- --------------------------------------------------------------------
10,859,738
- --------------------------------------------------------------------
Local Phone Companies--2.3%
53,600 Ameritech Corp. 3,202,600
67,100 GTE Corp. 3,153,700
104,900 Worldcom, Inc.* 2,635,613
- --------------------------------------------------------------------
8,991,913
- --------------------------------------------------------------------
Machinery and Equipment--0.6%
20,100 Dover Corp. 994,950
29,300 Ingersoll-Rand Co. 1,336,813
- --------------------------------------------------------------------
2,331,763
- --------------------------------------------------------------------
Media/Entertainment--1.4%
41,400 King World Productions, Inc.* 1,619,775
54,942 Walt Disney Co. 4,024,502
- --------------------------------------------------------------------
5,644,277
- --------------------------------------------------------------------
Nonferrous Metals--1.3%
15,900 Phelps Dodge Corp. 1,111,013
72,800 Tyco International Ltd. 4,158,700
- --------------------------------------------------------------------
5,269,713
- --------------------------------------------------------------------
Office & Business Equipment--0.5%
36,400 Xerox Corp. 2,133,950
- --------------------------------------------------------------------
Oil & Gas Exploration--0.4%
31,100 Burlington Resources, Inc. 1,547,225
- --------------------------------------------------------------------
Pharmaceuticals--6.7%
51,100 Abbott Labs 2,778,563
53,100 Bristol Myers Squibb 6,743,700
18,600 Eli Lilly & Co. 1,620,525
82,100 Merck & Co. 7,450,575
23,600 Pfizer, Inc. 2,191,850
31,700 Pharmacia & Upjohn, Inc. 1,180,825
47,600 Schering Plough Corp. 3,599,750
13,800 Warner Lambert Co. 1,110,900
- --------------------------------------------------------------------
26,676,688
- --------------------------------------------------------------------
Recreational Products--0.2%
29,407 Mattel, Inc. 827,072
- --------------------------------------------------------------------
Restaurants & Hotels--1.0%
14,000 HFS, Inc.* 980,000
23,000 ITT Corp.* 1,313,875
40,200 McDonalds Corp. 1,829,100
- --------------------------------------------------------------------
4,122,975
- --------------------------------------------------------------------
Retail--0.7%
34,100 Home Depot, Inc. 1,687,950
29,900 TJX Companies, Inc. 1,188,525
- --------------------------------------------------------------------
2,876,475
- --------------------------------------------------------------------
Retail-Specialty--1.2%
48,200 Gap, Inc. 1,385,750
49,600 Nike, Inc. 3,366,600
- --------------------------------------------------------------------
4,752,350
- --------------------------------------------------------------------
Semiconductors & Electronics--2.8%
67,800 Intel Corp. 11,000,550
- --------------------------------------------------------------------
Software--2.7%
33,350 Computer Associates International,
Inc. 1,513,256
79,900 Microsoft Corp.* 8,149,800
24,600 Oracle Corp.* 956,325
- --------------------------------------------------------------------
10,619,381
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Supermarkets--0.9%
63,300 Great A&P Tea Co., Inc. $ 1,978,125
31,200 Safeway, Inc.* 1,489,800
- --------------------------------------------------------------------
3,467,925
- --------------------------------------------------------------------
Technical Services--0.4%
22,800 3Com Corp.* 1,530,450
- --------------------------------------------------------------------
Technology Capital Goods--0.7%
18,800 Applied Materials, Inc.* 928,250
22,000 Harris Corp. 1,674,750
- --------------------------------------------------------------------
2,603,000
- --------------------------------------------------------------------
Telecommunications--0.2%
17,000 Tellabs, Inc.* 700,188
- --------------------------------------------------------------------
Textiles--1.1%
22,500 Liz Claiborne, Inc. 947,813
33,200 Sara Lee Corp. 1,311,400
30,800 VF Corp. 2,048,200
- --------------------------------------------------------------------
4,307,413
- --------------------------------------------------------------------
Tire & Other Related Rubber Products--0.8%
36,800 BF Goodrich Co. 1,508,800
29,800 Goodyear Tire & Rubber Co. 1,624,100
- --------------------------------------------------------------------
3,132,900
- --------------------------------------------------------------------
Tobacco--1.7%
55,600 Philip Morris Companies, Inc. 6,609,450
- --------------------------------------------------------------------
Total Common Stocks
(Cost $294,916,122) $ 385,205,653
====================================================================
Rights--0.9%
Insurance--0.2%
9,400 MBIA, Inc.,* exp. 12/12/01 $ 903,575
- --------------------------------------------------------------------
Insurance-Life--0.4%
36,400 Protective Life Corp.*, exp. 07/13/97 1,442,350
- --------------------------------------------------------------------
Specialty Finance--0.3%
19,100 Beneficial Corp.,* exp. 11/23/97 1,284,475
- --------------------------------------------------------------------
Total Rights
(Cost $2,826,759) $ 3,630,400
- --------------------------------------------------------------------
<CAPTION>
Principal
Amount Description Value
====================================================================
<S> <C> <C>
U.S. Treasury Obligations--0.2%
$ 841,000 U.S. Treasury Bill
5.08%, 05/29/97/(b)/ $ 827,118
- --------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $827,118) $ 827,118
- --------------------------------------------------------------------
Repurchase Agreement--0.9%
$ 3,600,000 Joint Repurchase Agreement Account
5.63%, 02/03/97 $ 3,600,000
- --------------------------------------------------------------------
Total Repurchase Agreements
(Cost $3,600,000) $ 3,600,000
- --------------------------------------------------------------------
Total Investments
(Cost $302,169,999)/(a)/ $ 393,263,171
====================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 94,373,749
Gross unrealized loss for investments in
which cost exceeds value (3,489,045)
- --------------------------------------------------------------------
Net unrealized gain $ 90,884,704
====================================================================
</TABLE>
<TABLE>
<CAPTION>
Futures Contracts open at January 31, 1997 are as follows:
Number of
Contracts Settlement Unrealized
Type Long/(c)/ Month Gain
- ------------------------- ------------- ------------ ----------------
<S> <C> <C> <C>
S&P 500 Stock Index 7 March 1997 $91,800
</TABLE>
* Non-income producing security.
/(a)/The aggregate cost for federal income tax purposes is $302,378,467.
/(b)/Portion of this security is being segregated as collateral for futures
contracts.
/(c)/Each S&P 500 Stock Index represents $50,000 in notional par value. The
total net notional amount and net market value at risk are $350,000 and
$2,756,250, 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 percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Growth and Income Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Growth and Income Fund seeks long-term growth of
capital and growth of income primarily through investments in a diversified
portfolio of common stocks and other equity securities. The fund is managed with
a value style, which means we focus on companies whose stocks we believe are
inexpensive relative to their expected long-term earnings growth and their
ability to pay dividends. Investments may include well-known companies that are
temporarily out of favor due to cyclical economic conditions or are experiencing
near-term difficulties the portfolio managers judge to be temporary in nature.
In-depth fundamental research of a company's financial structure, its
competitive position in the market and its management's commitment to increasing
shareholder value are all critical parts of the fund's investment approach.
Though we are not sector investors, we closely monitor the fund's sector and
industry exposures compared with the benchmark in an effort to avoid
unintentional over- or underweightings.
Performance Review: The Fund Outperformed the Index...
<TABLE>
<CAPTION>
- ------------------------------------- ----------------- -----------
Fund Total
Return S&P 500
(based on net Total
asset value) Return
----------- ------
<S> <C> <C>
Class A (1/31/96 - 1/31/97)* 28.42% 26.25%
Class B (5/1/96 - 1/31/97)* 22.23% 22.18%
Institutional (6/3/96 - 1/31/97)* 20.77% 19.11%
Service (3/6/96 - 1/31/97)* 23.87% 22.20%
- ------------------------------------- ----------------- -----------
</TABLE>
* Class A, B, Institutional and Service share performance assumes reinvestment
of all dividends and distributions, a complete redemption at the net asset value
at the end of the period and no initial sales charge or contingent deferred
sales charge. Performance for Class B, Institutional and Service shares is a
cumulative total return (not annualized) from their inceptions through the end
of the period.
The U.S. stock market continued to soar during the period under
review, adding to the impressive performance recorded during the prior year.
Most of the market's gains occurred during the latter half of the period, when
equities rebounded strongly following a sharp correction in July.
We are pleased to report that all of the fund's share classes
outperformed the S&P 500 stock index during the past fiscal year. Most notably,
its Class A shares returned 28.42% (at net asset value) versus 26.25% for the
index. During the period, the fund increased its regular quarterly dividend.
....And Fared Very Well Relative to Its Peers
We are proud to announce that for the three-year period ended January
31, 1997, the fund's Class A shares were rated "five stars" (out of 1,858
domestic equity funds) by Morningstar, Inc., an independent mutual fund rating
agency. The "five star" designation is Morningstar's highest rating for
historical risk-adjusted performance, and is given to mutual funds that
Morningstar determines to be in the top 10% of their category.1
In addition, the fund's Class A shares ranked within the top 10% of
the Lipper growth and income category (53rd of 533) for the 12-month period
ended January 31, 1997, according to Lipper Analytical Services, Inc. (Please
note that Lipper rankings do not take sales charges into account and that past
performance is not a guarantee of future results. Class B, Institutional and
Service shares
- -------------------------
1 Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 1/31/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five- and ten-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. For the one-year period, the Class A shares
received four stars and was rated among 2,990 domestic equity funds. The
Morningstar rating applies only to the fund's Class A shares; the fund's Class
B, Institutional and Service shares have not been rated. Class B, Institutional
and Service shares are subject to additional fees and expenses that may have the
effect of lowering performance and may affect any future Morningstar rating.
Morningstar rates funds against peers in the same category. In all, there are
five Morningstar categories (domestic equity, international equity, fixed
income, municipal and hybrid). Morningstar ratings range from five stars
(highest) to one star (lowest). Funds with five-star ratings are in the top 10%
of their category, four-star ratings in the next 22.5%, three stars the next
35%, two stars the next 22.5% and one star the lowest 10% of their categories.
22
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
were not ranked because they did not exist during the full year.)
Financial, Technology and Energy Stocks Were Among the Fund's Best Performers
The fund's outperformance came from successful stock selection in a
wide range of industries, led by finance, its largest sector weighting at 18.0%.
Technology and energy investments also did well. In addition, the fund benefited
significantly from our decision to limit its exposure in the media and
communication sector. Our concerns regarding increased competition between the
local exchange and long-distance companies and high valuations in the sector
proved to be on target.
In the financial sector, top performers were BankAmerica Corp. and
NationsBank Corp., the country's third and fourth largest banks, respectively.
BankAmerica Corp. increased its focus on aggressive capital management, which
resulted in its exiting unprofitable businesses and buying back some of its
stock. NationsBank Corp. acquired Bank South Corp. and Boatmen's Bancshares,
Inc., and investors began to realize the benefits of its cost structure due to
its acquisitions over the past few years.
Technology holdings that performed well included Intel Corp., the
dominant microprocessor manufacturer, which was purchased when the sector was
depressed due to concerns that the personal computer upgrade cycle had slowed.
Intel quickly rebounded when investors recognized the advantages of its dominant
market position, and we subsequently sold the stock when it reached our target
price. We saw solid gains from Avnet, Inc., the second largest distributor of
semiconductors and other electronic components, which we viewed as an
inexpensive opportunity to participate in the growth of the technology sector.
The fund was also well served by a number of its energy-related
investments. Tosco Corp., an oil refiner and distributor, more than doubled in
price as it continued to consolidate its market position through an ambitious
acquisition strategy, and Texaco Inc. benefited from higher petroleum prices and
a restructuring program that meaningfully improved profits.
In addition, several holdings appreciated due to special situations.
Our confidence in Long Island Lighting Co., a New York-based utility, which had
been shunned by many other investors, was handsomely rewarded when the stock
soared after Brooklyn Union Gas Co. made an attractive bid for the company in
January. The fund also benefited when McDonnell Douglas Corp., one of our
long-term positions, was acquired by Boeing Co. at a very favorable price.
Sunbeam Corp., a leading consumer products company, met with an enthusiastic
investor response to the aggressive restructuring program initiated by its new
CEO.
Paper and Chemical Stocks Were Weak
Disappointing performers included three companies impacted by
overcapacity in their respective industries: Georgia-Pacific Corp. and Stone
Container Corp., both manufacturers of paper products, and Geon Corp., a
manufacturer of polyvinyl chloride. We continue to have confidence in these
companies and expect their prospects to improve over time.
Additional Investments in a Variety of Sectors
During the period, we added a number of new holdings. These included
Dean Witter, Discover & Co., which we viewed as undervalued based on the
potential of its broker-dealer/asset management business and its large Discover
credit card business. In February 1997, Dean Witter, Discover & Co. announced
its intention to merge with investment bank Morgan Stanley. We also invested in
Unicom Corp., an electric utility that operates 12 nuclear units at six sites.
Unicom generates excess capital and, unlike many other electric utilities, has
no utility power purchase problems. We established a position after its stock
price declined due to a mandated increase in spending on operations and
maintenance, an issue that management believes will not impair the company's
long-
23
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Growth and Income Fund (continued)
- --------------------------------------------------------------------------------
term prospects. Also notable was our decision to increase the fund's
position in Tenet Healthcare Corp., a long-term holding, based on its prospects
for improved efficiencies resulting from the integration of its acquisition of
OrNda Healthcorp., a for-profit hospital chain.
Sales Included Several Financial and Technology Positions
We sold several stocks after they appreciated and reached our price
targets. These included Anheuser-Busch Co., Inc., the world's largest brewer,
which reported strong earnings; Greenpoint Financial Corp., which benefited from
increased investor appreciation of the value of its
"no-documentation--low-documentation" mortgage franchise; and technology
holdings Compaq Computer Corp. and Intel Corp.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Top 10 Portfolio Holdings as of January 31, 1997
Percentage
of Total Net
<S> <C> <C>
Company Line of Business Assets
Aetna Inc. Healthcare Service 3.3%
Provider
Tenet Healthcare Corp. Hospitals 3.3%
Lear Corp. Autoparts/Original 3.0%
Equipment
Cigna Corp. Insurance 2.9%
Brunswick Corp. Pleasure 2.9%
Boats/Marine
Engines
Dean Witter, Discover & Co. Financial Services 2.8%
Goodyear Tire & Rubber Co. Tire and Rubber 2.8%
Products
Philip Morris Companies, Tobacco and Food 2.7%
Inc. Products
Avnet, Inc. Electronic 2.7%
Components
Distributor
BankAmerica Corp. Commercial Bank 2.6%
- --------------------------------------------------------------------
</TABLE>
Outlook
As we enter the seventh year of a bull market for U.S. equities, we
view the market as moderately overvalued and therefore unlikely to match the
strong return it achieved in 1996. In this environment, it is particularly
noteworthy that the fund's holdings continue to be attractively valued even
after last year's rally. Our focus on undervalued stocks and extensive
fundamental research will continue to be extremely important in the more
challenging market we anticipate ahead.
/s/ Ronald E. Gutfleish /s/ G. Lee Anderson
- ------------------------ -------------------------
Ronald E. Gutfleish G. Lee Anderson
Senior Portfolio Manager, Portfolio Manager,
U.S. Active Equity Value U.S. Active Equity Value
/s/ Eileen A. Aptman
--------------------
Eileen A. Aptman
Portfolio Manager,
U.S. Active Equity Value
March 3, 1997
24
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Growth and Income Fund
January 31, 1997
- -------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's benchmark
(the Standard and Poor's 500 Index ("S&P 500")) is shown for the appropriate
time periods. All performance data shown represents past performance and should
not be considered indicative of future performance which will fluctuate with
changes in market conditions. These performance fluctuations will cause an
investor's shares, when redeemed, to be worth more or less than their original
cost.
<TABLE>
<CAPTION>
Class A
[LINE GRAPH APPEARS HERE]
GS Growth & Inc GS Growth & Inc
Class A Class A
(w/sales charge) (no sales charge) S&P 500
---------------- ----------------- -------
<S> <C> <C> <C>
2/5/93 $ 9,450 $10,000 $10,000
1/31/94 10,686 11,308 11,073
1/31/95 11,110 11,757 11,132
1/31/96 14,716 15,573 15,436
1/31/97 18,911 20,012 19,501
<CAPTION>
Class B
[LINE GRAPH APPEARS HERE]
GS Growth & Inc GS Growth & Inc
Class B Class B
(no redemp charge) (w/redemp charge) S&P 500
------------------ ----------------- -------
<S> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000
1/31/97 12,223 11,723 12,218
<CAPTION>
Institutional
[LINE GRAPH APPEARS HERE]
GS Growth & Inc
Institutional Class S&P 500
------------------- -------
<S> <C> <C>
6/3/96 $10,000 $10,000
1/31/97 12,077 11,911
<CAPTION>
Service
[LINE GRAPH APPEARS HERE]
GS Growth & Inc
Service Class S&P 500
--------------- -------
<S> <C> <C>
3/6/96 $10,000 $10,000
1/31/97 12,387 12,220
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------
Average Annual Total Return
--------------------------------------------
One Year Since Inception /(a)/
- --------------------------------------------------------------------------------
<S> <C> <C>
Class A, no sales charge 28.42% 18.98%
- --------------------------------------------------------------------------------
Class A, w/sales charge 21.39% 17.31%
- --------------------------------------------------------------------------------
Class B, no redemption charge N/A 22.23% /(b)/
- --------------------------------------------------------------------------------
Class B, w/redemption charge N/A 17.23% /(b)/
- --------------------------------------------------------------------------------
Institutional Class N/A 20.77% /(b)/
- --------------------------------------------------------------------------------
Service Class N/A 23.87% /(b)/
- --------------------------------------------------------------------------------
</TABLE>
/(a)/ Class A, Class B, Institutional and Service shares commenced operations on
February 5, 1993, May 1, 1996, June 3, 1996 and March 6, 1996,
respectively.
/(b)/ An aggregate total return (not annualized) is shown instead of an average
annual total return since these classes have not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
25
<PAGE>
Statement of Investments
- -------------------------------------------------------------------
Goldman Sachs Growth and Income Fund
January 31, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Shares Description Value
===================================================================
<S> <C> <C>
Common Stocks--93.2%
Airlines--3.2%
96,100 AMR Corp.* $ 7,736,050
463,600 Continental Airlines, Inc.* 12,980,800
- -------------------------------------------------------------------
20,716,850
- -------------------------------------------------------------------
Appliance Manufacturer--1.9%
440,900 Sunbeam Corp. 12,234,975
- -------------------------------------------------------------------
Auto/Original Equipment Manufacturer--3.0%
512,800 Lear Corp.* 19,165,900
- -------------------------------------------------------------------
Auto/Vehicle--2.0%
394,800 Ford Motor Co. 12,682,950
- -------------------------------------------------------------------
Banks--8.3%
146,600 BankAmerica Corp. 16,364,225
64,900 Chase Manhattan Corp. 6,003,250
117,800 Fleet Financial Group Inc. 6,361,200
146,900 NationsBank Corp. 15,865,200
96,500 Republic of New York Corp. 8,552,313
- -------------------------------------------------------------------
53,146,188
- -------------------------------------------------------------------
Chemicals-Commodity--2.0%
439,800 Geon Co. 8,246,250
97,400 Union Carbide Corp. 4,419,525
- -------------------------------------------------------------------
12,665,775
- -------------------------------------------------------------------
Defense--3.4%
225,100 McDonnell Douglas Corp. 15,137,975
79,800 Northrop Grumman Corp. 6,234,375
6,300 Thiokol Corp. 352,800
- -------------------------------------------------------------------
21,725,150
- -------------------------------------------------------------------
Department Stores--1.6%
207,700 Sears Roebuck & Co. 9,969,600
- -------------------------------------------------------------------
Electric Utilities--5.1%
95,100 CMS Energy Corp. 3,185,850
641,400 Long Island Lighting Co. 14,591,850
632,300 Unicom Corp. 14,938,088
- -------------------------------------------------------------------
32,715,788
- -------------------------------------------------------------------
Food--2.8%
582,200 Chiquita Brands International, Inc. 8,514,675
58,400 Unilever Inc. 9,606,800
- -------------------------------------------------------------------
18,121,475
- -------------------------------------------------------------------
Forest Products--1.9%
161,500 Georgia Pacific Corp. 11,890,438
- -------------------------------------------------------------------
Health Suppliers/Services--2.0%
280,800 Baxter International, Inc. 12,951,900
- -------------------------------------------------------------------
Healthcare Management--6.6%
266,400 Aetna Inc. 21,045,600
768,500 Tenet Healthcare Corp.* 20,749,500
- -------------------------------------------------------------------
41,795,100
- -------------------------------------------------------------------
Home Builders--3.1%
232,800 Centex Corp. 9,079,200
388,500 Lennar Corp. 10,343,813
- -------------------------------------------------------------------
19,423,013
- -------------------------------------------------------------------
Insurance-Life--4.3%
123,600 Cigna Corp. 18,740,850
166,200 Lincoln National Corp. 8,912,475
- -------------------------------------------------------------------
27,653,325
- -------------------------------------------------------------------
Insurance-Property & Casualty--1.4%
16,100 Integon Corp. 223,388
237,600 Partner Re Holding Ltd. 8,434,800
- -------------------------------------------------------------------
8,658,188
- -------------------------------------------------------------------
Integrated Oil--4.8%
121,400 Atlantic Richfield Co. 16,055,150
138,900 Texaco, Inc. 14,706,038
- -------------------------------------------------------------------
30,761,188
- -------------------------------------------------------------------
Logistics/Rails--1.8%
415,700 Canadian Pacific Ltd. 11,275,863
- -------------------------------------------------------------------
Logistics/Trucking--2.0%
512,100 Consolidated Freightways, Inc. 12,994,538
- -------------------------------------------------------------------
Oil Refining & Marketing--3.6%
187,700 Ashland Inc. 8,094,563
166,800 Tosco Corp. 14,761,800
- -------------------------------------------------------------------
22,856,363
- -------------------------------------------------------------------
Packaging--2.5%
661,600 Owens Illinois Corp.* 15,713,000
- -------------------------------------------------------------------
Recreational Products--2.9%
724,800 Brunswick Corp. 18,210,600
- -------------------------------------------------------------------
- -------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
- -------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Shares Description Value
- -------------------------------------------------------------------
<C> <S> <C>
Common Stocks (continued)
Security and Commodity Brokers, Dealers and Services--1.0%
195,900 Lehman Brothers Holdings, Inc. $ 6,195,338
- -------------------------------------------------------------------
Semiconductors & Electronics--2.7%
275,100 Avnet, Inc. 17,021,813
- -------------------------------------------------------------------
Software--1.1%
214,300 Autodesk, Inc. 6,777,238
- -------------------------------------------------------------------
Specialty Finance--2.8%
470,200 Dean Witter Discover & Co. 17,926,375
- -------------------------------------------------------------------
Steel--1.6%
251,600 AK Steel Holding Corp. 10,126,900
- -------------------------------------------------------------------
Supermarkets--3.4%
726,500 Fleming Companies, Inc. 11,714,813
316,700 Supervalu, Inc. 9,778,113
- -------------------------------------------------------------------
21,492,926
- -------------------------------------------------------------------
Textiles--2.4%
374,400 Fruit of The Loom, Inc.* 15,022,800
- -------------------------------------------------------------------
Tire & Other Related Rubber Products--2.8%
320,900 Goodyear Tire & Rubber Co. 17,489,050
- -------------------------------------------------------------------
Tobacco--5.2%
63,700 Loews Corp. 6,298,338
144,700 Philip Morris Companies, Inc. 17,201,204
187,480 RJR Nabisco, Inc. 6,139,970
115,600 Universal Corp. 3,583,600
- -------------------------------------------------------------------
33,223,112
- -------------------------------------------------------------------
Total Common Stocks
(Cost $465,569,279) $ 592,603,719
===================================================================
Preferred Stocks--0.6%
Food--0.3%
44,600 Chiquita Brands International, Inc.
Convertible, 5.75% $ 2,073,900
- -------------------------------------------------------------------
Tobacco--0.3%
287,100 RJR Nabisco, Inc., Class C 9.25% 1,902,038
- -------------------------------------------------------------------
Total Preferred Stocks
(Cost $3,843,410) $ 3,975,938
===================================================================
Rights--2.0%
Forest Products--1.2%
579,100 Stone Container Corp.,* exp.
08/08/98 $ 7,817,850
- -------------------------------------------------------------------
Technology Capital Goods--0.8%
166,300 Teradyne, Inc.,* exp. 03/26/00 5,134,513
- -------------------------------------------------------------------
Total Rights
(Cost $13,294,493) $ 12,952,363
===================================================================
Repurchase Agreements--4.2%
- -------------------------------------------------------------------
$ 26,800,000 Joint Repurchase Agreement Account
5.63%, 02/03/97 $ 26,800,000
- -------------------------------------------------------------------
Total Repurchase Agreements
(Cost $26,800,000) $ 26,800,000
===================================================================
<CAPTION>
Contracts Description Value
===================================================================
<C> <S> <C>
Options*--0.4%
1,340 S & P 500 Index Put, Strike 750
exp. 06/97 $ 2,244,500
1,439 S & P 500 Index Put, Strike 700
exp. 03/97 377,738
- -------------------------------------------------------------------
Total Options
(Cost $4,105,525) $ 2,622,238
===================================================================
Total Investments
(Cost $513,612,707)/(a)/ $ 638,954,258
===================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $136,933,045
Gross unrealized loss for investments in which
cost exceeds value (11,607,531)
- -------------------------------------------------------------------
Net unrealized gain $125,325,514
===================================================================
</TABLE>
* Non-income producing security.
/(a)/The aggregate cost for federal income tax purposes is $513,628,744. The
percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- -------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Capital Growth Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Capital Growth Fund seeks long-term growth of capital
primarily through investments in a portfolio of large-capitalization stocks. We
use extensive fundamental research to identify companies in a diversified range
of industries that we believe offer attractive growth potential at a reasonable
price.
The fund's investment management team believes that wealth is created
through the long-term ownership of growing businesses. As such, we view each
stock purchase as if we were buying the entire business. To implement this
investment strategy, we focus on growing companies with characteristics such as
strong brand franchises, dominant market share, recurring revenue, product
pricing flexibility, long product life cycles, high returns on invested capital,
high profit margins, strong free cash flow, excellent management and favorable
long-term prospects. Finally, we will buy a stock meeting our rigorous criteria
only if it trades at a reasonable discount to the company's intrinsic value.
Performance Review: Fund Achieved Strong Results
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Fund Total Return S&P 500
(based on net Total
asset value) Return
----------- ------
<S> <C> <C>
Class A (1/31/96 - 1/31/97)* 25.97% 26.25%
Class B (5/1/96 - 1/31/97)* 19.39% 22.18%
- --------------------------------------------------------------------
</TABLE>
* Class A and B share performance assumes reinvestment of all dividends and
distributions, a complete redemption at the net asset value at the end of the
period and no initial sales charge or contingent deferred sales charge.
Performance for Class B shares is a cumulative total return (not annualized)
from their inception through the end of the period.
During the 12-month period ended January 31, 1997, the fund's Class A shares
achieved a total return of approximately 26%, in line with the S&P 500 stock
index, reflecting the robust equity market, particularly during the second half
of the period. The fund's Class B shares also achieved strong absolute results;
however, a partial year of only nine months is obviously too short a time frame
to meaningfully measure long-term performance.
We are pleased to report that for the five-year period ended January
31, 1997, the fund's Class A shares were rated "four stars" (out of 1,072
domestic equity funds) by Morningstar, Inc., an independent mutual fund rating
agency./1/ In addition, the fund's Class A shares fared well versus its peers in
the Lipper growth fund category, placing in the top third (187th out of 685) for
the 12-month period and in the top quartile (56th out of 263) for the five-year
period, as of January 31, 1997, according to Lipper Analytical Services, Inc.
(Please note that Lipper rankings do not take sales charges into account and
that past performance is not a guarantee of future results. Lipper did not rank
the fund's Class B shares.)
Top Performers Included Financial, Technology and Defense Stocks
The fund's best performers during the period came from a variety of sectors,
particularly financial services (20.4% of the portfolio), technology (9.1%) and
defense/aerospace (3.2%).
.. Top performers in the financial sector included MBNA Corp. and First USA
Inc., the nation's third and fourth largest credit card issuers, respectively,
which both reported better than expected earnings and loan growth. In
- --------
/1/ Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 1/31/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five- and ten-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Class A shares received three stars
for both the three- and one-year periods. The Class A shares were rated among
1,858 and 2,990 domestic equity funds for the three- and one-year periods,
respectively. The Morningstar rating applies only to the fund's Class A shares;
the fund's Class B shares have not been rated. Class B shares are subject to
additional fees and expenses that may have the effect of lowering performance
and may affect any future Morningstar rating. Morningstar rates funds against
peers in the same category. In all, there are five Morningstar categories
(domestic equity, international equity, fixed income, municipal and hybrid).
Morningstar ratings range from five stars (highest) to one star (lowest). Funds
with five-star ratings are in the top 10% of their category, four-star ratings
in the next 22.5%, three stars the next 35%, two stars the next 22.5% and one
star the lowest 10% of their categories.
- --------------------------------------------------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
addition, these companies benefited from continuing industry consolidation,
with First USA performing particularly well after Banc One announced that it was
acquiring the company. Two of the fund's commercial bank holdings, BankAmerica
Corp. and NationsBank Corp., appreciated due to successful cost cutting, strong
earnings growth and aggressive capital management, and PartnerRe Holding Ltd., a
worldwide provider of catastrophe reinsurance, rose on strong earnings.
.. Several of our technology holdings also performed well. During the first
half of the period, we increased the fund's positions in Intel Corp., the
dominant microprocessor manufacturer, and Compaq Computer Corp., the world's
largest manufacturer of personal computers, when their prices slumped because of
concerns regarding slowing computer sales. This strategy significantly
contributed to the fund's performance when computer sales were stronger than
expected. We subsequently sold Compaq Computer when it reached our target price
but continue to hold Intel, which more than tripled in price during the period.
.. Consolidation in the defense industry helped two of the fund's long-
standing investments in that sector. McDonnell Douglas Corp. climbed over 50%
after the announcement of its proposed merger with Boeing Co., and Northrop
Grumman Corp. was buoyed by its purchase of Westinghouse Electric Corp.'s
defense electronics businesses.
Specific Paper, Airline and Insurance Stocks Lagged
Not all of the fund's holdings fulfilled our expectations. For example,
Georgia-Pacific Corp., a manufacturer of paper products, suffered from an
industry oversupply and a consequent decline in paper and pulp prices; AMR
Corp., the holding company of American Airlines, was impacted by concerns
regarding competition from discount carriers; and Integon Corp., a provider of
automobile insurance, experienced a higher than expected increase in claims and
lower earnings.
New Additions in Consumer Product Companies and Pharmaceuticals
During the period, we initiated several positions that reflect our new
emphasis on large-capitalization stocks with world-class franchises and/or
strong brand names. For example, we added Procter & Gamble Co., one of the
strongest marketers in the U.S. with a stable of brand name products, many of
which hold number one or number two positions in their respective markets. Over
the past decade, the company has achieved steady growth in revenues and
earnings, exactly the type of consistent operating history that we favor.
Another recent investment was Coca-Cola Co., a world-class company with four of
the five leading carbonated soft drinks -- Coca-Cola, Diet Coke, Sprite and
Fanta. With 80% of its business coming from abroad, we expect Coca-Cola's long-
term earnings growth to continue as it further penetrates the emerging markets
of China, India, Latin America, Southeast Asia, Eastern Europe and Russia.
Other new positions included pharmaceutical companies Bristol-Myers
Squibb Co., Johnson & Johnson Co. and Pfizer, Inc., which are attractive because
of their strong new product flow, huge free cash flow, earnings growth and
essentially net debt-free balance sheets. We believe these companies are
positioned to be major beneficiaries as the baby boomers age and require more
health-related products and services over the coming decades.
Sales Included Several Investments in Cyclical Industries
During the period, we sold Kirby Corp. and Trinity Industries after we lost
confidence in their managements' attempts to improve their competitive
positions, and cyclical stocks such as Quanex Corp. and Harnischfeger
Industries, Inc. after they were unable to improve their profitability in
difficult industry conditions. In contrast, we sold the fund's long-held
position in Millipore Corp., an industrial filter producer, after it reached our
target price.
- --------------------------------------------------------------------------------
29
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Capital Growth Fund (continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Top 10 Portfolio Holdings as of January 31, 1997
<TABLE>
<CAPTION>
Percentage
of Total
Company Line of Business Net Assets
<S> <C> <C>
First USA, Inc. Financial Services 4.5%
Intel Corp. Semiconductors and 4.3%
Electronics
NationsBank Corp. Commercial Bank 3.4%
Aetna Inc. Healthcare 3.4%
Management
Texaco Inc. International 3.3%
Integrated Oil
Company
BankAmerica Corp. Commercial Bank 3.2%
Tenet Healthcare Corp. Hospitals 3.0%
Philip Morris Companies, Tobacco and Food 3.0%
Inc. Products
Baxter International, Inc. Medical Supplies 2.9%
PartnerRe Ltd. Insurance 2.7%
- --------------------------------------------------------------------
</TABLE>
Outlook
We believe that the global political and economic environments will
continue to remain favorable for the financial markets. In our opinion, the
outlook for the U.S. stock market is attractive, as we expect it to continue to
benefit from low inflation, moderate growth and high levels of consumer
confidence. In addition, we anticipate that the equity market will continue to
be buoyed as baby boomers increase their savings and 401(k) investment plans
grow. To enhance the fund's ability to benefit from the positive investing
climate, we expect to continue to diversify the portfolio among industry sectors
and increase its holdings of large-cap stocks, with the intention of both
providing favorable long-term returns and reducing portfolio risk.
We want to emphasize that investing is a marathon, not a sprint.
Notwithstanding the excellent performance the fund has recently experienced, we
have a long-term investment horizon. In a nutshell, we hope to be able to
purchase great companies with attractive business characteristics and favorable
long-term outlooks, and then patiently hold them for an extended period of time
so that their growth compounds.
/s/ Herbert E. Ehlers
Herbert E. Ehlers
Senior Portfolio Manager,
U.S. Active Equity Growth
/s/ Robert G. Collins
Robert G. Collins
Portfolio Manager,
U.S. Active Equity Growth
/s/ Gregory H. Ekizian
Gregory H. Ekizian
Portfolio Manager,
U.S. Active Equity Growth
March 3, 1997
- --------------------------------------------------------------------------------
30
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Capital Growth Fund
January 31, 1997
- -------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's benchmark
(the Standard and Poor's 500 Index ("S&P 500")) is shown for the appropriate
time periods. All performance data shown represents past performance and should
not be considered indicative of future performance which will fluctuate with
changes in market conditions. These performance fluctuations will cause an
investor's shares, when redeemed, to be worth more or less than their original
cost.
Class A
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Capital Growth GS Capital Growth
Class A Class A
(w/sales charge) (no sales charge) S&P 500
----------------- ----------------- -------
<S> <C> <C> <C>
4/20/90 9,450 10,000 10,000
1/31/91 9,529 10,084 10,552
1/31/92 12,322 13,040 12,946
1/31/93 14,542 15,388 14,316
1/31/94 16,998 17,987 16,160
1/31/95 16,254 17,200 16,246
1/31/96 21,203 22,437 22,528
1/31/97 26,726 28,282 28,460
</TABLE>
Class B
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Capital Growth GS Capital Growth
Class B Class B
(no redemp. charge) (w/redemp. charge) S&P 500
------------------- ------------------ -------
<S> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000
1/31/97 11,939 11,439 12,218
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------
Average Annual Total Return
----------------------------------------------
One Year Five Year Since Inception/(a)/
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A, no sales charge 25.97% 16.73% 16.54%
- ------------------------------------------------------------------------------
Class A, w/sales charge 19.04% 15.42% 15.57%
- ------------------------------------------------------------------------------
Class B, no redemption charge N/A N/A 19.39%/(b)/
- ------------------------------------------------------------------------------
Class B, w/redemption charge N/A N/A 14.39%/(b)/
- ------------------------------------------------------------------------------
</TABLE>
/(a)/Class A and Class B shares commenced operations on April 20, 1990 and
May 1, 1996, respectively.
/(b)/An aggregate total return (not annualized) is shown instead of an average
annual total return since this class has not completed a full twelve months
of operations.
- --------------------------------------------------------------------------------
31
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Capital Growth Fund
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks--98.9%
Advertising & Marketing--1.8%
888,900 Valassis Communications, Inc.* $ 16,333,538
- --------------------------------------------------------------------
Airlines--1.5%
176,500 AMR Corp.* 14,208,250
- --------------------------------------------------------------------
Auto/Original Equipment Manufacturer--1.6%
391,900 Lear Corp.* 14,647,262
- --------------------------------------------------------------------
Banks--6.6%
263,700 BankAmerica Corp. 29,435,512
291,500 NationsBank Corp. 31,482,000
- --------------------------------------------------------------------
60,917,512
- --------------------------------------------------------------------
Beverages--2.1%
155,100 Coca Cola Co. 8,976,413
293,800 Pepsico, Inc. 10,246,275
- --------------------------------------------------------------------
19,222,688
- --------------------------------------------------------------------
Commercial Services--0.9%
226,500 Ecolab Inc. 8,380,500
- --------------------------------------------------------------------
Communications Technology--1.7%
290,860 Lucent Technologies, Inc. 15,779,155
- --------------------------------------------------------------------
Construction/Environmental Services--2.0%
497,500 WMX Technologies, Inc. 18,220,938
- --------------------------------------------------------------------
Consumer Staples--4.0%
150,800 Avon Products Inc. 9,462,700
109,000 Gillette Co. 8,883,500
160,940 Procter & Gamble Co. 18,588,570
- --------------------------------------------------------------------
36,934,770
- --------------------------------------------------------------------
Defense--3.2%
226,800 McDonnell Douglas Corp. 15,252,300
187,500 Northrop Grumman Corp. 14,648,438
- --------------------------------------------------------------------
29,900,738
- --------------------------------------------------------------------
Electric Utilities--1.6%
669,400 Long Island Lighting Co. 15,228,850
- --------------------------------------------------------------------
Electrical Equipment Manufacturer--1.0%
89,400 General Electric Co. 9,208,200
- --------------------------------------------------------------------
Electronics & Semiconductors--1.5%
219,700 Avnet Inc. 13,593,937
- --------------------------------------------------------------------
Food--1.8%
186,500 Nabisco Holdings Corp. 7,133,625
160,480 William Wrigley Jr. Co. 9,327,900
- --------------------------------------------------------------------
16,461,525
- --------------------------------------------------------------------
Forest Products--2.2%
273,500 Georgia Pacific Corp. 20,136,437
- --------------------------------------------------------------------
Health Suppliers/Services--8.4%
589,600 Baxter International, Inc. 27,195,300
477,500 Fisher Scientific International, Inc. 20,950,312
176,400 Johnson & Johnson 10,165,050
277,600 Perkin-Elmer Corp. 19,397,300
- --------------------------------------------------------------------
77,707,962
- --------------------------------------------------------------------
Healthcare Management--8.5%
395,760 Aetna Inc. 31,265,040
487,650 Columbia HCA Healthcare 19,262,175
1,021,400 Tenet Healthcare Corp.* 27,577,800
- --------------------------------------------------------------------
78,105,015
- --------------------------------------------------------------------
Hotels & Restaurants--1.0%
169,720 Marriott International, Inc. 9,016,375
- --------------------------------------------------------------------
Information Management--1.9%
241,000 First Data Corp. 8,676,000
135,670 Reuters Holdings Corp. ADR 8,665,921
- --------------------------------------------------------------------
17,341,921
- --------------------------------------------------------------------
Insurance-Property and Casualty--3.2%
356,650 Integon Corp. 4,948,519
703,800 PartnerRe Holding Ltd. 24,984,900
- --------------------------------------------------------------------
29,933,419
- --------------------------------------------------------------------
Integrated Oil--6.7%
68,700 Amoco Corp. 5,976,900
52,700 Atlantic Richfield Co. 6,969,575
90,900 Mobil Corp. 11,930,625
41,200 Royal Dutch Petroleum ADR 7,148,200
284,800 Texaco, Inc. 30,153,200
- --------------------------------------------------------------------
62,178,500
- --------------------------------------------------------------------
Logistics/Rails--1.6%
556,900 Canadian Pacific Ltd. 15,105,912
- --------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
- --------------------------------------------------------------------
<S> <C> <C>
Common Stocks (continued)
Media Content--4.6%
166,200 Gaylord Entertainment Co. $ 4,258,875
261,800 Knight Ridder, Inc. 10,046,575
530,700 Telecommunication Liberty
Media Group* 10,083,300
237,610 Time Warner Inc. 9,147,985
130,400 Walt Disney Co. 9,551,800
- --------------------------------------------------------------------
43,088,535
- --------------------------------------------------------------------
Packaging--1.6%
614,000 Owens Illinois Corp.* 14,582,500
- --------------------------------------------------------------------
Pharmaceuticals--2.3%
90,500 Bristol Myers Squibb 11,493,500
104,300 Pfizer, Inc. 9,686,863
- --------------------------------------------------------------------
21,180,363
- --------------------------------------------------------------------
Retail Trade--1.0%
222,600 Walgreen Co. 9,154,425
- --------------------------------------------------------------------
Retail-Department Stores--2.1%
658,400 Dillard Department Stores, Inc. 19,669,700
- --------------------------------------------------------------------
Security and Commodity Brokers, Dealers and Services--2.0%
571,000 Lehman Brothers Holdings, Inc. 18,057,875
- --------------------------------------------------------------------
Semiconductors & Electronics--4.3%
247,000 Intel Corp. 40,075,750
- --------------------------------------------------------------------
Specialty Finance & Agency--8.6%
345,300 Federal National Mortgage Assn. 13,639,350
828,200 First USA, Inc. 41,927,625
683,925 MBNA Corp. 23,595,413
- --------------------------------------------------------------------
79,162,388
- --------------------------------------------------------------------
Specialty Retail--1.0%
311,900 Service Corp. International 9,045,100
- --------------------------------------------------------------------
Technology Capital Goods--1.5%
286,400 Applied Materials Inc.* 14,141,000
- --------------------------------------------------------------------
Tire & Other Related Rubber Products--2.1%
362,400 Goodyear Tire & Rubber Co. 19,750,800
- --------------------------------------------------------------------
Tobacco--3.0%
229,400 Philip Morris Companies, Inc. 27,269,925
- --------------------------------------------------------------------
Total Common Stocks
(Cost $661,066,240) $ 913,741,765
- --------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------
Principal
Amount Description Value
====================================================================
<S> <C> <C>
Repurchase Agreement--2.0%
$18,300,000 Joint Repurchase Agreement Account
5.63%, 02/03/97 $ 18,300,000
- --------------------------------------------------------------------
Total Repurchase Agreement
(Cost $18,300,000) $ 18,300,000
- --------------------------------------------------------------------
Total Investments
(Cost $679,366,240)(a) $ 932,041,765
- --------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 255,377,138
Gross unrealized loss for investments in
which cost exceeds value (3,163,091)
- --------------------------------------------------------------------
Net unrealized gain $ 252,214,047
====================================================================
</TABLE>
* Non-income producing security.
(a) The aggregate cost for federal income tax purposes is $679,827,718.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
Letter to Shareholders
- ----------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund
- ----------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Small Cap Equity Fund's objective is long-term
capital appreciation, primarily through investments in equity securities of U.S.
companies with market capitalizations of $1 billion or less. The fund is managed
using a "business value" approach to investing, which means we look for
attractive companies with high or improving returns on capital that we believe
can achieve solid, sustainable growth, as well as generate free cash after
investing for future growth. This approach differs markedly from many emerging
growth small-cap funds that invest in companies with high price-to-earnings
multiples solely on the basis of rapid, but frequently unsustainable, growth
rates. Using our own rigorous fundamental research, which includes meeting with
a company's management and examining a company's competitors, customers and
suppliers, we build the fund's portfolio one stock at a time.
Performance Review: Class A Shares Outperformed the Benchmark and the S&P 500
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
<S> <C> <C>
Fund Total Return Russell
(based on net 2000 Total
asset value) Return
----------- ------
Class A (1/31/96 - 1/31/97)* 27.28% 18.95%
Class B (5/1/96 - 1/31/97)* 5.39% 7.32%
- --------------------------------------------------------------------
</TABLE>
* Class A and B share performance assumes reinvestment of all dividends and
distributions, a complete redemption at the net asset value at the end of the
period and no initial sales charge or contingent deferred sales charge.
Performance for Class B shares is a cumulative total return (not annualized)
from their inception through the end of the period.
During the period under review, small-cap stocks achieved strong
returns but still underperformed large-cap stocks. Small-caps began the period
on a strong note, outpacing large-caps from February through May, then gave up
their early lead during June and July when the market experienced a sharp
correction. While both large-cap and small-cap stocks sold off, small-caps were
particularly hard hit. During the latter half of the period, the market surged
to record highs, but small-caps trailed their larger peers as investors rushed
to participate in the rising market, but hedged their bets by sticking with the
largest, most liquid stocks.
Despite the small-cap sector's waning momentum, we are pleased to
report that the fund's Class A shares returned 27.28% (at net asset value),
outperforming both its benchmark, the Russell 2000 index (18.95%), and the
large-cap S&P 500 stock index (26.25%). In addition, the fund's Class A shares
placed in the top third of the Lipper small-company growth fund category
(ranking 129th out of 394) for the 12-month period ended January 31, 1997,
according to Lipper Analytical Services, Inc. (Please note that Lipper rankings
do not take sales charges into account and that past performance is not a
guarantee of future results. Lipper did not rank the fund's Class B shares.) The
fund's Class B shares also achieved positive returns, but did not fare as well
because their inception coincided with the start of a more difficult market
environment for small-cap stocks.
The fund's performance was especially strong during the first half of
the period, when a number of its long-held investments performed well. These
positions included some companies that had experienced temporary difficulties
and rebounded on improving fundamentals, as well as companies that had been
relatively undiscovered and garnered increased investor awareness due to
continued strong earnings gains. The fund also performed better than the broader
market during the summer correction, when expensive, momentum-type stocks were
hit harder than those with inexpensive valuations, which the fund typically
emphasizes. In contrast, during the second half of the period, stocks with
momentum characteristics rebounded, while the types of stocks that the fund
stresses did not perform as strongly. In addition, the fund experienced price
corrections in several holdings due to earnings volatility.
The fund's top performers during the period came from a wide variety
of industries, with Black Box Corp. and Morningstar Group, Inc. contributing
significantly to overall results. Black Box Corp., a catalog marketer of
34
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
communications and networking products, was the fund's largest holding in the
beginning of the period and climbed substantially as it continued to achieve
record revenues and profits due to successful direct marketing efforts and new
product introductions. The position in Black Box was then sold after it reached
our target price. Morningstar Group, Inc., a manufacturer of specialty foods,
was the fund's eighth largest holding at the start of the period and nearly
tripled in price when it consolidated its market position through internal
growth, new product introductions and several attractive acquisitions. The fund
has held Morningstar Group for over four years; it is a good example of our
willingness to hold strong businesses until the market recognizes their true
value.
Other strong performers included American Safety Razor Co., the
leading U.S. manufacturer of private-brand and value-priced shaving blades,
which benefited from internal profit enhancement efforts and particularly strong
sales of its branded and private-label shaving and personal care products;
Movado Group, Inc., the owner of the Movado, Concord and Esquire watch brands,
which rebounded due to significant sales growth, new licensing agreements and
increased analyst coverage; J. Baker, Inc., a diversified retailer of footwear
and apparel, which announced its intention to sell its shoe division in order to
focus its resources on its successful "Casual Male Big & Tall" stores; and
Nimbus CD International, Inc., a CD and CD-ROM manufacturer that we sold after
it rose sharply due to high investor expectations of future DVD (digital video
disk) demand. Finally, several financial holdings performed well, such as Horace
Mann Educators Co., a provider of property, casualty and life insurance for the
educator market, and Terra Nova Bermuda Holdings, a worldwide provider of
property casualty insurance and reinsurance.
Not all of the fund's holdings fulfilled our expectations. Several
stocks were hurt by disappointing earnings, although we continue to believe in
their long-term prospects. For example, Landstar System, Inc. experienced
weakness when the restructuring of its trucking operations from a fixed cost to
a variable cost business took longer than expected. In addition, Central Maine
Power Co. was impacted by uncertainty in the regulatory environment, and Alpine
Lace Brands, Inc., a developer and marketer of cheese products, declined due to
an increase in commodity cheese prices. We took advantage of lower prices and
increased the fund's positions in all three stocks. In contrast, we liquidated
two other underperformers, Musicland Stores Corp. and Levitz Furniture Inc.,
because their fundamental businesses continued to deteriorate.
Recent Additions
During the period, we initiated a number of positions that have
already contributed to performance. These included Linens 'N Things, Inc., a
retailer of home accessories, which was attractively valued versus its key
competitor, Bed, Bath and Beyond, and has significant store expansion and margin
improvement potential, and Sun Healthcare Group, Inc., a well-managed
owner/operator of nursing homes with attractive long-term growth potential.
Though Sun Healthcare Group has been temporarily impacted by a government
investigation of one of its subsidiaries, we believe this issue is fully
reflected in the current stock price. In the technology sector, we added
DecisionOne Holdings Corp., the leading independent provider of computer
hardware and maintenance support services to U.S. companies. We intend to
continue to focus on technology-related service providers and distributors that
we believe are positioned to benefit from the expected long-term growth of the
sector but are not dependent on the success of any single product or service.
Other new investments were APS Holding Corp., a distributor of
automotive parts, which was depressed by industry- and company-specific issues
that we believe to be temporary, and Friedman's, Inc., a retailer of inexpensive
jewelry with significant expansion potential and a very low-cost operating
strategy. We also added two specialty insurance companies, SCPIE Holdings, Inc.
and Symon's International Group, Inc.
35
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund (continued)
- --------------------------------------------------------------------------------
Sales Included Several Financial Holdings
The fund sold several stocks after they appreciated and reached our
target prices. These included a number of financial holdings, such as Greenpoint
Financial Corp., the leading national lender of "no-documentation--low-
documentation" mortgages; Dime Bancorp, Inc., the fifth largest thrift in the
U.S.; and Western National Corporation, a marketer of annuity products.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Top 10 Portfolio Holdings as of January 31, 1997
Percentage of
Total Net
Company Line of Business Assets
<S> <C> <C>
Movado Group, Inc. Luxury and 5.6%
Affordable Watch
Distributor
DecisionOne Holdings Corp. Computer Support 4.9%
Provider
Sun Healthcare Group, Inc. Healthcare Services 3.9%
APS Holding Corp. Automotive Parts 3.6%
Distributor
Mariner Health Group, Inc. Healthcare Services 3.6%
Groupe AB Television 3.5%
Programming
Distributor
Friedman's, Inc. Jewelry Retailer 3.5%
J. Baker, Inc. Specialty Apparel 3.5%
Heritage Media Corp. Marketing Services 3.4%
Provider
Linens 'N Things, Inc. Home Products 3.1%
Retailer
- --------------------------------------------------------------------
</TABLE>
Outlook
One of the key factors that will affect equity performance during
1997 will be the continuation of the favorable economic environment of moderate
growth and low inflation, which would ensure that both the corporate earnings
outlook and the interest rate climate remain hospitable. Small-capitalization
stocks as a group currently appear undervalued relative to large-cap stocks and
to their own expected earnings potential. We believe that corporate earnings
growth will slow somewhat in 1997, and to the extent that smaller companies can
achieve better earnings growth than larger companies, they should perform
relatively well. The performance of small-caps will particularly depend on
investors broadening their focus from the largest, most liquid stocks to
smaller, less widely followed issues. We are optimistic regarding the fund's
future performance based on the strong earnings growth and the free cash flow we
expect from many of our top holdings, as well as from new investments.
/s/ Paul D. Farrell
Paul D. Farrell
Senior Portfolio Manager,
U.S. Active Equity Value
/s/ Matthew B. McLennan
Matthew B. McLennan
Assistant Portfolio Manager,
U.S. Active Equity Value
/s/ Timothy G. Ebright
Timothy G. Ebright
Portfolio Manager,
U.S. Active Equity Growth
March 3, 1997
36
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund
January 31, 1997
- -------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's
benchmarks (the Standard and Poor's 500 Index ("S&P 500") and the Russell 2000)
are shown for the appropriate time periods. All performance data shown
represents past performance and should not be considered indicative of future
performance which will fluctuate with changes in market conditions. These
performance fluctuations will cause an investor's shares, when redeemed, to be
worth more or less than their original cost.
Class A
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Small Cap Class A GS Small Cap Class A Russell
(w/sales charge) (no sales charge) S&P 500 2000
-------------------- --------------------- ------- -------
<S> <C> <C> <C> <C>
10/22/92 $ 9,450 10,000 $10,000 $10,000
1/31/93 11,138 11,786 10,655 11,733
1/31/94 14,494 15,337 12,027 13,914
1/31/95 11,953 12,649 12,091 13,078
1/31/96 12,813 13,559 16,768 17,010
1/31/97 16,320 17,270 21,183 20,242
</TABLE>
Class B
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Small Cap Class B GS Small Cap Class B Russell
(no redemp. charge) (w/redemp. charge) S&P 500 2000
-------------------- -------------------- ------- -------
<S> <C> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000 $10,000
1/31/97 10,539 10,039 12,218 10,732
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------
Average Annual Total Return
-----------------------------------------
One Year Since Inception/(a)/
-------------------------------------------------------------------------
<S> <C> <C>
Class A, no sales charge 27.28% 13.61%
-------------------------------------------------------------------------
Class A, w/sales charge 20.27% 12.12%
-------------------------------------------------------------------------
Class B, no redemption charge N/A 5.39%/(b)/
-------------------------------------------------------------------------
Class B, w/redemption charge N/A 0.39%/(b)/
-------------------------------------------------------------------------
</TABLE>
/(a)/ Class A and Class B shares commenced operations on October 22, 1992
and May 1, 1996, respectively.
/(b)/ An aggregate total return (not annualized) is shown instead of an
average annual total return since this class has not completed a full
twelve months of operations.
- --------------------------------------------------------------------------------
37
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks--92.5%
- --------------------------------------------------------------------
Auto/Original Equipment Manufacturer--3.6%
777,200 APS Holding Corp.* $ 7,869,150
- --------------------------------------------------------------------
Commercial Products--2.4%
211,000 Figgie International, Inc. Class A* 2,611,125
231,400 Figgie International, Inc. Class B* 2,487,550
- --------------------------------------------------------------------
5,098,675
- --------------------------------------------------------------------
Commercial Services--1.0%
539,200 Opinion Research Corp.* 2,022,000
- --------------------------------------------------------------------
Computers & Peripherals--7.5%
598,700 DecisionOne Holdings Corp.* 10,477,250
467,100 Multiple Zones International, Inc.* 5,605,200
- --------------------------------------------------------------------
16,082,450
- --------------------------------------------------------------------
Consumer Staples--3.8%
270,700 American Safety Razor Co.* 3,958,987
389,400 Spartech Corp. 4,234,725
- --------------------------------------------------------------------
8,193,712
- --------------------------------------------------------------------
Electric Utilities--2.2%
433,900 Central Maine Power Co. 4,827,137
- --------------------------------------------------------------------
Electrical Equipment--2.3%
240,100 Carbide/Graphite Group* 5,012,087
- --------------------------------------------------------------------
Food--2.3%
374,600 Alpine Lace Brands, Inc.* 2,341,250
109,000 Morningstar Group, Inc.* 2,588,750
- --------------------------------------------------------------------
4,930,000
- --------------------------------------------------------------------
Healthcare Management--9.0%
20,100 Health Systems International, Inc.* 520,088
798,000 Mariner Health Group, Inc.* 7,780,500
517,100 Sun Healthcare Group, Inc.* 8,402,875
146,200 Trigon Healthcare, Inc.* 2,595,050
- --------------------------------------------------------------------
19,298,513
- --------------------------------------------------------------------
Home Furnishing & Services--2.9%
221,500 Congoleum Corp.* 3,156,375
160,900 Synthetic Industries, Inc.* 3,036,988
- --------------------------------------------------------------------
6,193,363
- --------------------------------------------------------------------
Insurance Specialty--1.6%
63,100 Old Republic International Corp. 1,695,812
83,900 Scpie Holdings, Inc.* 1,761,900
- --------------------------------------------------------------------
3,457,712
- --------------------------------------------------------------------
Insurance-Life--0.3%
36,000 AmerUs Life Holdings, Inc.* 711,000
- --------------------------------------------------------------------
Insurance-Property and Casualty--6.0%
50,500 Horace Mann Educators Co. 2,158,875
206,500 IPC Holdings Ltd. 4,943,094
92,200 Symons International Group* 1,475,200
215,800 Terra Nova Bermuda Holdings 4,262,050
- --------------------------------------------------------------------
12,839,219
- --------------------------------------------------------------------
Leisure--1.0%
210,700 Trump Hotels & Casino Resorts,
Inc.* 2,212,350
- --------------------------------------------------------------------
Media Content--9.0%
596,300 Groupe AB SA ADR* 7,602,825
609,800 Heritage Media Corp.* 7,393,825
432,300 International Post Ltd.* 1,729,200
324,200 Platinum Entertainment, Inc.* 2,674,650
- --------------------------------------------------------------------
19,400,500
- --------------------------------------------------------------------
Metal Products--0.5%
57,200 Doncasters Plc ADR* 1,122,550
- --------------------------------------------------------------------
Packaging--0.7%
88,100 Shorewood Packaging Corp.* 1,596,813
- --------------------------------------------------------------------
Real Estate--0.7%
73,700 Insignia Financial Group, Inc.* 1,538,487
- --------------------------------------------------------------------
Recreation Products--5.6%
539,200 Movado Group, Inc. 12,064,600
- --------------------------------------------------------------------
Restaurants & Hotels--6.4%
262,400 IHOP Corp.* 6,461,600
399,300 Mortons Restaurant Group, Inc.* 6,438,713
40,000 Sonic Corp.* 815,000
- --------------------------------------------------------------------
13,715,313
- --------------------------------------------------------------------
Retail Hardgoods--4.7%
731,000 Brookstone Inc.* 5,939,375
290,700 Finlay Enterprises, Inc.* 4,287,825
- --------------------------------------------------------------------
10,227,200
- --------------------------------------------------------------------
</TABLE>
38
<PAGE>
- --------------------------------------------------------------------
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Specialty Retail--12.7%
506,200 Friedmans, Inc.* $ 7,593,000
242,000 General Nutrition Companies, Inc.* 4,386,250
1,500 Hibbett Sporting Goods, Inc.* 24,375
1,100,400 J. Baker, Inc. 7,565,250
87,000 Leslies Poolmart, Inc.* 1,141,875
307,200 Linens N'Things, Inc.* 6,758,400
- --------------------------------------------------------------------
27,469,150
- --------------------------------------------------------------------
Telephone Communications--0.3%
15,400 Telephone & Data Systems, Inc. 587,125
- --------------------------------------------------------------------
Textiles--1.6%
87,800 Samsonite Corp.* 3,468,100
- --------------------------------------------------------------------
Trucking--2.3%
207,100 Landstar Systems, Inc.* 4,918,625
- --------------------------------------------------------------------
Voice, Video and Data--2.1%
263,200 Pegasus Communications, Inc.* 3,224,200
142,700 Rural Cellular Corp.* 1,391,325
- --------------------------------------------------------------------
4,615,525
- --------------------------------------------------------------------
Total Common Stocks
(Cost $194,261,908) $199,471,356
====================================================================
<CAPTION>
Principal
Amount Description Value
====================================================================
<S> <C> <C>
Corporate Bond--0.2%
- --------------------------------------------------------------------
$ 500,000 J. Baker, Inc.
7.0%, 06/01/02 $ 412,500
- --------------------------------------------------------------------
Total Corporate Bond
(Cost $498,387) $ 412,500
====================================================================
Repurchase Agreement--7.7%
- --------------------------------------------------------------------
$16,600,000 Joint Repurchase Agreement Account
5.63%, 02/03/97 $ 16,600,000
- --------------------------------------------------------------------
Total Repurchase Agreement
(Cost $16,600,000) $ 16,600,000
====================================================================
<CAPTION>
Contracts Description Value
====================================================================
<S> <C> <C>
Options*--0.5%
200 S&P 500 Index Put Strike 725
exp. 03/97 $ 95,000
351 S&P 500 Index Put Strike 700
exp. 03/97 92,138
560 S&P 500 Index Put Strike 750
exp. 06/97 938,000
- --------------------------------------------------------------------
Total Options
(Cost $1,643,182) $ 1,125,138
====================================================================
Total Investments
(Cost $213,003,477)/(a)/ $217,608,994
====================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 31,335,604
Gross unrealized loss for investments in
which cost exceeds value (26,835,810)
- --------------------------------------------------------------------
Net unrealized gain $ 4,499,794
====================================================================
</TABLE>
* Non-income producing security.
/(a)/The aggregate cost for federal income tax purposes is $213,109,200.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs International Equity Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs International Equity Fund seeks long-term capital
appreciation by investing in equity securities of companies organized or traded
outside the U.S. that we believe have the potential to appreciate over the long
term. The fund focuses on growing companies that are attractively valued and
have strong, competitive positions in their respective industries. The fund's
portfolio managers are based in London, Tokyo and Singapore and their knowledge
of local markets plays an important role in uncovering investment opportunities.
While the fund does not allocate assets across specific countries based on
top-down economic or market forecasts, the portfolio managers strive to manage
risk by remaining diversified by country and industry sector and by closely
monitoring economic and political events in countries in which the fund does
invest.
Economic and Market Overview: European Markets Were Strong Despite Weak
Economies; Asia Faltered
Economic growth was slower than expected in many countries during the
period, prompting further monetary easing in much of Europe and continued very
low short-term interest rates in Japan. European equity markets performed very
well despite the growth shortfall, benefiting from an increased focus on
improving shareholder value. The Japanese market declined significantly, while
results in other Asian markets were mixed.
.. Europe. The economies of several European markets, such as the U.K., Norway
and Ireland, strengthened during the period, but overall growth remained weak
throughout most of Europe. A number of European countries attempted to stimulate
their economies through monetary easing, but maintained tight fiscal policies in
an effort to reduce their budget deficits enough to qualify for European
Monetary Union. This strategy proved to be only modestly successful, as
unemployment remained at record highs, particularly in Germany. Though the
recovery was somewhat disappointing, European equity markets rose 26.6% during
the period (as measured by the FT/S&P Actuaries Europe Index in terms of local
currencies), fueled by low inflation, low interest rates and relatively strong
bond markets. In addition, corporate profits improved, reflecting increased
emphasis on cost cutting and restructuring. The equity markets of Finland, Spain
and Sweden were among the strongest performers, while British stocks lagged much
of Europe due to a strengthening currency (which made U.K. exports more
expensive) and expectations of increases in short-term interest rates.
.. Japan. The Japanese economy strengthened during the period, but earnings
growth fell short of expectations. For the 12-month period ended January 31,
Japanese stocks (as measured by the TOPIX index in yen) declined 14.9%, with
approximately half of the loss occurring in January 1997 alone. During the first
half of the period, the Japanese market was bolstered by heavy demand from
Europe and the U.S., but foreign investors subsequently became net sellers when
the economic recovery softened and raised uncertainty surrounding the
sustainability of corporate profits. The weaker corporate earnings outlook
resulted in a conspicuous divergence between the performance of the largest
international blue-chip stocks and the rest of the market, particularly in the
third quarter. Lackluster investor sentiment was further exacerbated at the end
of the year due to increased pessimism that the Liberal Democratic Party (LDP)
government's higher taxes and scant spending on public works would dampen the
economy.
.. Asia (ex-Japan). Asian stock markets rose 2.4% during the period, as measured
by the MSCI All Country Asia Free (Ex Japan) Index (in terms of local
currencies). Asian markets began the period on a strong note, but several
markets faltered during the spring and summer due to a host of issues. These
included political uncertainty arising from national elections in several Asian
countries as well as slowing economic growth throughout the region, principally
due to weak electronics exports. From
- --------------------------------------------------------------------------------
40
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
September 1996 through January 1997, the region generally improved due to
stronger corporate earnings and stabilizing exports. The performance of the
individual markets varied widely. Malaysia was one of the region's best
performing markets during the period under review, rising 18.4%; Hong Kong, the
largest market in the region, performed well with a 12.0% return; and Thailand
was by far the weakest market, declining 45.3% (all in local currency terms).
Performance Review: Security Selection, Country Allocations and Industry
Weightings All Contributed to Strong Performance
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Fund Total FT/S&P
Return Actuaries
(based on Europe &
net asset Pacific Index
value) Total Return
------ ------------
<S> <C> <C>
Class A (1/31/96 - 1/31/97)* 13.48% 1.27%
Class B (5/1/96 - 1/31/97)* 2.83% -4.22%
Institutional (2/7/96 - 1/31/97)* 12.53% 0.53%
Service (3/6/96 - 1/31/97)* 10.42% 0.86%
- ------------------------------------------------------------------------------
</TABLE>
* Class A, B, Institutional and Service share performance assumes reinvestment
of all dividends and distributions, a complete redemption at the net asset value
at the end of the period and no initial sales charge or contingent deferred
sales charge. Performance for Class B, Institutional and Service shares is a
cumulative total return (not annualized) from their inception through the end of
the period.
The fund performed extremely well during the period under review,
with all of its share classes outperforming the benchmark, the Financial
Times/S&P Actuaries Europe & Pacific Index ("Europac") unhedged. Europac is a
capitalization-weighted composite of approximately 1,500 stocks from 23
countries in Europe and the Asia-Pacific region and is calculated on a monthly
basis. We are also pleased to note that the fund's Class A shares placed in the
top third of the Lipper international fund category (ranking 93rd out of 342)
for the 12-month period ended January 31, 1997, according to Lipper Analytical
Services, Inc. (Please note that Lipper rankings do not take sales charges into
account and that past performance is not a guarantee of future results. Lipper
did not rank the fund's Class B, Institutional or Service shares.)
The primary driver of the fund's superior performance was successful
stock selection, as we continued to focus on growing companies that actively
increased shareholder value through actions such as cost cutting, share buybacks
or restructuring. In addition, country allocations that worked in the fund's
favor were its overweighting in Sweden, one of the strongest performing markets
during the period, and its underweighting in Japan, one of the weakest, each the
result of our bottom-up approach to stock selection. The fund's industry
allocations also added value. The fund was overweighted in business services and
diversified consumer goods/services, which were among the best performing
sectors, and underweighted in financial services and basic industries, which
performed relatively poorly.
In terms of currency exposure, though the fund's neutral exposure is
unhedged, it was substantially hedged against the yen, which benefited
performance significantly when the yen continued to fall against the dollar. In
addition, the fund was partially hedged against some European currencies, such
as the Deutsche mark and the Swiss franc, which worked in its favor when the
dollar rose against those currencies.
The fund's Class B shares outperformed the benchmark by a wide
margin, but their performance was not as strong as the other share classes
because they began operations in May, after equity prices had already risen
significantly.
Portfolio Composition: A Widely Diversified Portfolio
As of January 31, 1997, the fund held positions in 56 companies based
in 16 countries. In terms of total portfolio assets, the five largest country
exposures were Japan (27.3%), the U.K. (12.6%), Germany (7.1%), Sweden (7.0%)
and Switzerland (6.8%).
Europe. At the end of the period, the portfolio's 53.0% allocation in European
stocks was in line with that of the benchmark (54.1%). In general, growth stocks
led the
- --------------------------------------------------------------------------------
41
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs International Equity Fund (continued)
- --------------------------------------------------------------------------------
market during the period. Many of the fund's European holdings were
growth-oriented stocks that benefited from positive earnings surprises and
successful efforts by senior management to enhance equity returns and
shareholder value. Several of the portfolio's longer term European holdings
were, once again, among its strongest performers. Securitas (Sweden), the
largest security services company in Europe, more than doubled during the
period, boosted by earnings from companies it acquired in Germany, France and
Portugal. Fresenius (Germany), a major producer of medical supplies, rose over
140% as it merged its global kidney dialysis division with W. R. Grace's
National Medical Center healthcare subsidiary and spun off the resulting
business, Fresenius Medical Care. Ericsson (Sweden), one of the world's leading
suppliers of mobile telephones and infrastructure, rebounded from weakness early
in the period when it achieved very good earnings, which reassured investors
that it was not suffering from margin pressure or weak mobile telephone orders.
Other strong performers were Randstad Holdings (Netherlands), the leading
temporary help organization in its market, which reported healthy sales and
earnings as its business continued to expand, and Comptoirs Modernes (France), a
supermarket chain operator, which gained market share in France and made
important acquisitions in Spain.
Several of the fund's newer additions also contributed to its
positive results. These included two pharmaceutical companies: Hoechst
(Germany), whose acquisition and restructuring plans indicate a commitment to
improving shareholder value, and Novartis (Switzerland), which was formed
through the merger of Ciba-Geigy and Sandoz and is expected to benefit from
significant cost reductions as well as new product development. Other
significant new positions that performed well were SGS Thomson (France), one of
the 10 largest semiconductor manufacturers in the world, which operates in the
high-value-added, application-specific sector of the market, and Telecom Italia
Mobile (Italy), the leading mobile telephone operator in Italy, which generates
strong cash flow and is extremely profitable.
Japan. Approximately 27% of the fund was invested in Japan, which was
underweighted relative to the benchmark (32.1%). The fund's Japanese stocks
fared better than the market, as we avoided banks and brokerages, two of the
weakest industries. We invested in companies with relatively robust earnings
visibility and good valuations, particularly favoring management that improved
cost competitiveness and strengthened their core business. The fund's best
performing Japanese stocks were TDK Corp., an electronic components manufacturer
that reported better than expected earnings due to strong sales of personal
computer-related components; Hoya Corp., an optical glass manufacturer that
aggressively restructured its operations and successfully diversified its
business so that it now dominates the glass magnetic disc market; and Mirai
Industry, a market leader in electric cables, pipes and other electric wiring
that introduced new products and cut costs. In contrast, Kyocera Corp., an
electronics components manufacturer, reported disappointing results due to
increased competition in the semiconductor and communication equipment
businesses. A new addition was Takeda Chemical Industry, the largest
pharmaceutical company in Japan, where aggressive new management initiatives
rapidly expanded overseas sales and improved the profitability of its
prescription drug business.
Asia-Pacific. Asia, a 13.5% allocation (excluding Japan), was slightly
overweighted compared with the benchmark's 10.7%, with Hong Kong representing
the largest country position at 6.7% of the portfolio. For most of the period,
the fund was overweighted in Malaysia, Hong Kong and Australia, which were three
of the better performing Asian markets. Though the performance of some of the
other markets fell short of expectations, our stock selection within the region
worked in the fund's favor. Several of the fund's top performers were financial
stocks, including Commerce Asset-Holdings, the fifth largest financial group in
Malaysia, which benefited from its merchant banking operations and strong loan
growth, and HSBC Holdings, a Hong Kong-based banking and financial services
organization, which reported strong results due to its dominant market position.
New holdings include Australia & New Zealand Bank Group, a bank that is
positioned to benefit from the potential deregulation in Australia's financial
services sector, and Asia Satellite Telecommunications Holdings Ltd., a
- --------------------------------------------------------------------------------
42
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
leading satellite owner and operator in the Asia-Pacific region that owns prime
orbital slots that are expected to result in high utilization rates and fees.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Top 10 Portfolio Holdings as of January 31, 1997
Percentage
of Total
Company Country Line of Business Net Assets
<S> <C> <C> <C>
HSBC Holdings Hong Kong Banking and 3.0%
Finance
Novartis Switzerland Pharmaceuticals 3.0%
Fresenius Germany Kidney Dialysis 2.4%
Equipment
TDK Corp. Japan Tape and Disc 2.4%
Manufacturer
Telecom Italia Italy Mobile Tele- 2.4%
Mobile communications
Operator
Canon, Inc. Japan Office Equipment 2.4%
Manufacturer
Adecco Switzerland Temporary Help 2.4%
Services
Adidas Germany Sporting Goods 2.4%
Manufacturer
Hoechst Germany Chemical and 2.3%
Drug
Manufacturer
Hoya Corp. Japan Optical Glass 2.3%
Manufacturer
- --------------------------------------------------------------------
</TABLE>
Outlook
In the near term, we expect most international economies to continue
to experience moderate growth and subdued inflation. We are particularly
positive on the prospects for the European markets in 1997, where we expect a
modest acceleration in economic growth and a continuation of healthy corporate
earnings growth helped by cost cutting as well as restructuring initiatives.
We are currently most concerned about Japan. Despite the sharp
correction, we expect to remain underweighted in the Japanese market because of
our negative view of the banking sector and only modest earnings recoveries in
nonmanufacturing sectors. Lack of investor confidence in the government's
commitment to deregulation, as well as simultaneous weakness in the bond and
currency markets, have all impacted market sentiment. In this state of
uncertainty, superior stock selection will be essential, and we intend to
emphasize companies with clear earnings visibility, strong management and
attractive valuations. Despite the generally poor conditions, the earnings for
the fund's Japanese holdings are above expectations and are being upgraded. In
non-Japan Asia, corporate earnings reports have been mixed, but we believe
improved political stability and export growth should help stocks in 1997.
Finally, we are pleased to report that we have expanded our
international equity team in all geographic regions to support our effort to
seek out the most promising companies around the world.
/s/ Roderick D. Jack
Roderick D. Jack
Senior Portfolio Manager, London
/s/ Marcel Jongen
Marcel Jongen
Senior Portfolio Manager, London
/s/ Shogo Maeda
Shogo Maeda
Senior Portfolio Manager, Tokyo
/s/ Warwick M. Negus
Warwick M. Negus
Senior Portfolio Manager, Singapore
March 3, 1997
- --------------------------------------------------------------------------------
43
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs International Equity Fund
January 31, 1997
- --------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and Class B, respectively) on the
inception date of each class. For comparative purposes, the performance of the
Fund's benchmark (the Financial Times-Actuaries World Euro-Pacific Index
Unhedged ("FT Euro-Pac (Unhedged)/(b)/) is shown for the appropriate time
periods. All performance data shown represents past performance and should not
be considered indicative of future performance which will fluctuate with changes
in market conditions. These performance fluctuations will cause an investor's
shares, when redeemed, to be worth more or less than their original cost.
<TABLE>
<CAPTION>
Class A
[LINE GRAPH APPEARS HERE]
GS Intl Eq GS Intl Eq
Class A Class A FT Euro-Pac Ft Euro-Pac
(w/sales charge) (no sales charge) (Comb )(b) (Unhedged)
---------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C>
12/1/92 9,450 10,000 10,000 10,000
1/31/93 9,566 10,123 10,063 10,055
1/31/94 12,066 12,768 13,498 14,399
1/31/95 10,058 10,643 12,119 13,902
1/31/96 12,942 13,695 13,983 16,039
1/31/97 14,961 15,546 14,160 16,243
<CAPTION>
Class B
[LINE GRAPH APPEARS HERE]
GS Intl Eq GS Intl Eq
Class B Class B FT Euro-Pac
(w/sales charge) (no sales charge) (Unhedged)
---------------- ----------------- -----------
<S> <C> <C> <C>
5/1/96 10,000 10,000 10,000
1/31/97 10,283 9,783 9,578
<CAPTION>
Institutional
[LINE GRAPH APPEARS HERE]
GS Intl Equity FT Euro-Pac
Institutional Class (Unhedged)
------------------- -----------
<S> <C> <C>
2/7/96 10,000 10,000
1/31/97 11,253 10,053
<CAPTION>
Service
[LINE GRAPH APPEARS HERE]
GS Intl Equity FT Euro-Pac
Service Class (Unhedged)
-------------- -----------
<S> <C> <C>
3/6/97 10,000 10,000
1/31/97 11,042 10,086
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------
Average Annual Total Return
----------------------------------------
One Year Since Inception/(a)/
- -------------------------------------- ------------------- --------------------
<S> <C> <C>
Class A, no sales charge 13.48% 11.15%
- -------------------------------------- ------------------- --------------------
Class A, w/sales charge 7.26% 9.66%
- -------------------------------------- ------------------- --------------------
Class B, no redemption charge N/A 2.83% /(c)/
- -------------------------------------- ------------------- --------------------
Class B, w/redemption charge N/A (2.17)%/(c)/
- -------------------------------------- ------------------- --------------------
Institutional Class N/A 12.53% /(c)/
- -------------------------------------- ------------------- --------------------
Service Class N/A 10.42% /(c)/
- -------------------------------------- ------------------- --------------------
</TABLE>
/(a)/ Class A, Class B, Institutional and Service shares commenced operations
on December 1, 1992, May 1, 1996, February 7, 1996 and March 6, 1996,
respectively.
/(b)/ Beginning on September 1, 1994, the Class A shares began using the
unhedged FT Euro-Pac as its benchmark (prior thereto, Class A used the
hedged FT Euro-Pac). The combined FT Euro-Pac represents the hedged FT
Euro-Pac performance up to August 31, 1994 and the unhedged FT Euro-Pac
performance from September 1, 1994 through January 31, 1997.
/(c)/ An aggregate total return (not annualized) is shown instead of an average
annual total return since these classes have not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
44
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs International Equity Fund
January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks--91.5%
Australian Dollar--3.6%
1,851,658 Australia & New Zealand Bank Group
(Commercial Banks) $ 11,355,706
1,564,955 Woodside Petroleum, Ltd. (Oil &
Gas) 11,053,763
- --------------------------------------------------------------------
22,409,469
- --------------------------------------------------------------------
Austrian Schilling--1.2%
105,400 Oesterreichische Elektrizitats
(Utilities) 7,698,241
- --------------------------------------------------------------------
Belgian Franc--0.2%
14,400 Dexia (Financial Services) 1,372,240
- --------------------------------------------------------------------
British Pound Sterling--12.6%
1,391,569 British Airport Authority
(Transportation) 11,661,442
1,788,649 Electrocomponents (Wholesale
Trade) 12,753,546
1,261,210 Premier Farnell PLC (Electronics) 10,670,067
706,368 Misys PLC (Business Services and
Computer Software) 12,393,414
1,708,700 Rentokil Group (Business Services) 12,553,100
473,916 Siebe (Machinery and Engineering
Services) 7,973,270
873,509 Standard Chartered (Banking) 10,497,224
- --------------------------------------------------------------------
78,502,063
- --------------------------------------------------------------------
Deutsche Mark--4.7%
155,760 Adidas AG (Textiles) 14,749,495
343,320 Hoechst AG (Healthcare) 14,439,672
- --------------------------------------------------------------------
29,189,167
- --------------------------------------------------------------------
French Franc--6.4%
22,531 Comptoirs Modernes (Retail) 11,749,983
40,720 CLF Dexia (Financial Services) 3,649,869
95,602 CLF Dexia - Registered Shares 8,569,124
(Financial Services)
63,189 Seita (Tobacco) 2,400,553
193,600 SGS Thomson Microelectronics
(Electronics) 13,882,408
- --------------------------------------------------------------------
40,251,937
- --------------------------------------------------------------------
Hong Kong Dollar--6.7%
4,148,000 Asia Satellite Tel.
(Telecommunications) 9,233,837
816,800 HSBC Holdings (Commercial Banks) 18,920,583
1,185,000 Sun Hung Kai Properties Co. (Real
Estate) 13,380,759
- --------------------------------------------------------------------
41,535,179
- --------------------------------------------------------------------
Irish Pound--2.3%
1,491,014 Bank of Ireland (Commercial Banks) 14,247,624
- --------------------------------------------------------------------
Italian Lira--2.4%
3,000,500 Telecom Italia Mobile (Utilities) 8,930,448
3,574,000 Telecom Italia Mobile (Di Risp
Shares) (Utilities) 6,095,944
- --------------------------------------------------------------------
15,026,392
- --------------------------------------------------------------------
Japanese Yen--27.3%
206,000 Aderans Company Ltd. (Retail) 4,808,281
702,000 Canon, Inc. (Office Equipment
Manufacturer) 14,880,119
363,000 Hoya Corp. (Electronics and
Instrumentation) 14,520,599
297,400 Inaba Denkisangyo (Industrial) 5,396,346
458,000 Kokuyo Co., Ltd. (Office Equipment
Manufacturer) 9,594,787
149,000 Kyocera Corp. (Electronics) 8,749,887
358,000 Max Co. (Electronics and
Instrumentation) 5,432,966
238,900 Mirai Industry Co. (Electrical
Equipment Manufacturer) 5,852,060
1,927,000 Mitsubishi Heavy Industries Ltd.
(Engineering) 13,874,972
1,530,000 Mitsui Marine & Fire (Insurance) 8,215,019
450,100 Santen Pharmaceutical Co.
(Healthcare) 8,352,716
92,800 Sanyo Shinpan Financial
(Financial) 5,204,668
</TABLE>
- --------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
45
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs International Equity Fund (continued)
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Japanese Yen (continued)
322,000 Shimachu (Retail-Furniture) $ 6,905,027
213,900 SMC Corp. (Machinery) 13,125,622
410,000 Taikisha Ltd. (Machinery) 5,038,558
570,000 Takeda Chemical Industry
(Healthcare) 11,235,927
235,000 TDK Corp. (Consumer Goods) 15,040,620
464,000 Tostem Corp. (Construction) 10,906,842
146,800 York Benimaru (Retail) 3,922,900
- --------------------------------------------------------------------
171,057,916
- --------------------------------------------------------------------
Malaysian Ringgit--1.9%
1,328,000 Commerce Asset Holdings
(Commercial Banks) 10,683,829
581,000 Leader Universal Holdings
(Metals-Diversified) 1,168,544
- --------------------------------------------------------------------
11,852,373
- --------------------------------------------------------------------
Netherlands Guilder--5.0%
146,070 Aegon (Insurance) 8,951,011
136,180 Randstad Holdings (Business
Services) 9,471,458
102,016 Wolters Kluwer (Media) 12,602,793
- --------------------------------------------------------------------
31,025,262
- --------------------------------------------------------------------
Singapore Dollar--1.5%
1,511,000 Singapore Land (Real Estate) 9,123,100
- --------------------------------------------------------------------
Spanish Peseta--1.9%
63,595 Banco Popular (Commercial Banks) 11,571,494
- --------------------------------------------------------------------
Swedish Krona--7.0%
335,300 Ericsson Telecommunications
(Computer - Office) 11,255,719
268,440 Hoganas AB (Metal Products) 8,455,037
405,970 Securitas AB (Business Services) 12,057,737
3,469,100 Swedish Match AB (Tobacco) 11,741,304
- --------------------------------------------------------------------
43,509,797
- --------------------------------------------------------------------
Swiss Franc--6.8%
52,468 Adecco SA (Business Services) 14,753,971
6,726 Cie Financier Richemont AG
(Consumer Goods) 9,231,858
16,335 Novartis AG (Healthcare) 18,730,002
- --------------------------------------------------------------------
42,715,831
- --------------------------------------------------------------------
Total Common Stocks
(Cost $503,926,410) $ 571,088,085
====================================================================
Preferred Stock--2.4%
- --------------------------------------------------------------------
Deutsche Mark--2.4%
74,790 Fresenius AG (Health Care),
Non-voting $ 15,042,126
- --------------------------------------------------------------------
Total Preferred Stock
(Cost $4,437,079) $ 15,042,126
====================================================================
<CAPTION>
Principal
Amount Description Value
====================================================================
<S> <C> <C>
Short-Term Obligations--6.6%
- --------------------------------------------------------------------
$ 41,394,109 State Street Bank & Trust
Euro-Time Deposit 5.5%, 02/03/97** $ 41,394,109
- --------------------------------------------------------------------
Total Short-Term Obligations
(Cost $41,394,109) $ 41,394,109
====================================================================
Total Investments
(Cost $549,757,598)/(a)/ $ 627,524,320
====================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $108,968,495
Gross unrealized loss for investments in
which cost exceeds value (31,533,818)
- --------------------------------------------------------------------
Net unrealized gain $ 77,434,677
====================================================================
</TABLE>
/(a)/ The aggregate cost for federal income tax purposes is $550,089,643.
* Non-income producing security.
** A portion of this security has been segregated for extended
settlement securities.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an intergral part of these financial statements.
46
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------
Common and Preferred Stock Industry Concentrations
====================================================================
<S> <C>
Business Services 7.8%
Commercial Banks 12.4%
Computer Software and Services 2.0%
Computer - Office 1.8%
Construction 1.7%
Consumer Goods 3.9%
Electrical Equipment Manufacturer 0.9%
Electronics 5.3%
Electronics and Instrumentation 3.2%
Engineering 2.2%
Financial 0.8%
Financial Services 2.2%
Health Care 10.9%
Industrial 0.9%
Insurance 2.7%
Machinery 2.9%
Machinery and Engineering Services 1.3%
Media 2.0%
Metal Products 1.4%
Metals-Diversified 0.2%
Office Equipment Manufacturer 3.9%
Oil & Gas 1.8%
Real Estate 3.6%
Retail 3.3%
Retail-Furniture 1.1%
Telecommunications 1.5%
Textiles 2.4%
Tobacco 2.3%
Transportation 1.9%
Utilities 3.6%
Wholesale Trade 2.0%
- --------------------------------------------------------------------
Total Common and Preferred Stock 93.9%
====================================================================
</TABLE>
The accompanying notes are an integral part of these financial
statements.
- --------------------------------------------------------------------
47
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Asia Growth Fund seeks long-term capital appreciation by
investing in a limited number of carefully selected companies located in 12
Asian markets, including China, Hong Kong, India, Indonesia, Malaysia, Pakistan,
the Philippines, Singapore, South Korea, Sri Lanka, Taiwan and Thailand.
We utilize extensive fundamental research in our search for well-managed
companies whose stock prices are, in our opinion, undervalued in the
marketplace. Because many companies in the Asian region are growing at
relatively rapid rates, we consider a company's return on capital, its
price-to-book value and the predictability of its earnings stream as among the
best measures of its intrinsic value. A strong market position and a skilled
management team dedicated to maximizing shareholder returns are also important
to us. Our investment process includes face-to-face meetings with senior
management as well as frequent contact with a company's customers, suppliers and
competitors.
While our primary focus is on stock selection, we seek to carefully manage
risk by diversifying the fund's portfolio in terms of countries, industry
sectors and size of capitalization. We are also mindful of making certain that
the market for a particular stock is relatively liquid, so we can easily sell a
position if our opinion changes. From time to time, we may choose to
significantly overweight or underweight our holdings in one country compared
with our benchmark, if we believe there is a compelling reason to do so.
Finally, we closely monitor the potential impact of political and economic
events in the region on particular companies and adjust the portfolio
accordingly.
Market Overview: Results Were Mixed in Asian Markets
As a group, the Asian stock markets rose 2.37% during the period, as
measured by the MSCI All Country Asia Free (Ex Japan) Index (without dividends
reinvested). The weak performance indicated by the Index masks the wide
divergence of performance among the individual Asian markets, as several
countries rose more than 10% while others fell more than 20%. The period under
review began on a strong note, but the region quickly sold off in mid-February
when investors became unnerved by rising political tension between China and
Taiwan. Though the Asian markets briefly rebounded, investor interest was
dampened again during the spring and summer due to uncertainty surrounding
national elections in several countries, a decline in exports and slowing
economic growth. From October 1996 through January 1997, most Asian markets
recovered due to improving corporate earnings and signs of stabilizing export
growth.
In terms of individual markets, Taiwan, Malaysia and Indonesia were the
strongest performers, rising 56.0%, 21.9% and 17.5%, respectively (in U.S.
dollar terms), with each overcoming brief setbacks such as negative short-term
economic data and political upheaval. Other positive markets were India, which
was the region's strongest performer during the first half of the year and
subsequently gave back some of its gains, and the Philippines, where healthy
economic growth and declining inflation renewed investor interest. Hong Kong,
the most heavily weighted country in the Index, posted lackluster results early
in the period, then rebounded to close the period with a 12.0% gain due to a
favorable interest rate environment and a soaring property market. The weakest
performer was Thailand, which dropped 46.5%. Thailand was impacted by a very
large budget deficit, exacerbated by the slowdown of computer-related exports as
well as a tear in the speculative bubble in the real estate market, as
nonperforming property loans caused problems in the banking sector. South Korea
and Singapore were weak as well, declining approximately 34% and 7%,
respectively. South Korean equities were affected by an ongoing investigation of
government corruption and a weakening economy, and Singapore's market fell due
to soft electronics exports.
- --------------------------------------------------------------------------------
48
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Review: Country Allocations Affected the Fund's Performance
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Fund Total MSCI AC
Return Asia Free
(based on net (Ex Japan)
asset value) Index +
------------ -----
<S> <C> <C>
Class A (1/31/96 - 1/31/97)* -1.01% 2.37%
Class B (5/1/96 - 1/31/97)* -6.02% -2.50%
Institutional (2/2/96 - 1/31/97)* -1.09% 2.06%
- -------------------------------------------------------------------
</TABLE>
* Class A, B and Institutional share performance assumes reinvestment of all
dividends and distributions, a complete redemption at the net asset value at
the end of the period and no initial sales charge or contingent deferred sales
charge. Performance for Class B and Institutional shares is a cumulative total
return (not annualized) from their inception through the end of the period.
+ Represents a price-only index that does not reflect reinvested dividends.
During the period under review, stock selection benefited the fund as a
number of holdings achieved strong returns. The fund's performance was
nonetheless affected by its country over- and underweightings relative to the
Index when individual markets performed better or worse than expected. For
example, Taiwan and Malaysia were two of the region's best performing markets,
but the fund was underweighted in those countries and therefore did not fully
participate in their rallies.
Financial, Property and Infrastructure Stocks Were the Strongest Performers
The fund's best performers during the period were its positions in the
financial, real estate and infrastructure sectors. Top financial stocks included
two of our Hong Kong investments, HSBC Holdings PLC, one of the world's largest
banking and financial services companies, and Wing Hang Bank Ltd., a provider of
banking, foreign exchange and treasury services, which both benefited from
strong growth in mortgage loans resulting from Hong Kong's robust property
market. Metropolitan Bank and Trust, the Philippines' largest bank in terms of
assets, rose substantially due to the growing Philippine economy and aggressive
branch expansion, and Commerce Asset-Holdings, the fifth largest financial group
in Malaysia, benefited from its merchant banking operations and strong loan
growth.
In the real estate sector, Hong Kong's booming property market buoyed
several of the fund's holdings. These included Sun Hung Kai Properties, one of
the largest and best managed property companies in Hong Kong; Henderson Land
Development, a large property development and investment holding company that
concentrates on mass residential developments; and HKR International Ltd., a
real estate developer that primarily focuses on residential development in
Discovery Bay on Lantau Island (a self-contained community that offers a
"quality lifestyle").
Other strong performers were two Malaysian companies that benefited from
the government's commitment to improve the country's infrastructure. Road
Builder Malaysia Holdings, a contractor specializing in civil engineering and
road construction, continued its strategic expansion and diversification, and
United Engineers Malaysia, Malaysia's largest builder and operator of toll
roads, rose due to the opening of several new roads.
Stocks that did not fulfill our expectations included Leader Universal
Holdings, Malaysia's leading manufacturer of power and telecommunication cable,
which reported lower than expected earnings due to very low export margins;
Industrial Finance Corp. of Thailand (IFCT), which declined in sympathy with
Thailand's financial sector; and Tata Engineering and Locomotive Company
(TELCO), India's largest vehicle manufacturer, which slumped on speculation
concerning rising inventories and general market uncertainty. We significantly
reduced the fund's position in Leader Universal Holdings and IFCT, but we
continue to have confidence in TELCO, which has strong fundamentals and fared
well relative to the broader Indian market.
Portfolio Composition
As of January 31, 1997, 97.1% of the fund's total market value was
invested in equities while 2.2% was in cash equivalents, with the remainder in
other securities. The fund's five largest country exposures were Hong Kong
(39.9%), Malaysia (13.5%), Singapore (10.1%), India (9.9%) and Indonesia (5.2%).
At the end of the period, the portfolio was overweighted relative to the Index
in Hong Kong, India and South Korea, slightly underweighted in
- --------------------------------------------------------------------------------
49
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund (continued)
- --------------------------------------------------------------------------------
the Philippines, and significantly underweighted in Thailand, Singapore,
Malaysia and Taiwan.
Additions in Real Estate and Security Services, Reductions in Several Existing
Positions
During the period, we added Hysan Development Company, a property
investment company that owns a number of commercial and residential properties
in Hong Kong and should be a beneficiary of rising rental prices, and
Taiwan-Sogo Shinkong, a security services company that controls approximately
38% of the market in Taiwan and is expected to experience growing demand from
residential clients. Other portfolio changes included the trimming of several
positions in Hong Kong after they appreciated significantly and became more
fully valued. These included Sun Hung Kai Properties, Henderson Land Development
and HKR International Ltd.
<TABLE>
<CAPTION>
Top 10 Portfolio Holdings as of January 31, 1997
Percentage
Line of of Total
Company Country Business Net Assets
<S> <C> <C> <C>
HKR International Hong Kong Property 4.4%
Ltd.
Road Builder Malaysia Infrastructure 4.1%
Malaysia Holdings
Swire Pacific Ltd. Hong Kong Conglomerate 4.1%
Metropolitan Bank Philippines Banking and 3.8%
and Trust Finance
Wing Hang Bank Hong Kong Banking and 3.9%
Ltd. Finance
Henderson Land Hong Kong Property 3.7%
Development
HSBC Holdings PLC Hong Kong Banking and 3.5%
Finance
Hutchison Hong Kong Conglomerate 3.5%
Whampoa
Sun Hung Kai Hong Kong Property 3.5%
Properties
Commerce Asset- Malaysia Conglomerate 3.5%
Holdings
</TABLE>
Outlook
In 1997, we expect export growth to strengthen, which should stimulate
economies throughout the region. With most of the region's elections now over,
the region should also benefit from greater political stability in 1997. Though
the recent death of Deng Xiaoping may increase near-term volatility, we remain
optimistic that the handover of Hong Kong to China will proceed smoothly, as it
is in China's best interests to maintain Hong Kong's current economic success.
We intend to increase the fund's weightings in Malaysia, the Philippines and
Indonesia, markets that we expect to benefit from stable currencies and good
economic fundamentals. In September 1996, the benchmark established a new
weighting in Taiwan and doubled its weighting in Korea, and we are actively
seeking investment opportunities in these countries. We continue to have a
favorable view of India but are still cautious regarding Thailand and Singapore,
where real estate overdevelopment may continue to hinder their respective
markets for the near term.
In general, we believe that Asian equities are attractively valued on a
historical basis. We expect that economic growth in the region may slow somewhat
to 5% to 7% annually, still approximately double versus the U.S., one of the
world's most mature economies. Over time, we intend to broaden our emphasis from
companies that tend to do well in the earliest stages of emerging economies to
companies that we believe are poised to benefit most from the region's internal
growth. These include new start-ups, consumer-related products and services, and
infrastructure companies.
On another front, we are pleased to announce that we have recently
expanded our portfolio management team. Our new team members will focus
primarily on real estate companies, conglomerates and cyclical industries, and
they will enhance our ability to seek out companies with above-average growth
potential.
50
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
We appreciate your continued support in what has been a challenging period
for the region and the fund. Going forward, we remain confident that the region
continues to offer many attractive investment opportunities for investors with a
long-term view.
/s/ Warwick M. Negus
Warwick M. Negus
Senior Portfolio Manager,
Asia Active Equity
/s/ Alice Lui
Alice Lui
Portfolio Manager,
Asia Active Equity
/s/ Ravi Shanker
Ravi Shanker
Portfolio Manager,
Asia Active Equity
/s/ Karma A. Wilson
Karma A. Wilson
Portfolio Manager,
Asia Active Equity
March 3, 1997
- --------------------------------------------------------------------------------
51
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund
January 31, 1997
- --------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's benchmark
(the Morgan Stanley Capital International Combined Asia (ex Japan) Index ("MSCI
Combined Asia-ex Japan")) is shown for the appropriate time periods. All
performance data shown represents past performance and should not be considered
indicative of future performance which will fluctuate with changes in market
conditions. These performance fluctuations will cause an investor's shares, when
redeemed, to be worth more or less than their original cost.
Class A
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Asia Growth GS Asia Growth
Class A Class A MSCI
(w/sales charge) (no sales charge) Combined
---------------- ----------------- --------
<S> <C> <C> <C>
7/8/94 $ 9,450 $10,000 $10,000
1/31/95 8,934 9,454 9,074
1/31/96 11,300 11,958 11,129
1/31/97 11,186 11,837 11,393
</TABLE>
Class B
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Asia Growth GS Asia Growth
Class B Class B MSCI
(w/redemp. charge) (no redemp. charge) Combined
------------------- ------------------ --------
<S> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000
1/31/97 9,398 8,928 9,750
</TABLE>
Institutional
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Asia Growth MSCI
Institutional Combined
-------------- --------
<S> <C> <C>
2/2/96 $10,000 $10,000
1/31/97 9,891 10,206
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------
Average Annual Total Return
----------------------------------------
One Year Since Inception/(a)/
- -------------------------------------------------------------------------
<S> <C> <C>
Class A, no sales charge (1.01)% 6.78%
- -------------------------------------------------------------------------
Class A, w/sales charge (6.44)% (4.46)%
- -------------------------------------------------------------------------
Class B, no redemption charge N/A (6.02)%/(b)/
- -------------------------------------------------------------------------
Class B, w/redemption charge N/A (10.72)%/(b)/
- -------------------------------------------------------------------------
Institutional Class N/A (1.09)%/(b)/
- -------------------------------------------------------------------------
</TABLE>
/(a)/ Class A, Class B and Institutional shares commenced operations July 8,
1994, May 1, 1996 and February 2, 1996, respectively.
/(b)/ An aggregate total return (not annualized) is shown instead of an average
annual total return since these classes have not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
52
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Asia Growth Fund
- --------------------------------------------------------------------
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
Common Stocks--96.0%
<S> <C> <C>
Hong Kong Dollar--39.9%
3,734,000 Asia Satellite Tel.*
(Telecommunications) $ 8,312,234
1,107,000 Henderson Land Development Co.
(Recreational Services) 10,250,000
7,947,440 HKR International Ltd.
(Real Estate) 12,358,582
2,731,000 Hong Kong Electric Holdings
(Utility) 9,709,517
426,000 HSBC Holdings
(Commercial Banks) 9,867,983
1,305,000 Hutchison Whampoa
(Conglomerates) 9,851,916
2,513,000 Hysan Development
(Utility) 9,145,257
9,735,666 JCG Holdings Ltd.
(Financial Services) 8,669,002
2,308,200 San Miguel Brewery Ltd.
(Breweries) 1,049,994
869,000 Sun Hung Kai Properties Co.
(Real Estate) 9,812,556
1,262,000 Swire Pacific Ltd. "A"
(Transportation) 11,603,755
2,316,500 Wing Hang Bank Ltd.
(Financial Services) 11,030,952
- --------------------------------------------------------------------
111,661,748
- --------------------------------------------------------------------
Indian Rupee--9.9%
235,000 Brook Bond Lipton India Ltd.
(Food) 2,438,494
372,900 Colgate Palmolive
(Conglomerates) 2,613,421
259,600 Hindustan Lever Ltd.
(Household Products) 6,423,018
10,000 Larsen & Toubro Ltd.
(Engineering) 65,272
143,500 Larsen & Toubro Ltd. GDR
(Engineering) 1,919,313
214,000 Larsen & Toubro LTD. GDS
(Engineering) 2,862,250
434,250 Mahindra & Mahindra Ltd.
(Autos and Trucks) 4,339,472
165,750 Mahindra & Mahindra GDR
(Autos and Trucks) 1,895,351
4,000 Niit Limited
(Computers) 32,022
80,000 Tata Engineering & Locomotive Ltd.
GDR (Engineering) 786,000
446,600 Tata Engineering & Locomotive Ltd.
GDS (Engineering) 4,387,845
- --------------------------------------------------------------------
27,762,458
- --------------------------------------------------------------------
Indonesian Rupiah--5.2%
2,374,750 Indofoods Sukses Makmur - Foreign
(Food) 5,245,031
2,346,000 PT Bank of Bali - Foreign
(Banking) 5,675,011
2,613,000 PT Jaya Real Property - Foreign
(Real Estate) 3,627,640
- --------------------------------------------------------------------
14,547,682
- --------------------------------------------------------------------
Malaysian Ringgit--13.2%
1,217,000 Commerce Asset Holdings
(Conglomerates) 9,790,829
623,000 Leader Universal Holdings
(Electronics) 1,253,017
1,936,000 Road Builder Malaysia Holdings
(Construction) 11,603,540
941,000 Tenaga National Berhad
(Utility) 4,504,385
1,081,000 United Engineers Malaysia Holdings
(Construction) 9,696,822
- --------------------------------------------------------------------
36,848,593
- --------------------------------------------------------------------
New Taiwan Dollar--2.5%
2,118,000 Taiwan Sogo Shinkong Securities
(Financial Services) 7,103,755
- --------------------------------------------------------------------
Philippine Peso--4.6%
18,189,000 Centennial City Inc.
(Real Estate) 2,208,911
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
53
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund (continued)
January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Philippine Peso (continued)
393,454 Metropolitan Bank and Trust
(Banking) $ 10,750,925
- --------------------------------------------------------------------
12,959,836
- --------------------------------------------------------------------
Singapore Dollar--9.9%
639,000 Overseas Union Bank - Foreign
(Banking) 5,174,457
1,149,000 Singapore Land
(Real Estate) 6,937,420
383,000 Singapore Press Holdings - Foreign
(Printing & Publishing) 7,671,970
2,195,000 Straits Steamship Land
(Conglomerates) 7,795,852
- --------------------------------------------------------------------
27,579,699
- --------------------------------------------------------------------
South Korean Won--3.8%
168,920 Korea Mobile Telecommunications
Corp. ADR* (Telecommunications) 2,512,685
4,759 Korea Mobile Telecommunications
Corp. (Telecommunications) 5,228,904
7,132 Samsung Fire & Marine Insurance
(Insurance) 2,982,743
- --------------------------------------------------------------------
10,724,332
- --------------------------------------------------------------------
Thai Baht--3.9%
723,800 Electricity Generating Public Co.
(Utility) 1,815,785
758,100 Electricity Generating Public Co.
Foreign(Utility) 1,843,315
1,989,000 Industrial Finance Corp - Foreign
(Financial Services) 5,220,069
425,000 Jasmine International Co. - Foreign
(Diversified) 602,808
1,617,500 Thai Telephone & Telecom Corp. -
Foreign (Telecommunications) 1,326,587
- --------------------------------------------------------------------
10,808,564
- --------------------------------------------------------------------
United States Dollar--3.1%
387,000 Korea Electric Power Corp. ADR*
(Utilities) 8,562,375
- --------------------------------------------------------------------
Total Common Stocks
(Cost $237,846,163) $268,559,042
====================================================================
Rights & Warrants*--0.3%
Singapore Dollar--0.2%
356,750 Straits Steamship Land, exp. 12/12/00
(Conglomerate)- warrants 494,149
Thai Baht--0.1%
808,750 Thai Telephone & Telecom Corp., exp.
03/07/97 (Telecommunications)-rights 351,155
- --------------------------------------------------------------------
Total Rights & Warrants
(Cost $287,980) $ 845,304
====================================================================
<CAPTION>
Principal
Amount Description Value
====================================================================
<S> <C> <C>
Corporate Bonds--0.3%
Malaysian Ringitt--0.3%
MYR United Engineers Malaysia
1,024,000 (Construction) 4.00%, 05/22/99 $ 848,528
- --------------------------------------------------------------------
Total Corporate Bonds
(Cost $521,580) $ 848,528
====================================================================
Short-Term Obligations--2.2%
$ 6,200,104 State Street Bank & Trust Euro-Time
Deposit, 5.50%, 02/03/97 $ 6,200,104
- --------------------------------------------------------------------
Total Short-Term Obligations
(Cost $6,200,104) $ 6,200,104
====================================================================
Total Investments
(Cost $244,855,827)/(a)/ $276,452,978
====================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 45,982,425
Gross unrealized loss for investments in
which cost exceeds value (14,998,273)
====================================================================
Net unrealized gain $ 30,984,152
====================================================================
</TABLE>
* Non-income producing security.
/(a)/The aggregate cost for federal income tax purposes is $244,890,862.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
54
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Common Stock, Rights, Warrants, and Corporate Bond Industry
Concentrations
====================================================================
<S> <C>
Autos and Trucks 2.2%
Banking 7.8%
Breweries 0.4%
Commercial Banks 3.5%
Conglomerates 10.9%
Construction 7.9%
Diversified 0.2%
Electronics 0.4%
Engineering 3.6%
Financial Services 11.5%
Food 2.7%
Household Products 2.3%
Insurance 1.1%
Printing & Publishing 2.7%
Real Estate 12.5%
Recreational Services 3.7%
Telecommunications 6.3%
Transportation 4.1%
Utilities 12.8%
- --------------------------------------------------------------------
Total Common Stock, Rights, Warrants, and
Corporate Bonds 96.6%
====================================================================
</TABLE>
- --------------------------------------------------------------------------------
55
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- -------------------------------------------------------------------------------
Statements of Assets and Liabilities
January 31, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Goldman Sachs Goldman Sachs
Balanced Select Equity
Fund Fund
===============================================
<S> <C> <C>
Assets:
Investments in securities, at value (identified cost $80,718,346, $302,169,999,
$513,612,707, $679,366,240, $213,003,477, $549,757,598 and $244,855,827,
respectively) $89,222,318 $393,263,171
Cash, at value 13,884 9,802
Receivables:
Investment securities sold 3,947,652 --
Forward foreign currency exchange contracts 6,692 --
Fund shares sold 565,860 3,095,601
Dividends and interest, at value 451,554 387,080
Variation margin 10,928 95,387
Deferred organization expenses, net 36,173 --
Other assets 97,786 8,495
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 94,352,847 396,859,536
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased 9,690,219 --
Forward foreign currency exchange contracts -- --
Fund shares repurchased 44,298 548,016
Amounts owed to affiliates 97,949 388,699
Covered securities sold short (cash received, $936,984) 938,808 --
Accrued expenses and other liabilities 61,446 89,126
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 10,832,720 1,025,841
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid-in capital 73,750,866 300,246,199
Accumulated undistributed (distributions in excess of) net investment income 180,204 --
(loss)
Accumulated undistributed (distributions in excess of) net realized gain (loss)
on investment, option and futures transactions 977,487 4,402,524
Accumulated net realized foreign currency gain (loss) 12,575 --
Net unrealized gain on investments, options and futures 8,611,563 91,184,972
Net unrealized loss on translation of assets and liabilities denominated in
foreign currencies (12,568) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets $83,520,127 $395,833,695
===================================================================================================================================
<CAPTION>
Class A Class B Class A Class B
------------ -------------- ------------- ------------
<S> <C> <C> <C> <C>
Total shares of beneficial interest outstanding, $.001 par
value (100,000,000 and 25,000,000 shares authorized for
each Class A and B, respectively) 4,336,101 112,660 9,688,806 744,222
Net asset and Class A redemption value per share (a) $18.78 $18.73 $23.32 $23.18
Maximum public offering price per share (Class A NAV x
1.0582) $19.87 $18.73 $24.68 $23.18
Institutional Service Institutional Service
------------ -------------- ------------- ------------
Total shares of beneficial interest outstanding, $.001 par
value (50,000,000 shares per each class authorized) -- -- 6,351,958 157,464
Net asset value, offering and redemption price per share -- -- $23.44 $23.27
===============================================================================================================================
(a) At redemption, Class B shares are subject to a contingent deferred sales charge assessed on the amount equal to the lesser
of the current net asset value or the original purchase price of the shares.
===============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
56
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs
Growth and Income Capital Growth Small Cap Equity International Equity Asia Growth
Fund Fund Fund Fund Fund
==================================================================================================================================
<S> <C> <C> <C> <C>
$638,954,258 $932,041,765 $217,608,994 $627,524,320 $276,452,978
59,158 94,994 30,728 1,735,366 1,060,177
1,632,491 1,390,277 4,392,159 959,642 3,093,623
-- -- -- 2,684,757 --
4,847,992 1,524,356 820,288 4,794,141 685,136
572,159 706,624 85,173 440,308 262,880
-- -- -- -- --
19,321 -- 13,467 14,573 77,113
14,043 16,281 2,597 10,188 770
- ----------------------------------------------------------------------------------------------------------------------------------
646,099,422 935,774,297 222,953,406 638,163,295 281,632,677
- ----------------------------------------------------------------------------------------------------------------------------------
9,130,091 9,797,231 6,585,828 8,912,558 --
-- -- -- 3,434,535 1,495
414,917 850,523 165,072 198,616 694,794
716,432 1,160,456 345,810 833,473 400,444
-- -- -- -- --
21,990 99,060 121,890 255,084 846,340
- ----------------------------------------------------------------------------------------------------------------------------------
10,283,430 11,907,270 7,218,600 13,634,266 1,943,073
- ----------------------------------------------------------------------------------------------------------------------------------
492,994,560 657,200,330 203,743,684 542,859,953 266,426,371
(193,256) (275,552) -- (25,666) (1,316,323)
17,673,137 14,266,724 7,385,605 2,530,732 (16,027,669)
-- -- -- (917,847) (411,919)
125,341,551 252,675,525 4,605,517 112,491,393 33,014,375
-- -- -- (32,409,536) (1,995,231)
- ----------------------------------------------------------------------------------------------------------------------------------
$635,815,992 $923,867,027 $215,734,806 $624,529,029 $279,689,604
==================================================================================================================================
<CAPTION>
Class A Class B Class A Class B Class A Class B Class A Class B Class A Class B
- ------------- ---------- ------------- ---------- ------------ ------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
26,534,286 751,089 55,021,724 193,240 10,140,493 176,544 27,765,580 997,807 16,122,122 206,387
$23.18 $23.10 $16.73 $16.67 $20.91 $20.80 $19.32 $19.24 $16.31 $16.24
$24.53 $23.10 $17.70 $16.67 $22.13 $20.80 $20.44 $19.24 $17.26 $16.24
<CAPTION>
Institutional Service Institutional Service Institutional Service Institutional Service Institutional Service
- ------------- ---------- ------------- ---------- ------------- ------------ ------------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
8,321 136,977 -- -- -- -- 3,524,169 34,830 815,499 --
$23.19 $23.17 -- -- -- -- $19.40 $19.34 $16.33 --
==================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
57
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Statements of Operations
For the Year Ended January 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Goldman Sachs
Balanced Select Equity
Fund Fund
===================================
<S> <C> <C>
Investment income:
Dividends /(a)/ $ 838,092 $ 5,629,026
Interest /(b)/ 2,107,288 541,011
- ----------------------------------------------------------------------------------------------------------------------------------
Total income 2,945,380 6,170,037
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses: /(c)/
Investment advisory fees 309,372 1,413,035
Administration fees 92,811 706,517
Distribution fees 157,253 468,965
Authorized dealer service fees 154,686 444,626
Custodian fees 93,352 95,947
Transfer agent fees 148,576 319,246
Professional Fees 71,598 74,319
Amortization of deferred organization expenses 13,468 9,549
Director fees 1,171 2,728
Other 53,077 96,414
- ----------------------------------------------------------------------------------------------------------------------------------
Total expenses 1,095,364 3,631,346
Less--expenses reimbursed and fees waived by Goldman Sachs (472,758) (626,188)
- ----------------------------------------------------------------------------------------------------------------------------------
Net expenses 622,606 3,005,158
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 2,322,774 3,164,879
- ----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions:
Net realized gain (loss) from:
Investment transactions 3,811,127 14,386,845
Options written (2,680) --
Futures transactions 148,013 645,873
Foreign currency related transactions 12,575 --
Net change in unrealized gain (loss) on:
Investments 5,008,557 49,393,370
Futures 14,475 67,175
Translation of assets and liabilities denominated in foreign currencies (12,568) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment, option, futures and foreign currency
transactions 8,979,499 64,493,263
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 11,302,273 $ 67,658,142
==================================================================================================================================
</TABLE>
/(a)/ For the Balanced, Select Equity, Growth and Income, Capital Growth, Small
Cap Equity, International Equity and Asia Growth Funds, taxes withheld on
dividends were $1,496, $42,274, $23,285, $53,869, $4,211, $900,877 and
$372,334, respectively.
/(b)/ For the Balanced Fund, taxes withheld on interest were $969.
/(c)/ Certain expenses reflected in the above statement of operations are
incurred on a class specific basis.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
58
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------
Goldman Sachs Goldman Sachs
Growth and Income Capital Growth
Fund Fund
<S> ========================================
Investment income: <C> <C>
Dividends /(a)/ $ 13,008,785 $ 14,748,431
Interest /(b)/ 1,235,823 2,802,840
- ---------------------------------------------------------------------------------------------------------------------------------
Total income 14,244,608 17,551,271
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses: /(c)/
Investment advisory fees 2,782,464 6,522,949
Administration fees 758,854 2,174,316
Distribution fees 1,280,332 2,179,405
Authorized dealer service fees 1,261,615 2,174,316
Custodian fees 102,394 129,556
Transfer agent fees 871,030 908,310
Professional Fees 75,891 74,529
Amortization of deferred organization expenses 19,164 --
Director fees 6,744 13,973
Other 144,279 208,397
- ----------------------------------------------------------------------------------------------------------------------------------
Total expenses 7,302,767 14,385,751
Less--expenses reimbursed and fees waived by Goldman Sachs (1,113,014) (2,171,272)
- ----------------------------------------------------------------------------------------------------------------------------------
Net expenses 6,189,753 12,213,979
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 8,054,855 5,337,292
- ----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions:
Net realized gain (loss) from:
Investment transactions 58,221,421 53,687,297
Options written (37,206) --
Futures transactions 45,994 --
Foreign currency related transactions -- --
Net change in unrealized gain (loss) on:
Investments 67,575,111 145,350,120
Futures -- --
Translation of assets and liabilities denominated in foreign currencies -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment, option, futures and foreign curren
transactions 125,805,320 199,037,417
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $133,860,175 $204,374,709
====================================================================================================================================
<CAPTION>
-------------------------------------------
Goldman Sachs Goldman Sachs
Small Cap Equity International Equity
Fund Fund
<S> ===========================================
Investment income: <C> <C>
Dividends /(a)/ $ 968,945 $ 5,944,299
Interest /(b)/ 896,528 1,533,039
- ------------------------------------------------------------------------------------------------------------------------------------
Total income 1,865,473 7,477,338
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses: /(c)/
Investment advisory fees 1,598,027 3,478,689
Administration fees 532,676 1,159,514
Distribution fees 538,657 1,115,919
Authorized dealer service fees 532,676 1,086,488
Custodian fees 63,636 786,004
Transfer agent fees 511,883 586,243
Professional Fees 72,844 84,162
Amortization of deferred organization expenses 18,742 17,603
Director fees 3,842 5,519
Other 73,764 229,722
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 3,946,747 8,549,863
Less--expenses reimbursed and fees waived by Goldman Sachs (529,684) (829,788)
- ------------------------------------------------------------------------------------------------------------------------------------
Net expenses 3,417,063 7,720,075
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (1,551,590) (242,737)
- ------------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions:
Net realized gain (loss) from:
Investment transactions 29,166,218 16,714,697
Options written (398,365) --
Futures transactions -- --
Foreign currency related transactions -- 146,694
Net change in unrealized gain (loss) on:
Investments 22,913,571 60,236,901
Futures -- --
Translation of assets and liabilities denominated in foreign currencies -- (28,245,657)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions 51,681,424 48,852,635
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $50,129,834 $48,609,898
====================================================================================================================================
<CAPTION>
-----------------
Goldman Sachs
Asia Growth
Fund
<S> ==================
Investment income: <C>
Dividends /(a)/ $ 4,216,521
Interest /(b)/ 716,243
- -----------------------------------------------------------------------------------------------------------
Total income 4,932,764
- -----------------------------------------------------------------------------------------------------------
Expenses: /(c)/
Investment advisory fees 1,937,658
Administration fees 645,897
Distribution fees 636,953
Authorized dealer service fees 630,134
Custodian fees 499,487
Transfer agent fees 385,114
Professional Fees 84,316
Amortization of deferred organization expenses 31,711
Director fees 3,496
Other 51,032
- -----------------------------------------------------------------------------------------------------------
Total expenses 4,905,798
Less--expenses reimbursed and fees waived by Goldman Sachs (511,880)
- -----------------------------------------------------------------------------------------------------------
Net expenses 4,393,918
- -----------------------------------------------------------------------------------------------------------
Net investment income (loss) 538,846
- -----------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions:
Net realized gain (loss) from:
Investment transactions (7,294,240)
Options written --
Futures transactions (141,910)
Foreign currency related transactions (1,099,538)
Net change in unrealized gain (loss) on:
Investments 5,823,115
Futures --
Translation of assets and liabilities denominated in foreign currencies (599,549)
- -----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions (3,312,122)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $(2,773,276)
===========================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
59
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- -------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Goldman Sachs Goldman Sachs
Balanced Select Equity
Fund Fund
===============================================
<S> <C> <C>
From operations:
Net investment income (loss) $ 2,322,774 $ 3,164,879
Net realized gain (loss) on investment, option and futures transactions 3,956,460 15,032,718
Net realized gain (loss) on foreign currency related transactions 12,575 --
Net change in unrealized gain (loss) on investments, options and futures 5,023,032 49,460,545
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies (12,568) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 11,302,273 67,658,142
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
Class A shares (2,259,972) (1,515,575)
Class B shares (13,466) (4,750)
Institutional shares -- (1,606,175)
Service shares -- (6,666)
In excess of net investment income
Class A shares (7,504) --
Class B shares -- (118,421)
Institutional shares -- (34,205)
Service shares -- (16,030)
From net realized gain on investment, option and futures transactions
Class A shares (3,654,841) (7,174,235)
Class B shares (77,400) (440,131)
Institutional shares -- (4,675,726)
Service shares -- (68,472)
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (6,013,183) (15,660,386)
-----------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 29,174,047 167,209,718
Reinvestment of dividends and distributions 5,694,651 14,904,237
Cost of shares repurchased (7,565,668) (32,152,494)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 27,303,030 149,961,461
- -----------------------------------------------------------------------------------------------------------------------------------
Total increase 32,592,120 201,959,217
Net assets:
Beginning of year 50,928,007 193,874,478
===================================================================================================================================
End of year $ 83,520,127 $ 395,833,695
===================================================================================================================================
Accumulated undistributed (distributions in excess of) net investment income $ 180,204 $ --
===================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
60
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Equity Portfolios, Inc.
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Goldman Sachs Goldman Sachs
Statements of Changes in Net Assets Growth and Income Capital Growth Small Cap
For the Year Ended January 31, 1997 Fund Fund Equity Fund
====================================================
<S> <C> <C> <C>
From operations:
Net investment income (loss) $ 8,054,855 $ 5,337,292 $ (1,551,590
Net realized gain (loss) on investment, option and futures transactions 58,230,209 53,687,297 28,767,853
Net realized gain (loss) on foreign currency related transactions -- -- --
Net change in unrealized gain (loss) on investments, options and futures 67,575,111 145,350,120 22,913,571
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 133,860,175 204,374,709 50,129,834
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
Class A shares (8,111,894) (5,948,617) --
Class B shares (5,818) -- --
Institutional shares (494) -- --
Service shares (11,500) -- --
In excess of net investment income
Class A shares (135,533) (258,749) --
Class B shares (48,273) (12,838) --
Institutional shares (380) --
Service shares (9,070) -- --
From net realized gain on investment, option and futures transactions
Class A shares (46,442,616) (91,862,169) (10,210,264)
Class B shares (754,312) (179,327) (149,626)
Institutional shares (9,971) -- --
Service shares (255,610) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (55,785,471) (98,261,700) (10,359,890)
- ----------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 140,362,846 76,008,897 56,119,213
Reinvestment of dividends and distributions 53,352,809 90,088,874 9,876,571
Cost of shares repurchased (72,730,939) (229,399,817) (95,024,895)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 120,984,716 (63,302,046) (29,029,111)
- ----------------------------------------------------------------------------------------------------------------------------------
Total increase 199,059,420 42,810,963 10,740,833
Net Asssets:
Beginning of Year 436,756,572 881,056,064 204,993,973
==================================================================================================================================
End of Year $635,815,992 $923,867,027 $ 215,734,806
==================================================================================================================================
Accumulated distributed (distributions in excess investment income) $ (193,256) $ (275,552) $ --
==================================================================================================================================
<CAPTION>
-----------------------------------------------------
Statements of Changes in Net Assets Goldman Sachs Goldman Sachs
For the Year Ended January 31, 1997 International Asia Growth
Equity Fund Fund
====================================================
<S> <C> <C>
From operations:
Net investment income (loss) $ (242,737) $ 538,846
Net realized gain (loss) on investment, option and futures transactions 16,714,697 (7,436,150)
Net realized gain (loss) on foreign currency related transactions 146,694 (1,099,538)
Net change in unrealized gain (loss) on investments, options and futures 60,236,901 5,823,115
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies (28,245,657) (599,549)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 48,609,898 (2,773,276)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
Class A shares -- (206,784)
Class B shares -- --
Institutional shares (106,712) --
Service shares -- --
In excess of net investment income
Class A shares -- --
Class B shares -- (5,064)
Institutional shares -- (83,075)
Service shares -- --
From net realized gain on investment, option and futures transactions
Class A shares (5,358,559) --
Class B shares (159,717) --
Institutional shares (689,171) --
Service shares (3,947) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (6,318,106) (294,923)
- ------------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 321,475,961 144,448,826
Reinvestment of dividends and distributions 5,481,492 221,279
Cost of shares repurchased (75,580,037) (67,451,011)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 251,377,416 77,219,094
- ----------------------------------------------------------------------------------------------------------------------------------
Total increase
Net assets: 293,669,208 74,150,895
Beginning of year 330,859,821 205,538,709
===================================================================================================================================
End of year $624,529,029 $279,689,604
====================================================================================================================================
Accumulated undistributed (distributions in excess of) net investment income $ (25,666) $ (1,316,323)
===================================================================================================================================
</TABLE>
61
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Goldman Sachs Goldman Sach
Balanced Select Equity
Fund Fund
==============================================
<S> <C> <C>
From operations:
Net investment income (loss) $ 1,083,645 $ 1,518,160
Net realized gain (loss) on investment, option and futures transactions 1,715,887 4,687,943
Net realized gain on foreign currency related transactions -- --
Net change in unrealized gain on investments, options and futures 3,518,420 37,068,509
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 6,317,952 43,274,612
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income (991,655) (1,610,216)
In excess of net investment income -- --
From net realized gain on investment, option and futures transactions (962,754) (3,527,188)
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,954,409) (5,137,404)
- ----------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 41,736,040 102,149,318
Reinvestment of dividends and distributions 1,802,563 4,880,575
Cost of shares repurchased (4,483,707) (46,260,132)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 39,054,896 60,769,761
- ----------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 43,418,439 98,906,969
Net assets:
Beginning of year 7,509,568 94,967,509
==================================================================================================================================
End of year $ 50,928,007 $ 193,874,478
==================================================================================================================================
Accumulated undistributed (distributions in excess of) net investment income $ 125,304 $ 86,854
==================================================================================================================================
Summary of share transactions:
===================================================================================================================================
<CAPTION>
Class A Class A Institutional
-------------- -------------- --------------
<S> <C> <C> <C>
Shares sold 2,578,356 2,479,285 3,220,915
Reinvestment of dividends and distributions 108,023 161,481 97,993
Shares repurchased (271,753) (2,578,247) (30,492)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 2,414,626 62,519 3,288,416
==================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
62
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs
Growth and Income Capital Growth Small Cap International Asia Growth
Fund Fund Equity Fund Equity Fund Fund
=================================================================================================================================
<S> <C> <C> <C> <C>
$ 5,307,925 $ 6,032,534 $ (1,717,759) $ 725,369 $ 1,643,482
18,815,320 188,790,639 (5,033,599) (8,757,936) (5,766,395)
-- -- -- 21,213,851 416,433
58,081,439 53,559,848 30,594,034 69,834,990 42,480,420
-- -- -- (12,612,130) (1,710,833)
- --------------------------------------------------------------------------------------------------------------------------------
82,204,684 248,383,021 23,842,676 70,404,144 37,063,107
- ---------------------------------------------------------------------------------------------------------------------------------
(5,300,032) (6,289,354) -- (9,491,864) (1,787,451)
-- -- -- -- (1,657,672)
(11,998,907) (139,713,660) (161,357) (14,089,155) --
- ---------------------------------------------------------------------------------------------------------------------------------
(17,298,939) (146,003,014) (161,357) (23,581,019) (3,445,123)
- ---------------------------------------------------------------------------------------------------------------------------------
199,623,973 144,529,476 56,891,181 85,900,104 88,560,430
16,219,024 131,979,456 149,801 21,651,092 2,951,847
(37,764,413) (359,937,680) (195,215,538) (98,600,969) (43,889,831)
- ---------------------------------------------------------------------------------------------------------------------------------
178,078,584 (83,428,748) (138,174,556) 8,950,227 47,622,446
- ---------------------------------------------------------------------------------------------------------------------------------
242,984,329 18,951,259 (114,493,237) 55,773,352 81,240,430
193,772,243 862,104,805 319,487,210 275,086,469 124,298,279
=================================================================================================================================
$436,756,572 $ 881,056,064 $ 204,993,973 $ 330,859,821 $ 205,538,709
=================================================================================================================================
$ 56,087 $ 607,360 $ -- $ 227,683 $ (1,630,536)
=================================================================================================================================
Class A Class A Class A Class A Class A
------------- --------------- --------------- -------------- --------------
10,766,604 9,130,715 3,285,739 5,082,572 5,830,049
848,870 9,145,811 8,585 1,286,112 197,978
(2,027,335) (22,215,374) (11,228,873) (6,067,690) (2,898,305)
- ---------------------------------------------------------------------------------------------------------------------------------
9,588,139 (3,938,848) (7,934,549) 300,994 3,129,722
=================================================================================================================================
- -------------------------------------------------------------------- ----------------------------------------------------------
</TABLE>
63
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements
January 31, 1997
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Equity Portfolios, Inc. (the "Company") is a Maryland corporation
registered under the Investment Company Act of 1940, as amended, as an open-end,
diversified management investment company. Included in this report are the
financial statements for the Goldman Sachs Balanced Fund ("Balanced Fund"),
Goldman Sachs Select Equity Fund ("Select Equity Fund"), Goldman Sachs Growth
and Income Fund ("Growth and Income Fund"), Goldman Sachs Capital Growth Fund
("Capital Growth Fund"), Goldman Sachs Small Cap Equity Fund ("Small Cap Equity
Fund"), Goldman Sachs International Equity Fund ("International Equity Fund")
and Goldman Sachs Asia Growth Fund ("Asia Growth Fund"), collectively, "the
Funds." The Select Equity, Growth and Income, International Equity and Asia
Growth Funds offer four classes of shares - Class A, Class B, Institutional and
Service. The Balanced, Capital Growth and Small Cap Equity Funds offer two
classes of shares - Class A and Class B.
2. Significant Accounting Policies
The following is a summary of the significant accounting policies consistently
followed by the Company. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts.
A. Investment Valuation
- ------------------------
Investments in securities traded on a U.S. or foreign securities exchange or the
NASDAQ system are valued daily at their last sale or closing price on the
principal exchange on which they are traded or NASDAQ. If no sale occurs,
securities traded on a U.S. exchange or NASDAQ are valued at the mean between
the closing bid and asked price, and securities traded on a foreign exchange
will be valued at the official bid price. Unlisted equity and debt securities
for which market quotations are available are valued at the mean between the
most recent bid and asked prices. Debt securities are valued at prices supplied
by an independent pricing service, which reflect broker/dealer-supplied
valuations and matrix pricing systems. Short-term debt obligations maturing in
sixty days or less are valued at amortized cost. Restricted securities, and
other securities for which quotations are not readily available, are valued at
fair value using methods approved by the Board of Directors of the Company.
B. Securities Transactions and Investment Income
- -------------------------------------------------
Securities transactions are recorded on the trade date. Realized gains and
losses on sales of investments are calculated on the identified-cost basis.
Dividend income is recorded on the ex-dividend date. Dividends for which the
Funds have the choice to receive either cash or stock are recognized as
investment income in an amount equal to the cash dividend. This amount is also
used as an estimate of the fair value of the stock received. Interest income is
determined on the basis of interest accrued, premium amortized and discount
earned with the exception of the Balanced Fund which does not amortize premiums.
In addition, it is the Funds' policy to accrue for estimated capital gains taxes
on foreign securities held by the Funds subject to such taxes.
C. Mortgage Dollar Rolls
- -------------------------
The Balanced 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. For financial reporting and
tax reporting purposes, the Fund treats mortgage dollar rolls as two separate
transactions; one involving the purchase of a security and a separate
transaction involving a sale.
D. Foreign Currency Translations
- ---------------------------------
The books and records of the Company are maintained in U.S. dollars. 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 on current exchange rates; (ii) purchases and sales of
foreign investments,
- --------------------------------------------------------------------------------
64
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
income and expenses are converted into U.S. dollars based on 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
dividends and interest recorded and the amounts actually received.
E. Forward Foreign Currency Exchange Contracts
- -----------------------------------------------
Certain of the Funds are authorized to enter into forward foreign currency
exchange contracts for the purchase 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 International Equity and Asia Growth
Funds may enter into such contracts to seek to increase total return. All
commitments are "marked-to-market" daily at the applicable translation rates and
any resulting unrealized gains or losses are recorded in the funds' financial
statements. The Funds record 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 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.
F. Short Securities Positions
- ------------------------------
The Funds (other than the Select Equity Fund) may enter into covered short
sales. Short securities positions are accounted for at cost and subsequently
marked to market to reflect the current market value of the position. The market
value of the short position is recorded as a liability on the fund's records and
any difference between this market value and cash received is reported as
unrealized gain or loss. Gains and losses are realized when a short
- --------------------------------------------------------------------------------
position is closed out by delivering securities back to the broker.
At January 31, 1997, the Balanced Fund had the following covered short positions
open:
- -------------------------------------------------------------------------------
Short Position
Issuer Par Value Market Value
- --------------------------- --------------- --------------------
FNMA TBA 15-Year $900,000 $938,808
- -------------------------------------------------------------------------------
G. Federal Taxes
- -----------------
It is the Funds' policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all of their investment company taxable income and capital gains
to their 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 the Funds' distributions may be shown in the accompanying financial
statements as either from or in excess of net investment income or net realized
gain on investment transactions, or from capital, depending on the type of
book/tax differences that may exist as well as timing differences associated
with having different book and tax year ends.
Asia Growth Fund had approximately $184,000, $5,487,000 and $9,825,000 at
January 31, 1997 of capital loss carryforward expiring in 2002, 2003 and 2004
for federal tax purposes. These amounts are available to be carried forward to
offset future capital gains to the extent permitted by applicable laws or
regulations.
H. Deferred Organization Expenses
- ----------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
I. Expenses
- ------------
Expenses incurred by the Company which do not specifically relate to an
individual fund of the Company are allocated to the Funds based on each Fund's
relative
- --------------------------------------------------------------------------------
65
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
January 31, 1997
- --------------------------------------------------------------------------------
average net assets for the period.
Class A and Class B 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. Each class of Shares separately bears
their respective class-specific transfer agency fees. Service Shares separately
bear a service fee.
J. Option Accounting Principles
- --------------------------------
When certain of the Funds write call or put options, 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 the funds enter into a closing purchase
transaction, the funds realize a gain or loss 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, the funds
realize a gain or loss 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 which the funds purchase upon exercise.
There is a risk of loss from a change in value of such options which may exceed
the related premiums received.
Upon the purchase of a call option or a protective put option by the Funds
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 the Funds
have purchased expires on the stipulated expiration date, the funds will realize
a loss in the amount of the cost of the option. If the funds enter into a
closing sale transaction, the funds will realize a gain or loss, depending on
whether the sale proceeds from the closing sale transaction are greater or less
than the cost of the option. If the Funds exercise a purchased put option, the
funds will realize a gain or loss from the sale of the underlying security, and
the proceeds from such sale will be decreased by the premium originally paid. If
the Funds exercise a purchased call option, the cost of the security which the
funds purchase upon exercise will be increased by the premium originally paid.
K. Futures Contracts
- ---------------------
The Funds may enter into futures transactions in order to hedge against changes
in interest rates, securities prices or currency exchange rates or to seek to
increase total return. The Select Equity Fund may enter into such transactions
only with respect to the S&P 500 Index. A Fund will engage in futures
transactions only for bona fide hedging purposes as defined in regulations of
the CFTC or to seek to increase total return (except with respect to
transactions by the Balanced, Growth and Income, Select Equity, Capital Growth
and Small Cap Equity Funds, in futures on foreign currencies) to the extent
permitted by such regulations. 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.
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 price,
unless such price does not reflect the fair market value of the contract, in
which case the position will be valued using methods approved by the Board of
Directors of the Company.
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'
- --------------------------------------------------------------------------------
66
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
hedging strategies and may also result in a loss to the Funds.
3. Agreements
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), acts as investment adviser to the
Balanced, Growth and Income, Small Cap Equity and International Equity Funds;
Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate of Goldman Sachs,
acts as investment adviser to the Select Equity and Capital Growth Funds; and
Goldman Sachs Asset Management International ("GSAM International") acts as
investment adviser to the Asia Growth Fund and subadviser to the International
Equity Fund. Under the Investment Advisory and Subadvisory Agreements, GSAM,
GSFM and GSAM International (the "Investment Advisors"), subject to the general
supervision of the Company's Board of Directors, manage the Company's
portfolios. As compensation for the services rendered under 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%, .55%, .75% and .25% of the average daily net assets of the Balanced,
Growth and Income, Small Cap Equity and International Equity Funds,
respectively. GSFM is entitled to a fee of .50% and .75% of the average daily
net assets of the Select Equity and Capital Growth Funds, respectively. GSAM
International is entitled to an advisory fee for the Asia Growth Fund and a
subadvisory fee for the International Equity Fund of .75% and .50% of the
average daily net assets for those funds, respectively.
GSAM also acts as the Funds' administrator pursuant to Administration
Agreements. Under these Administration Agreements, GSAM administers the Funds'
business affairs, including providing facilities. As compensation for the
services rendered pursuant to the Administration Agreements, GSAM is entitled to
a fee of .15% of the average daily net assets of the Balanced and Growth and
Income Funds, and .25% of the average daily net assets of the Select Equity,
Capital Growth, Small Cap Equity, International Equity and Asia Growth Funds.
Goldman Sachs has voluntarily agreed to reduce or limit certain "Other
Expenses" for the Balanced, Select Equity, Growth and Income, International
Equity and Asia Growth Funds (excluding advisory, administration, service,
distribution and authorized dealer service fees and litigation and
indemnification costs, taxes, interest, brokerage commissions and extraordinary
expenses and with the exception of the Balanced Fund, transfer agent fees) until
further notice to the extent such expenses exceed .10%, .06%, .11%, .20% and
..24% of the average daily net assets of the funds, respectively.
Goldman Sachs serves as the Distributor of shares of the Funds pursuant to
Distribution Agreements. Goldman Sachs may receive a portion of the Class A
salesload and Class B back-end salesload imposed and has advised the Company
that it retained approximately $94,000, $380,000, $555,000, $323,000, $219,000,
$1,563,000 and $1,397,000 during the year ended January 31, 1997 for the
Balanced, Select Equity, Growth and Income, Capital Growth, Small Cap Equity,
International Equity and Asia Growth Funds, respectively.
The Company, 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% and .75% of a Fund's average daily
net assets attributable to Class A and Class B shares, respectively.
The Company, on behalf of each Fund, has 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, on an annual basis, to .25%
of its average daily net assets attributable to Class A and Class B shares.
Goldman Sachs also serves as the Transfer Agent of the funds for a fee.
For the year ended January 31, 1997, the Advisors, Administrator and
Distributor have voluntarily agreed to waive certain fees and reimburse other
expenses as follows (in thousands):
- --------------------------------------------------------------------------------
67
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Waivers
------- Reimburse-
Admin- Class A Reimburse- ment
Fund Adviser istrator 12b-1 ment Outstanding
- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balanced $ -- $ -- $ 153 $ 320 $ 88
Select Equity 170 282 69 105 3
Growth and
Income -- -- 1,113 -- --
Capital
Growth -- -- 2,171 -- --
Small Cap
Equity -- -- 530 -- --
International
Equity 50 464 171 145 --
Asia Growth 103 259 100 50 --
</TABLE>
The Investment Advisors, Administrator and Distributor may discontinue or
modify such waivers and limitations in the future at their discretion.
At January 31, 1997, the amounts owed to affiliates were as follows(in
thousands):
<TABLE>
<CAPTION>
Authorized
Admin- Distri- Dealer Transfer
Fund Adviser istrator butor Service Agent Total
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balanced $ 33 $ 10 $ 2 $ 15 $ 38 $ 98
Select Equity 143 49 56 57 84 389
Growth and
Income 284 78 28 119 207 716
Capital
Growth 568 190 2 190 210 1,160
Small Cap
Equity 134 45 2 45 120 346
International
Equity 391 78 105 116 143 833
Asia Growth 171 36 50 53 90 400
</TABLE>
4. Portfolio Securities Transactions
Purchases and proceeds of sales or maturities of securities (excluding
short-term investments, futures and options) for the year ended January 31,
1997, were as follows:
<TABLE>
<CAPTION>
Sales or
Fund Purchases Maturities
- --------- --------------- -------------
<S> <C> <C>
Balanced $146,297,709 $123,056,708
Select Equity 242,635,637 102,479,847
Growth and Income 330,177,173 256,802,366
Capital Growth 436,178,218 569,122,643
Small Cap Equity 202,036,820 256,627,457
International Equity 400,682,323 166,164,906
Asia Growth 192,125,629 118,802,040
</TABLE>
Included in the above amounts were purchases and proceeds of sales or
maturities of governmental securities for the Balanced Fund in the amounts of
$99,727,748 and $91,845,598, respectively.
For the year ended January 31, 1997, written put option transactions in the
Balanced Fund were as follows:
<TABLE>
<CAPTION>
Number of Premium
Written Options Contracts Received
- ---------------------- ------------- -------------
<S> <C> <C>
Balance outstanding at
beginning of year 0 $ 0
Options written 32 5,416
Options repurchased (32) (5,416)
--------------- ---------------
Balance outstanding,
end of year 0 $ 0
=============== ===============
</TABLE>
For the year ended January 31, 1997, written call option transactions in the
Growth and Income Fund were as follows:
<TABLE>
<CAPTION>
Number of Premium
Written Options Contracts Received
- ---------------------- ------------- -------------
<S> <C> <C>
Balance outstanding at
beginning of year 0 $ 0
Options written 438 73,608
Options repurchased (438) (73,608)
--------------- ---------------
Balance outstanding,
end of year 0 $ 0
=============== ===============
</TABLE>
- --------------------------------------------------------------------------------
68
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
For the year ended January 31, 1997, written put option transactions in the
Small Cap Equity Fund were as follows:
<TABLE>
<CAPTION>
Number of Premium
Written Options Contracts Received
- ---------------------- ------------- -------------
<S> <C> <C>
Balance outstanding at
beginning of year 0 $ 0
Options written 2,100 575,871
Options expired (9) (2,026)
Options exercised (1,091) (238,096)
Options repurchased (1,000) (335,749)
--------------- ---------------
Balance outstanding,
end of year 0 $ 0
=============== ===============
</TABLE>
Certain risks arise related to call and put options from the possible
inability of counterparties to meet the terms of their contracts.
At January 31, 1997, the Balanced Fund had the following outstanding forward
foreign currency exchange contracts:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Foreign Currency Value on Unrealized
Sale Contracts Settlement Date Current Value Gain
- --------------------------------------------------------------------
<S> <C> <C> <C>
Australian Dollar
expiring 3/14/97 $777,277 $770,585 $6,692
- --------------------------------------------------------------------
Total Foreign
Currency Sale
Contracts $777,277 $770,585 $6,692
- --------------------------------------------------------------------
</TABLE>
At January 31, 1997, the International Equity Fund had the following
outstanding forward foreign currency exchange contracts:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Foreign Currency Value on Unrealized
Sale Contracts Settlement Date Current Value Gain (Loss)
- --------------------------------------------------------------------
<S> <C> <C> <C>
Swiss Franc
expiring 4/28/97 $39,343,000 $39,665,062 $ (322,062)
Deutsche Mark
expiring 2/27/97 22,305,725 22,183,180 122,545
Hong Kong Dollar
expiring 8/8/97 38,565,981 38,530,005 35,976
Japanese Yen
expiring 4/24/97 122,316,352 119,792,909 2,523,443
- --------------------------------------------------------------------
Total Foreign Currency
Sale Contracts $222,531,058 $220,171,156 $2,359,902
- --------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------
Foreign Currency Value on Unrealized
Purchase Contracts Settlement Date Current Value Gain (Loss)
- --------------------------------------------------------------------
<S> <C> <C> <C>
Hong Kong Dollar
expiring 2/3/97 $35,454 $35,454 $--
- --------------------------------------------------------------------
Total Foreign Currency
Purchase Contracts $35,454 $35,454 $--
- --------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 January 31,
1997, the Balanced and International Equity Fund's had sufficient cash and
securities to cover any commitments under these contracts.
The Balanced and International Equity Funds have 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 $6,692 and $0, and $2,684,757 and
$3,434,535, respectively, in the accompanying Statements of Assets and
Liabilities. Included in these amounts for the International Equity Fund are
$2,793 and $3,112,473, respectively, related to forward contracts closed but not
settled as of January 31, 1997.
For the year ended January 31, 1997, Goldman Sachs earned approximately
$5,000, $78,000, $304,000, $36,000, $11,000 and $66,000 of brokerage commissions
from portfolio transactions executed on behalf of the Balanced, Growth and
Income, Capital Growth, Small Cap Equity, International Equity and Asia Growth
Funds, respectively.
5. Repurchase Agreements
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping at the Funds' custodian.
- --------------------------------------------------------------------------------
69
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
January 31, 1997
- --------------------------------------------------------------------------------
6. Joint Repurchase Agreement Account
The Funds, together with other registered investment companies having advisory
agreements with GSAM or GSFM, transfer uninvested cash balances into joint
accounts, 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 and agency obligations. At January 31, 1997, the Balanced,
Select Equity, Growth and Income, Capital Growth and Small Cap Equity Funds had
undivided interests in the repurchase agreements in the following joint account
which equaled $9,200,000, $3,600,000, $26,800,000, $18,300,000 and $16,600,000,
respectively, in principal amount. At January 31, 1997, the repurchase
agreements held in this joint account, along with the corresponding underlying
securities (including the type of security, market value, interest rate and
maturity date) were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------
Bear Stearns Securities, Inc., dated 01/31/97, repurchase
price $800,375,333 (GNMA: $26,604,837, 7.50%, 10/15/26;
FNMA: $720,411,516, 5.50%-8.00%, 02/01/09-09/01/26;
FHLMC: $77,372,676, 6.00%-8.00%, 04/01/98-07/01/26)
<S> <C> <C> <C>
$800,000,000 5.63% 02/03/97 $ 800,000,000
<CAPTION>
Nomura Securities, Inc. dated 01/31/97, repurchase price
$100,047,083 (GNMA: $102,007,864, 5.50%-10.25%
01/15/20-01/20/27)
<S> <C> <C> <C>
100,000,000 5.65 02/03/97 100,000,000
<CAPTION>
Lehman Government Securities, dated 01/31/97, repurchase
price $201,894,173 (U.S. Treasury Notes: $191,656,654,
6.38%, 01/15/00-08/15/02; U.S. Treasury Stripped
Securities: $14,095,535, 05/15/02-11/15/03)
<S> <C> <C> <C>
201,800,000 5.60 02/03/97 201,800,000
</TABLE>
- --------------------------------------------------------------------
Total Joint Repurchase Agreement Account $ 1,101,800,000
- --------------------------------------------------------------------
7. Line of Credit Facility
The Funds participate in a $250,000,000 uncommitted, unsecured revolving line of
credit facility. In addition, the Funds, except the Select Equity Fund,
participate in a $50,000,000 committed, unsecured revolving line of credit
facility. Both facilities are 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. The
committed facility also requires a fee to be paid based on the amount of the
commitment which has not been utilized. During the year ended January 31, 1997,
the Funds did not have any borrowings under these facilities.
8. Transactions With Affiliated Companies
A Fund is considered to be invested in an affiliated company if that Fund owns
greater than five percent of the outstanding voting securities of such company.
Transactions during the year ended January 31, 1997 which are considered to be
affiliates of Small Cap Equity are as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
Purchases Sales Realized Dividend Market
Affiliate Name at Cost Proceeds Gain/(Loss) Income Value
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
American Safety
Razor $ -- $5,751 $ 289 $ -- $ --
- --------------------------------------------------------------------
Alpine Lace
Brands, Inc. 7,790 -- -- -- 2,341
- --------------------------------------------------------------------
APS Holding
Corp. 10,305 654 290 -- 7,869
- --------------------------------------------------------------------
J. Baker, Inc. 1,591 1,349 (1,090) 60 7,565
- --------------------------------------------------------------------
Black Box, Inc. -- 23,013 14,149 -- --
- --------------------------------------------------------------------
Brookstone, Inc. -- 2,722 (758) -- 5,939
- --------------------------------------------------------------------
Congoleum Corp. -- 2,323 (102) -- 3,156
- --------------------------------------------------------------------
Hollinger
International
Corp. -- 10,903 (1,311) 112 --
- --------------------------------------------------------------------
International Post
Ltd. -- 2,215 (3,933) -- 1,729
- --------------------------------------------------------------------
Morningstar
Group Inc. -- 12,216 6,346 -- --
- --------------------------------------------------------------------
Mortons
Restaurant
Group, Inc. -- 4,106 1,625 -- 6,439
- --------------------------------------------------------------------
Opinion Research
Corp. -- -- -- -- 2,022
- --------------------------------------------------------------------
Pegasus
Communications
Corp. 3,697 -- -- -- 3,224
- --------------------------------------------------------------------
Platinum
Entertainment
Corp. 3,354 -- -- -- 2,675
- --------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
70
<PAGE>
9. Other Matters
As of January 31, 1997, Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 14% of the
outstanding shares of the Select Equity Fund.
10. Certain Reclassifications
In accordance with Statement of Position 93-2, the Balanced, Select Equity,
Growth and Income, International Equity and Asia Growth Funds have reclassified
$13,068, $9,549, $18,764, $302,042 and $31,712, respectively, from paid-in
capital to accumulated undistributed net investment income. Additionally, the
Small Cap Equity Fund has reclassified $1,532,848 from accumulated net realized
gains on investments to accumulated net investment loss and $18,742 from paid-in
capital to accumulated net investment loss. The Select Equity Fund reclassified
$40,540 from accumulated net realized gains on investments to distributions in
excess of net investment income. The International Equity Fund and the Asia
Growth Fund have reclassified $205,942 and $338,857 from accumulated net
realized foreign currency loss to distributions in excess of net investment
income, respectively. The Asia Growth Fund also reclassified $377,435 from
accumulated net realized gains on investments to distributions in excess of net
investment income. These reclassifications have no impact on the net asset value
of the Funds and are designed to present the Funds' capital accounts on a tax
basis.
71
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
January 31, 1997
- --------------------------------------------------------------------------------
11. Summary of Share Transactions
Share activity for the year ended January 31, 1997 is as follows:
<TABLE>
<CAPTION>
Balanced Fund Select Equity Fund Growth and Income Fund
- ------------------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A shares
Shares sold 1,529,469 $27,172,279 3,862,697 $81,642,386 5,616,082 $121,074,992
Reinvestment of dividends
and distributions 310,437 5,598,883 370,586 8,175,333 2,390,917 52,287,188
Shares repurchased (446,535) (7,533,272) (1,109,202) (23,823,146) (3,328,038) (72,163,062)
-------------------------------------------------------------------------------------
1,393,371 25,237,890 3,124,081 65,994,573 4,678,961 101,199,118
-------------------------------------------------------------------------------------
Class B shares
Shares sold 109,171 2,001,768 733,802 15,946,016 729,877 16,222,639
Reinvestment of dividends
and distributions 5,284 95,768 24,314 535,407 35,976 787,421
Shares repurchased (1,795) (32,396) (13,894) (310,118) (14,764) (340,546)
-------------------------------------------------------------------------------------
112,660 2,065,140 744,222 16,171,305 751,089 16,669,514
-------------------------------------------------------------------------------------
Institutional shares
Shares sold -- -- 3,151,881 66,277,175 8,228 186,173
Reinvestment of dividends
and distributions -- -- 275,197 6,102,331 92 2,020
Shares repurchased -- -- (363,536) (7,991,198) -- --
-------------------------------------------------------------------------------------
-- -- 3,063,542 64,388,308 8,321 188,193
-------------------------------------------------------------------------------------
Service shares
Shares sold -- -- 154,590 3,344,141 134,652 2,879,042
Reinvestment of dividends
and distributions -- -- 4,126 91,166 12,587 276,180
Shares repurchased -- -- (1,252) (28,032) (10,262) (227,331)
-------------------------------------------------------------------------------------
-- -- 157,464 3,407,275 136,977 2,927,891
-------------------------------------------------------------------------------------
Net increase (decrease) in
shares 1,506,031 $27,303,030 7,089,309 $149,961,461 5,575,348 $120,984,716
=====================================================================================
<CAPTION>
Capital Growth Fund
- -------------------------------------------------------
Shares Dollars
--------------------------
<S> <C> <C>
Class A shares
Shares sold 4,677,047 $73,029,007
Reinvestment of dividends
and distributions 5,870,272 89,898,521
Shares repurchased (14,635,348) (229,277,58)
----------------------------
(4,088,029) (66,350,058)
----------------------------
Class B shares
Shares sold 188,331 2,979,890
Reinvestment of dividends
and distributions 12,408 190,353
Shares repurchased (7,499) (122,231)
----------------------------
193,240 3,048,012
----------------------------
Institutional shares
Shares sold -- --
Reinvestment of dividends
and distributions -- --
Shares repurchased -- --
----------------------------
----------------------------
Service shares
Shares sold -- --
Reinvestment of dividends
and distributions -- --
Shares repurchased -- --
----------------------------
-- --
----------------------------
Net increase (decrease) in
shares (3,894,789) $(63,302,046)
============================
</TABLE>
- --------------------------------------------------------------------------------
72
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Small Cap Equity Fund International Equity Fund Asia Growth Fund
- ----------------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A shares
Shares sold 2,508,268 $52,353,524 12,103,239 $230,847,197 7,588,351 $124,281,405
Reinvestment of dividends
and distributions 475,255 9,732,097 241,377 4,749,851 11,669 184,607
Shares repurchased (4,697,902) (94,933,279) (3,820,157) (72,226,935) (3,945,614) (63,723,269)
------------------------------------------------------------------------------------
(1,714,379) (32,847,658) 8,524,459 163,370,113 3,654,406 60,742,743
------------------------------------------------------------------------------------
Class B shares
Shares sold 173,849 3,765,689 1,000,064 19,327,085 210,879 3,433,876
Reinvestment of dividends
and distributions 7,086 144,474 7,924 155,475 279 4,391
Shares repurchased (4,391) (91,616) (10,181) (198,263) (4,771) (76,391)
------------------------------------------------------------------------------------
176,544 3,818,547 997,807 19,284,297 206,387 3,361,876
------------------------------------------------------------------------------------
Institutional shares
Shares sold -- -- 3,657,119 70,627,799 1,041,822 16,733,545
Reinvestment of dividends
and distributions -- -- 28,973 572,219 2,040 32,281
Shares repurchased -- -- (161,923) (3,153,741) (228,363) (3,651,351)
------------------------------------------------------------------------------------
-- -- 3,524,169 68,046,277 815,499 13,114,475
------------------------------------------------------------------------------------
Service shares
Shares sold -- -- 34,686 673,880 -- --
Reinvestment of dividends
and distributions -- -- 200 3,947 -- --
Shares repurchased -- -- (56) (1,098) -- --
------------------------------------------------------------------------------------
-- -- 34,830 676,729 -- --
------------------------------------------------------------------------------------
Net increase (decrease) in
shares (1,537,835) $(29,029,111) 13,081,265 $251,377,416 4,676,292 $77,219,094
=====================================================================================
<CAPTION>
Share activity for the year ended January 31, 1996 is as follows:
Select Equity Fund
- -------------------------------------------------------------
Shares Dollars
------------- ---------------
<S> <C> <C>
Class A shares
Shares sold 2,479,285 $44,569,920
Reinvestment of dividends and 161,481
distributions 3,032,597
Shares repurchased (2,578,247) (45,692,944)
------------- ---------------
62,519 1,909,573
------------- ---------------
Institutional shares
Shares sold 3,220,915 57,579,398
Reinvestment of dividends and
distributions 97,993 1,847,978
Shares repurchased (30,492) (567,188)
------------- ----------------
3,288,416 $58,860,188
------------- ----------------
Net increase 3,350,935 $60,769,761
============= ================
</TABLE>
- --------------------------------------------------------------------------------
73
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) from Distributions to
investment operations/h/ shareholders
------------------------------- ------------------------------------------
Net realized From
and unrealized net realized
Net asset gain (loss) on From gain on In excess
value, Net investments, net investment of net
beginning investment options and investment and futures investment
of period income futures income transactions income
-----------------------------------------------------------------------------------------
BALANCED FUND
- ------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares................ $17.31 $0.66 $2.47 $(0.66) $(1.00) --
1997 - Class B Shares/b/............. 17.46 0.42 2.34 (0.42) (1.00) (0.07)
1996 - Class A Shares................ 14.22 0.51 3.43 (0.50) (0.35) --
For the Period Ended January 31,
- --------------------------------
1995 - Class A Shares/d/............. 14.18 0.10 0.02 (0.08) -- --
<CAPTION>
Net asset
Net increase value, Portfolio Average
in net end of Total turnover commission
asset value period return/a/ rate rate/g/
---------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C>
1997 - Class A Shares................ $1.47 $18.78 18.59% 208.11/f/ $.0587
1997 - Class B Shares(b)............. 1.27 18.73 16.22/c/ 208.11/f/ .0587
1996 - Class A Shares................ 3.09 17.31 28.10 197.10/f/ --
For the Period Ended January 31,
- -------------------------------------
1995 - Class A Shares/d/............. 0.04 14.22 0.87/c/ 14.71/c/ --
<CAPTION>
Ratio assuming no
voluntary waiver of fees
or expense limitations
-------------------------------
Net Ratio of Ratio of net Ratio of net
assets at net investment Ratio of investment
end of expenses to income to expenses to income (loss)
period average net average net average to average
(in 000s) assets assets net assets net assets
-----------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C>
1997 - Class A Shares................ $81,410 1.00% 3.76% 1.77% 2.99%
1997 - Class B Shares/b/............. 2,110 1.75/e/ 2.59/e/ 2.27/e/ 2.07/e/
1996 - Class A Shares................ 50,928 1.00 3.65 1.90 2.75
For the Period Ended January 31,
- --------------------------------
1995 - Class A Shares/d/............. 7,510 1.00/e/ 3.39/e/ 8.29/e/ (3.90)/e/
</TABLE>
- --------------------------
/a/ 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
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
/b/ For the period from May 1, 1996 (commencement of operations) to January 31,
1997.
/c/ Not annualized.
/d/ For the period from October 12, 1994 (commencement of operations) to
January 31, 1995.
/e/ Annualized.
/f/ Includes the effect of mortgage dollar roll transactions.
/g/ For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/h/ Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
(The accompanying notes are an integral part of these financial statements.)
74
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) from Distributions to
investment operations/(h)/ shareholders
========================== ====================================
Net realized From
and unrealized net realized
Net asset gain (loss) on From gain on In excess
value, Net investments, net investment of net
beginning investment options and investment and futures investment
of period income futures income transactions income
============================================================================
SELECT EQUITY FUND
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
==============================
1997 - Class A Shares ........................ 19.66 $0.16 $4.46 $(0.16) $(0.80) --
1997 - Class B Shares/(f)/.................... 20.44 0.04 3.70 (0.04) (0.80) (0.16)
1997 - Institutional Shares .................. 19.71 0.30 4.51 (0.28) (0.80) --
1997 - Service Shares/(f)/.................... 21.02 0.13 3.15 (0.13) (0.80) (0.10)
1996 - Class A Shares ........................ 14.61 0.19 5.43 (0.16) (0.41) --
1996 - Institutional Shares/(d)/.............. 16.97 0.16 3.23 (0.24) (0.41) --
1995 - Class A Shares ........................ 15.93 0.20 (0.38) (0.20) (0.94) --
1994 - Class A Shares ........................ 15.46 0.17 2.08 (0.17) (1.61) --
1993 - Class A Shares ........................ 15.05 0.22 0.41 (0.22) -- --
For the Period Ended January 31,
================================
1992 - Class A Shares/(e)/.................... 14.17 0.11 0.88 (0.11) -- --
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Net Net Net
increase asset assets
(decrease) value, Portfolio Average end of
in net end of Total turnover commission period
asset value period return/(a)/ rate rate/(g)/ (in 000s)
======================================================================
SELECT EQUITY FUND
- ------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
===============================
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares .............. $3.66 $23.32 23.75% 37.28% $.0417 $225,968
1997 - Class B Shares/(f)/.......... 2.74 23.18 18.59/(b)/ 37.28 .0417 17,258
1997 - Institutional Shares ........ 3.73 23.44 24.63 37.28 .0417 148,942
1997 - Service Shares/(f)/.......... 2.25 23.27 15.92/(b)/ 37.28 .0417 3,666
1996 - Class A Shares .............. 5.05 19.66 38.63 39.35 -- 129,045
1996 - Institutional Shares/(d)/.... 2.74 19.71 20.14/(b)/ 39.35/(b)/ -- 64,829
1995 - Class A Shares .............. (1.32) 14.61 (1.10) 56.18 -- 94,968
1994 - Class A Shares .............. 0.47 15.93 15.12 87.73 -- 92,769
1993 - Class A Shares .............. 0.41 15.46 4.30 144.93 -- 117,757
For the Period Ended January 31,
================================
1992 - Class A Shares/(e)/............ 0.88 15.05 7.01/(b)/ 135.02(c) -- 151,142
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming no
voluntary waiver of fees
or expense limitations
-------------------------
Ratio of Ratio of net Ratio of net
net investment Ratio of investment
expenses income to expenses to income
to average average net average to average
assets assets net assets net assets
==================================================
SELECT EQUITY FUND
- -----------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C>
1997 - Class A Shares ........................ 1.29% 0.91% 1.53% 0.67%
1997 - Class B Shares/(f)/.................... 1.83/(c)/ 0.06/(c)/ 2.00/(c)/ (0.11)/(c)/
1997 - Institutional Shares .................. 0.65 1.52 0.85 1.32
1997 - Service Shares/(f)/.................... 1.15/(c)/ 0.69/(c)/ 1.35/(c)/ 0.49/(c)/
1996 - Class A Shares ........................ 1.25 1.01 1.55 0.71
1996 - Institutional Shares/(d)/.............. 0.65/(c)/ 1.49/(c)/ 0.96/(c)/ 1.18/(c)/
1995 - Class A Shares ........................ 1.38 1.33 1.63 1.08
1994 - Class A Shares ........................ 1.42 0.92 1.67 0.67
1993 - Class A Shares ........................ 1.28 1.30 1.53 1.05
For the Period Ended January 31,
================================
1992 - Class A Shares/(e)/.................... 1.57/(c)/ 1.24/(c)/ 1.82/(c)/ 0.99/(c)/
</TABLE>
- --------------
/(a)/ 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 or redemption charges. Total return would be reduced if
a sales or redemption charge were taken into account.
/(b)/ Not annualized.
/(c)/ Annualized.
/(d)/ For the period from June 15, 1995 (commencement of operations) to January
31, 1996.
/(e)/ For the period from May 24, 1991 (commencement of operations) to January
31, 1992.
/(f)/ For the period from May 1 and June 7, 1996 (commencement of operations) to
January 31, 1997 for Class B and Service shares, respectively.
/(g)/ For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/(h)/ Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
75
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from
investment
operations/(h)/ Distributions to shareholders
====================== =====================================
Net
realized
and From net
Net unrealized realized
asset gain(loss) gain In Net
value, on on excess Increase
beginning Net investments From net investment of net Additional in net
of investment and investment and option investment paid-in asset
period income options income transactions income capital value
===============================================================================================
GROWTH AND INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares ............. $19.98 $0.35 $5.18 $(0.35) $(1.97) $ (0.01) $ -- $3.20
1997 - Class B Shares/(f)/ ........ 20.82 0.17 4.31 (0.17) (1.97) (0.06) -- 2.28
1997 - Institutional Shares/(f)/ .. 21.25 0.29 3.96 (0.30) (1.97) (0.04) -- 1.94
1997 - Service Shares/(f)/ ........ 20.71 0.28 4.50 (0.28) (1.97) (0.07) -- 2.46
1996 - Class A Shares ............. 15.80 0.33 4.75 (0.30) (0.60) -- -- 4.18
1995 - Class A Shares ............. 15.79 0.20/(b)/ 0.30/(b)/ (0.20) (0.33) (0.07) 0.11/(b)/ 0.01
<CAPTION>
For the Period Ended January 31,
==================================
<S>
1994 - Class A Shares/(c)/......... 14.18 0.15 1.68 (0.15) (0.06) (0.01) -- 1.61
</TABLE>
<TABLE>
<CAPTION>
Ratio of Ratio of
Net net net
Net assets expenses investment
asset at to income to
value Total Portfolio Average end of average average
end of return turnover commission period net net
period /(a)/ rate rate/(g)/ (in 000s) assets assets
===================================================================================
GROWTH AND INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares ............. $23.18 28.42% 53.03% $.0586 $615,103 1.22% 1.60%
1997 - Class B Shares/(f)/ ........ 23.10 22.23/(d)/ 53.03 .0586 17,346 1.93/(e)/ 0.15/(e)/
1997 - Institutional Shares/(f)/ .. 23.19 20.77/(d)/ 53.03 .0586 193 0.82/(e)/ 1.36/(e)/
1997 - Service Shares/(f)/ ........ 23.17 23.87/(d)/ 53.03 .0586 3,174 1.32/(e)/ 0.94/(e)/
1996 - Class A Shares ............. 19.98 32.45 57.93 -- 436,757 1.20 1.67
1995 - Class A Shares ............. 15.80 3.97 71.80 -- 193,772 1.25 1.28
<CAPTION>
For the Period Ended January 31,
==================================
<S> <C> <C> <C> <C> <C> <C> <C>
1994 - Class A Shares/(c)/......... 15.79 13.08/(d)/102.23/(d)/ -- 41,528 1.25/(e)/ 1.23/(e)/
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming no
voluntary waiver of fees
or expense limitations
=================================
Ratio of
Ratio of net investment
expenses income (loss)
to average to average
net assets net assets
=================================
GROWTH AND INCOME FUND
- -----------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C>
1997 - Class A Shares ............. 1.43% 1.39%
1997 - Class B Shares/(f/) ........ 1.93/(e)/ 0.15/(e)/
1997 - Institutional Shares/(f)/ .. 0.82/(e)/ 1.36/(e)/
1997 - Service Shares/(f)/ ........ 1.32/(e)/ 0.94/(e)/
1996 - Class A Shares ............. 1.45 1.42
1995 - Class A Shares ............. 1.58 0.95
<CAPTION>
For the Period Ended January 31,
==================================
<S>
1994 - Class A Shares/(c)/......... 3.24/(e)/ (0.76)/(e)/
</TABLE>
- ----------------------------------
/(a)/Assumes investment at the net asset v alue 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
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
/(b)/Calculated based on the average shares outstanding methodology.
/(c)/For the period from February 5, 1993 (commencement of operations) to
January 31, 1994.
/(d)/Not annualized.
/(e)/Annualized.
/(f)/For the period from March 6, May 1 and June 3, 1996 (commencement of
operations) to January 31, 1997 for Service, Class B and Institutional
shares, respectively.
/(g)/For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/(h)/Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
76
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from
investment operations/(g)/ Distributions to shareholders
=========================== =============================================
Net realized
and unrealized From net
Net asset gain (loss) on realized gain In excess
value, Net investments, From net on investments, of net
beginning investment options and investment options investment
of period income futures income and futures income
=======================================================================================
CAPITAL GROWTH FUND
- -----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares.................... $14.91 $0.10 $3.56 $ (0.10) $ (1.72) $(0.02)
1997 - Class B Shares(b)................. 15.67 0.01 2.81 (0.01) (1.72) (0.09)
1996 - Class A Shares.................... 13.67 0.12 3.93 (0.12) (2.69) --
1995 - Class A Shares.................... 15.96 0.03 (0.69) (0.01) (1.62) --
1994 - Class A Shares.................... 14.64 0.02 2.40 (0.01) (1.07) (0.02)
1993 - Class A Shares.................... 13.65 0.06 2.28 (0.07) (1.28) --
1992 - Class A Shares.................... 11.10 0.28 2.90 (0.31) (0.32) --
For the Period Ended January 31,
================================
1991 - Class A Shares/(c)/............... 11.34 0.34 (0.27) (0.31) -- --
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Net
Net increase Net asset assets at
(decrease) value, Portfolio Average end of
in net end of Total turnover commission period
asset value period return/(a)/ rate rate/(f)/ (in 000s)
=======================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares.................... $1.82 $16.73 25.97% 52.92% $.0563 $920,646
1997 - Class B Shares(b)................. 1.00 16.67 19.39/(d)/ 52.92 .0563 3,221
1996 - Class A Shares.................... 1.24 14.91 30.45 63.90 -- 881,056
1995 - Class A Shares.................... (2.29) 13.67 (4.38) 38.36 -- 862,105
1994 - Class A Shares.................... 1.32 15.96 16.89 36.12 -- 833,682
1993 - Class A Shares.................... 0.99 14.64 18.01 58.93 -- 665,976
1992 - Class A Shares.................... 2.55 13.65 29.31 48.93 -- 500,307
For the Period Ended January 31,
================================
1991 - Class A Shares(c)................. (0.24) 11.10 0.84/(d)/ 35.63/(d)/ -- 437,533
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Ratios assuming no
voluntary waiver of fees
=============================
Ratio of Ratio of net Ratio of net
net investment Ratio of investment
expenses to income (loss) to expenses to income (loss)
average net average average to average
assets net assets net assets net assets
====================================================================
- ----------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C>
1997 - Class A Shares.................... 1.40% 0.62% 1.65% 0.37%
1997 - Class B Shares/(b)/................. 2.15/(e)/ (0.39)/(e)/ 2.15/(e)/ (0.39)/(e)/
1996 - Class A Shares.................... 1.36 0.65 1.61 0.40
1995 - Class A Shares.................... 1.38 0.16 1.63 (0.09)
1994 - Class A Shares.................... 1.38 0.13 1.63 (0.12)
1993 - Class A Shares.................... 1.41 0.42 1.66 0.17
1992 - Class A Shares.................... 1.53 2.09 1.78 1.84
For the Period Ended January 31,
- --------------------------------
1991 - Class A Shares/(c)/............... 1.27/(d)/ 3.24/(d)/ 1.47/(d)/ 3.04/(d)/
</TABLE>
- --------------------------
/(a)/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
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
/(b)/For the period from May 1, 1996 (commencement of operations) to
January 31, 1997.
/(c)/For the period from April 20, 1990 (commencement of operations) to January
31, 1991.
/(d)/Not annualized.
/(e)/Annualized.
/(f)/For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/(g)/Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
77
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from Distributions to
investment operations/(g)/ shareholders
=========================== =======================================
From In excess
net of
Net realized realized realized Net
and unrealized gain on gains on increase
Net asset Net gain (loss) on From investment, investment (decrease)
value, investment investments, net option and option and in net
beginning income options and investment futures futures asset
of period (loss) futures income transactions transactions value
==============================================================================================
SMALL CAP EQUITY FUND
- -----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
===================================
<S> <C> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares ............. $17.29 $(0.21) $4.92 $ - $(1.09) $ - $3.62
1997 - Class B Shares/(b)/......... 20.79 (0.11) 1.21 - (1.09) - 0.01
1996 - Class A Shares ............. 16.14 (0.23) 1.39 - (0.01) - 1.15
1995 - Class A Shares ............. 20.67 (0.07) (3.53) - (0.69) (0.24) (4.53)
1994 - Class A Shares ............. 16.68 (0.04) 5.03 - (1.00) - 3.99
For the Period Ended January 31,
===================================
1993 - Class A Shares/(c)/......... 14.18 0.03 2.50 (0.03) - - 2.50
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Net asset Net assets
value, Portfolio Average at end of
end of Total turnover commission period
period return/(a)/ rate rate/(f)/ (in 000s)
================================================================
SMALL CAP EQUITY FUND
- ---------------------------------------------------------------------------------------------------
For the Year Ended January 31,
===================================
<S> <C> <C> <C> <C> <C>
1997 - Class A Shares ............. $20.91 27.28% 99.46% $.0461 $212,061
1997 - Class B Shares/(b)/......... 20.80 5.39/(d)/ 99.46 .0461 3,674
1996 - Class A Shares ............. 17.29 7.20 57.58 - 204,994
1995 - Class A Shares ............. 16.14 (17.53) 43.67 - 319,487
1994 - Class A Shares ............. 20.67 30.13 56.81 - 261,074
For the Period Ended January 31,
===================================
1993 - Class A Shares/(c)/......... 16.68 17.86/(d)/ 7.12/( e)/ - 59,339
<CAPTION>
- ---------------------------------------------------------------------------------------------
Ratios assuming no
voluntary waiver of fees
Ratio of ===========================
Ratio of net Ratio of
net investment Ratio of net
expenses income expenses investment
to average (loss) to to average loss to
net average net net average net
assets assets assets assets
=======================================================
SMALL CAP EQUITY FUND
- ---------------------------------------------------------------------------------------------
For the Year Ended January 31,
===================================
<S> <C> <C> <C> <C>
1997 - Class A Shares ............. 1.60% (0.72)% 1.85% (0.97)%
1997 - Class B Shares/(b)/......... 2.35/(e)/ (1.63)/(e)/ 2.35/(e)/ (1.63)/(e)/
1996 - Class A Shares ............. 1.41 (0.59) 1.66 (0.84)
1995 - Class A Shares ............. 1.53 (0.53) 1.78 (0.78)
1994 - Class A Shares ............. 1.60 (0.45) 1.85 (0.70)
For the Period Ended January 31,
===================================
1993 - Class A Shares/(c)/......... 1.65/(e)/ 0.62/(e)/ 2.70/(e)/ (0.43)/(e)/
- ------------------
</TABLE>
/(a)/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
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
/(b)/For the period from May 1, 1996 (commencement of operations) to January 31,
1997.
/(c)/For the period from October 22, 1992 (commencement of operations) to
January 31, 1993.
/(d)/Not annualized.
/(e)/Annualized.
/(f)/For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/(g)/Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
78
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from Distributions
investment operations/(g)/ to shareholders
================================================= ==============================
Net Net realized From net
realized and unrealized realized
and unrealized gain (loss) gain on
Net asset gain (loss) on on foreign From investment,
value, Net investments, currency net option and
beginning investment options related investment futures
of period income (loss) and futures transactions income transactions
============================================================================================
INTERNATIONAL EQUITY FUND
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
=====================================
1997 - Class A Shares............... $17.20 $0.10 $3.51 $(1.28) $ -- $(0.21)
1997 - Class B Shares/(e)/.......... 18.91 (0.06) 0.94 (0.34) -- (0.21)
1997 - Institutional Shares/(e)/.... 17.45 0.04 3.39 (1.24) (0.03) (0.21)
1997 - Service Shares/(e)/.......... 17.70 (0.02) 2.95 (1.08) -- (0.21)
1996 - Class A Shares .............. 14.52 0.13 2.58 1.42 (0.58) (0.87)
1995 - Class A Shares............... 18.10 0.06 (3.04) (0.01) -- (0.59)
1994 - Class A Shares............... 14.35 0.05 4.08 (0.38) -- --
For the Period Ended January 31,
=====================================
1993 - Class A Shares/(b)/.......... 14.18 (0.01) 0.29 (0.11) -- --
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Net
increase Net asset
(decrease) value, Portfolio Average Net assets at
in net asset end of Total turnover commission end of period
value period return/(a)/ rate rate/(f)/ (in 000s)
==================================================================================
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
========================================
1997 - Class A Shares................... $ 2.12 $19.32 13.48% 38.01% $.0318 $536,283
1997 - Class B Shares/(e)/.............. 0.33 19.24 2.83/(c)/ 38.01 .0318 19,198
1997 - Institutional Shares/(e)/........ 1.95 19.40 12.53/(c)/ 38.01 .0318 68,374
1997 - Service Shares/(e)/.............. 1.64 19.34 10.42/(c)/ 38.01 .0318 674
1996 - Class A Shares .................. 2.68 17.20 28.68 68.48 -- 330,860
1995 - Class A Shares................... (3.58) 14.52 (16.65) 84.54 -- 275,086
1994 - Class A Shares................... 3.75 18.10 26.13 60.04 -- 269,091
For the Period Ended January 31,
========================================
1993 - Class A Shares/(b)/.............. 0.17 14.35 1.23/(c)/ 0.00 -- 66,063
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Ratios assuming no
voluntary waiver of fees or
expense limitations
===============================
Ratio of net Ratio of
Ratio of investment net investment
net income Ratio of income
expenses to (loss) to expenses (loss)
average net average net to average to average
assets assets net assets net assets
=============================================================
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For the Year Ended January 31,
========================================
1997 - Class A Shares................... 1.69% (0.07)% 1.88% (0.26)%
1997 - Class B Shares/(e)/.............. 2.23/(d)/ (0.97)/(d)/ 2.38/(d)/ (1.12)/(d)/
1997 - Institutional Shares/(e)/........ 1.10/(d)/ 0.43/(d)/ 1.25/(d)/ 0.28/(d)/
1997 - Service Shares/(e)/.............. 1.60/(d)/ (0.40)/(d)/ 1.75/(d)/ (0.55)/(d)/
1996 - Class A Shares .................. 1.52 0.26 1.77 0.01
1995 - Class A Shares................... 1.73 0.40 1.98 0.15
1994 - Class A Shares................... 1.76 0.51 2.01 0.26
For the Period Ended January 31,
========================================
1993 - Class A Shares/(b)/.............. 1.80/(d)/ (0.42)/(d)/ 2.58/(d)/ (1.20)/(d)/
</TABLE>
- --------------------------
/(a)/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
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
/(b)/For the period from December 1, 1992 (commencement of operations) to
January 31, 1993.
/(c)/Not annualized.
/(d)/Annualized.
/(e)/For the period from February 7, March 6 and May 1, 1996 (commencement of
operations) to January 31, 1997 for Institutional, Service and Class B
shares, respectively.
/(f)/For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/(g)/Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
79
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) Distributions to
from investment operations /(g)/ shareholders
--------------------------------------------- ------------------------------
Net
realized and
unrealized
Net Net gain on
asset Net realized and foreign
value, investment unrealized currency From net In excess
beginning income gain(loss) on related investment of net investment
of period (loss) investments transactions income income
----------------------------------------------------------------------------------------
ASIA GROWTH FUND
- ----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares..................... $16.49 $ 0.06 $(0.11) $(0.12) $(0.01) $ --
1997 - Class B Shares/(e)/................ 17.31 (0.05) (0.48) (0.51) -- (0.03)
1997 - Institutional Shares/(e)/.......... 16.61 0.04 (0.11) (0.11) (0.04) (0.06)
1996 - Class A Shares..................... 13.31 0.17 3.44 (0.12) (0.17) (0.14)
For the Period Ended January 31,
- --------------------------------
1995 - Class A Shares/(b)/................ 14.18 0.11 (0.89) 0.01 (0.10) --
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Net
increase Net
(decrease) asset
in net value, Portfolio Average Net assets at
asset end of Total turnover commission end of period
value period return/(a)/ rate rate/(f)/ (000s)
------------------------------------------------------------------------------------
ASIA GROWTH FUND
- ------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares..................... $(0.18) $16.31 (1.01)% 48.40% $.0151 $263,014
1997 - Class B Shares/(e)/................ (1.07) 16.24 (6.02)/(c)/ 48.40 .0151 3,354
1997 - Institutional Shares/(e)/.......... (0.28) 16.33 (1.09)/(c)/ 48.40 .0151 13,322
1996 - Class A Shares..................... 3.18 16.49 26.49 88.80 -- 205,539
For the Period Ended January 31,
- --------------------------------
1995 - Class A Shares/(b)/................ (0.87) 13.31 (5.46)/(c)/ 36.08/(c)/ -- 124,298
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios assuming no
voluntary waiver of fees
or expense limitations
------------------------------
Ratio Ratio Ratio
of net of net Ratio of of net
expenses to investment expenses investment
Net assets at average income(loss) to average income(loss)
end of period net to average net to average
(000s) assets net assets assets net assets
-------------------------------------------------------------------------------
ASIA GROWTH FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C>
1997 - Class A Shares................................ $263,014 1.67% 0.20% 1.87% 0.00%
1997 - Class B Shares/(e)/........................... 3,354 2.21/(d)/ (0.56)/(d)/ 2.37/(d)/ (0.72)/(d)/
1997 - Institutional Shares/(e)/..................... 13,322 1.10/(d)/ 0.54/(d)/ 1.26/(d)/ 0.38/(d)/
1996 - Class A Shares................................ 205,539 1.77 1.05 2.02 0.80
For the Period Ended January 31,
- --------------------------------
1995 - Class A Shares/(b)/........................... 124,298 1.90/(d)/ 1.83/(d)/ 2.38/(d)/ 1.35/(d)/
</TABLE>
- --------------------------
(a) 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
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
(b) For the period from July 8, 1994 (commencement of operations) to January 31,
1995.
(c) Not annualized.
(d) Annualized.
(e) For the period from February 2 and May 1, 1996 (commencement of operations)
to January 31, 1997 for Institutional and Class B shares, respectively.
(f) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate on security transactions on which
commissions are charged. This rate may vary due to various types of
transactions and number of security trades executed.
(g) Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
80
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of the
Goldman Sachs Equity Portfolios, Inc.:
We have audited the accompanying statements of assets and liabilities of the
Goldman Sachs Equity Portfolios, Inc. (a Maryland Corporation), comprising the
Balanced Fund, Select Equity Fund, Growth and Income Fund, Capital Growth Fund,
Small Cap Equity Fund, International Equity Fund and Asia Growth Fund, including
the statements of investments, as of January 31, 1997 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
January 31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of each of the respective portfolios constituting Goldman Sachs Equity
Portfolios, Inc. as of January 31, 1997 the results of their operations and the
changes in their net assets and the financial highlights for the periods
presented, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 15, 1997
- --------------------------------------------------------------------------------
81
<PAGE>
- --------------------------------------------------------------------------------
- -------------------------------------- ----------------------------------------
[This Page Intentionally Left Blank]
- -------------------------------------- ----------------------------------------
82
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Equity Portfolios, Inc.
Prospectus which contains facts concerning the Fund's objectives and policies,
management, expenses and other information.
- --------------------------------------------------------------------------------
83
<PAGE>
Goldman Sachs
One New York Plaza
New York, NY 10004
Directors
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Equity Portfolios
- -------------------
Annual Report
January 31, 1997
Goldman Sachs Balanced Fund
Goldman Sachs Select Equity Fund
Goldman Sachs Growth and Income Fund
Goldman Sachs Capital Growth Fund
Goldman Sachs Small Cap Equity Fund
Goldman Sachs International Equity Fund
Goldman Sachs Asia Growth Fund
[LOGO OF GOLDMAN SACHS APPEARS HERE]
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MID-CAP EQUITY FUND
- --------------------------------------------------------------------------------
DEAR SHAREHOLDERS:
We are pleased to have the opportunity to discuss the performance and holdings
of the Goldman Sachs Mid-Cap Equity Fund for the 12 months ended January 31,
1997. The U.S. equity market rewarded investors with excellent returns once
again in 1996, with the Goldman Sachs Mid-Cap Equity Fund outperforming its
benchmark by a wide margin during the period under review. To help put the
fund's performance in perspective, we will also provide a brief overview of the
economic and investment environment.
OBJECTIVE AND INVESTMENT APPROACH
The Goldman Sachs Mid-Cap Equity Fund seeks long-term capital growth primarily
by investing at least 65% of its total assets in equities with market
capitalizations of between $500 million and $7 billion at the time of
investment. However, the fund currently intends to emphasize investments in
companies with market capitalizations of under $5 billion at the time of
investment. The fund is managed with a value style, which means we focus on
companies whose stocks we believe are inexpensive relative to their expected
long-term earnings growth and their asset value. Investments may include well-
known companies that are temporarily out of favor due to cyclical economic
conditions or are experiencing near-term difficulties the portfolio managers
judge to be temporary in nature. In-depth fundamental research of a company's
financial structure, its competitive position in the market and its management's
commitment to increasing shareholder value are all critical parts of the fund's
investment approach. Though we are not sector investors, we closely monitor the
fund's sector and industry exposures compared with the benchmark in an effort to
avoid unintentional over- or underweightings.
MID-CAPS PERFORMED WELL, BUT LAGGED LARGE-CAPS
The U.S. stock market surged to record levels during the period under review,
rising an impressive 26.3% (as measured by the Standard & Poor's 500 stock
index). After a run-up from January through mid-February, market volatility
notably increased, as investor sentiment vacillated between two contradictory
concerns. With some economic news, investors feared that the economy was growing
too quickly, making higher inflation a possibility, while other news caused them
to worry that the economy was slowing, putting earnings at risk. In May,
investors briefly overcame their fears and sent the market higher, but their
concerns quickly reemerged and caused the market to settle into another choppy
trading range that culminated in a sharp sell-off in July. However, stock
prices rebounded throughout the second half of the period, as investors became
more confident that the environment of low inflation, moderate economic growth
and healthy corporate earnings would persist. Though small-cap stocks led the
market during the first half of the year, the post-July rally was dominated by a
handful of large-cap, growth companies.
During the period, the mid-cap sector of the stock market recorded a total
return of 20.9% (as measured by the Russell Midcap index), lagging its larger
peers but slightly outperforming small-cap stocks, which rose 19.0% (as measured
by the Russell 2000 index). The divergence between the performance of the
different stock capitalizations was primarily a reflection of investors "flight
to quality" in the uncertain market, with investors favoring large-cap growth
companies that were highly liquid.
1
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MID-CAP EQUITY FUND (cont'd)
- --------------------------------------------------------------------------------
ECONOMIC GROWTH REBOUNDED AFTER A WEAK START, THEN MODERATED
When the period began, lackluster consumer spending, harsh winter weather and
the General Motors strike restrained economic growth. Despite these adverse
conditions, the economy advanced faster than expected, with first-quarter real
GDP growth reported at 2.0% (annualized). Momentum accelerated even more
dramatically during the second quarter, as industrial activity, automobile sales
and home sales all showed significant improvement. As a result, second-quarter
GDP rose a robust 4.7% (annualized), its highest rate in two years.
The economy's torrid growth cooled markedly during the third quarter, with
annualized real GDP slowing to 2.1%, largely due to lackluster consumer spending
and a widening U.S. trade deficit. This slowdown proved to be temporary,
however, as a wide range of economic reports pointed toward renewed strength
from October through December. Fourth-quarter real GDP growth was revised to
3.9% (annualized), reflecting a narrowing trade deficit, rising consumer
spending and accelerating manufacturing activity. In January 1997, the economic
data suggested that the economy's advance was continuing. Despite firm growth,
underlying inflation remained surprisingly mild. For all of 1996, consumer
prices rose only 2.9%.
The U.S. Federal Reserve cut the Federal funds rate by 25 basis points in
January 1996, just prior to the start of the period. Though stronger than
expected growth shifted investor expectations from further Federal Reserve
interest rate cuts to potential tightening, the Fed then left rates unchanged.
As of January 31, 1997, the Federal funds rate remained at 5.25%.
PERFORMANCE REVIEW: STRONG OUTPERFORMANCE, LED BY OUR TECHNOLOGY, FINANCIAL AND
ENERGY STOCKS
For the 12-month period ended January 31, 1997, the Goldman Sachs Mid-Cap
Equity Fund had a total return of 25.63% based on net asset value, significantly
outperforming the 20.90% total return of the fund's benchmark, the Russell
Midcap Index. We are also pleased to note that the fund fared very well
compared with its peers. For the 12-month period ended January 31, 1997, the
fund ranked within the top 20% of the Lipper mid-cap fund category (30th of
157), according to Lipper Analytical Services, Inc. (Please note that Lipper
rankings do not take sales charges into account and that past performance is not
a guarantee of future results.)
The fund's strong results came primarily during the second half of the period,
and can be attributed to successful stock selection. The best performing stocks
came from a wide range of sectors, with technology, financial and energy-related
investments performing particularly well. In addition, the fund benefited from
several of its positions in consumer nondurables, a sector that had been
underweighted early in the period and subsequently increased.
The fund's top performers included a number of manufacturers of computer-
related components. For example, we took advantage of the slump in technology
stocks in early 1996 by establishing a position in TERADYNE, INC., a
manufacturer of semiconductor testing equipment, at an extremely inexpensive
price. The stock then rebounded much faster than we anticipated in advance of
the turnaround of the semiconductor cycle. Other successful holdings in the
sector were the best performing initial public offering of 1996, CYMER, INC., a
producer of excimer lasers used to etch semiconductors, and SEAGATE TECHNOLOGY,
INC., the world's largest independent disk-drive maker. Seagate Technology
spent much of the past year
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MID-CAP EQUITY FUND (cont'd)
- --------------------------------------------------------------------------------
integrating its acquisition of Conner Peripherals, Inc., which gave it a
dominant market share and made it the most vertically integrated hard disk-drive
manufacturer. By the end of the period, we sold the fund's position in Cymer and
reduced Teradyne and Seagate Technology as they appreciated and became less
undervalued.
In the financial sector, several of our bank and insurance holdings performed
extremely well. Bank stocks included GREENPOINT FINANCIAL CORP., which reported
strong demand for its "no-documentation" and "low-documentation" mortgages;
REPUBLIC BANK OF NEW YORK CORP., which achieved an earnings improvement due to
better than expected revenues and non-interest expense control; and STANDARD FED
BANCORPORATION, a Michigan-based thrift that is in the process of being
acquired, which we sold after it reached our target price. In the insurance
industry, OLD REPUBLIC INTERNATIONAL CORP. enhanced shareholder value in a slow
premium growth environment by improving its capital management, which included a
stock buyback program; USLIFE CORP. surged amid takeover speculation, and
ALLMERICA FINANCIAL CORP. announced a restructuring that would combine its four
units.
The fund also benefited from several of its energy and consumer nondurable
investments. TOSCO CORP., an oil refiner and distributor, continued to
consolidate its market position through an ambitious acquisition strategy, and
LONG ISLAND LIGHTING CO., a New York-based utility, agreed to be acquired by
Brooklyn Union Gas Co. at a very attractive price. In the consumer nondurable
sector, SUNBEAM CORP., a leading consumer products company, surged due to the
aggressive restructuring program initiated by its new CEO; and FRUIT OF THE
LOOM, INC. performed well due to increased investor recognition of its ability
to improve future cash flow.
DIFFICULT INDUSTRY CONDITIONS IMPACTED SEVERAL HOLDINGS
Fund holdings that did not fulfill our expectations included several companies
that were affected by difficult industry conditions. These included GEON CORP.,
VISHAY INTERTECHNOLOGY, INC. and STONE CONTAINER CORP., which all suffered when
their respective businesses -- chemicals, electronic capacitors, and pulp and
paper products -- came under pressure due to increased competition and
overcapacity. Another disappointment was CENTRAL MAINE POWER CO., which was
impacted by continuing uncertainty in the regulatory environment for electric
utilities. We believe that the market has overreacted to the short-term
problems facing these companies and the fund continued to hold them as of the
end of the period.
NEW INVESTMENTS ADDED DIVERSIFICATION
After many holdings performed extremely well and were sold upon reaching our
price targets, we initiated several new investments that we determined were very
undervalued. These included two stocks that were among the fund's 10 largest
positions as of the end of the period under review: INTERNATIONAL MULTIFOODS
CORP. and UNICOM CORP. International Multifoods Corp., a distributor of
specialty foods, has a relatively low valuation, a high degree of operating
leverage and new management that is expected to improve profitability,
particularly in its vending distribution business. Unicom Corp., an electric
utility that operates 12 nuclear units at six sites, generates excess capital
and, unlike many other electric utilities, has no utility power purchase
problems. We established a position after its stock price declined due to a
mandated increase in spending on operations and maintenance, an issue that
management believes will not impair the company's long-term prospects.
We established a major position in PERRIGO CO., the largest manufacturer of
store-brand health and
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MID-CAP EQUITY FUND (cont'd)
- --------------------------------------------------------------------------------
beauty aids, over-the-counter pharmaceuticals and nutritional products. We
expect Perrigo to benefit from stricter cost controls as well as its "over-the-
counter switch" business, where it produces drugs that are equivalent to brand-
name products after the original drug patents expire. These products are a
significant new source of revenues because they command higher margins and have
higher unit growth. Another new position was IMATION CORP., a spin-off of 3M
Co., which manufactures products for data storage, printing and publishing,
medical imaging and photography. Imation has a strong balance sheet and is using
the cash flow generated by its older businesses to develop new products such as
high-capacity disks.
We significantly increased the fund's existing position in THIOKOL CORP., a
defense/aerospace company that has a debt-free balance sheet, trades at a very
low earnings multiple and is reducing its dependence on the federal government.
As part of this strategy, Thiokol formed a joint venture to manufacture
components for commercial aircraft, which will enable it to benefit from an
expected upturn in the aircraft cycle.
<TABLE>
<CAPTION>
TOP 10 EQUITY HOLDINGS AS OF JANUARY 31, 1997
COMPANY LINE OF BUSINESS PERCENTAGE OF TOTAL NET ASSETS
<S> <C> <C>
Thiokol Corp. Defense/Aerospace 3.0%
Shopko Stores, Inc. Discount Retailer 2.5%
Goodyear Tire & Rubber Co. Tire and Rubber Products 2.5%
Republic Bank of New York Corp. Bank 2.5%
Long Island Lighting Co. Electric Utilities 2.5%
International Multi-foods Corp. Food Distributor 2.4%
Avnet, Inc. Electronic Components Distributor 2.4%
USLife Corporation Insurance 2.4%
Unicom Corp. Utility 2.4%
Owens-Illinois, Inc. Packaging 2.4%
</TABLE>
OUTLOOK
As of this writing, we believe the stock market, in general, is somewhat
overvalued. Though we still expect the market to achieve positive results in
1997, its returns are unlikely to match the strong returns of 1995 or 1996.
Despite the expensive market, the fund's current holdings are attractively
valued and we expect them to continue to perform well. We intend to continue to
utilize extensive fundamental research to identify attractive, undervalued
stocks with solid long-term prospects.
Sincerely,
/s/ Eileen A. Aptman
Eileen A. Aptman
Portfolio Manager
/s/ Ronald E. Gutfleish
Ronald E. Gutfleish
Portfolio Manager
U.S. Active Equity Value
March 3, 1997
4
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MID-CAP EQUITY FUND
- --------------------------------------------------------------------------------
The following graph shows the value, as of January 31, 1997, of a $1,000,000
investment made on the inception date of the Fund. For comparative purposes,
the performance of the Fund's benchmark (the Russell Midcap Index ("Russell
Midcap")) is shown for the appropriate time periods. All performance data shown
represents past performance and should not be considered indicative of future
performance which will fluctuate with changes in market conditions. These
performance fluctuations will cause an investor's shares, when redeemed, to be
worth more or less than their original cost.
(dollars in thousands)
[LINE GRAPH APPEARS HERE]
GS MIDCAP RUSSELL MIDCAP
8/1/95 $1,000 $1,000
1/31/96 $1,069 $1,094
1/31/97 $1,344 $1,523
<TABLE>
<CAPTION>
Average Annual Total Return
-----------------------------------
One Year Since Inception
(a)
-----------------------------------
<S> <C> <C>
Institutional 25.63% 21.65%
Shares
</TABLE>
(a) Institutional shares commenced operations on August 1, 1995.
5
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS
January 31, 1997
<TABLE>
<CAPTION>
Shares Description Value
- -------------------------------------------------------------
<S> <C> <C>
Common Stocks--96.5%
Airlines--2.0%
102,400 Continental Airlines, $ 2,867,200
Inc.*
- -------------------------------------------------------------
APPLIANCE MANUFACTURER--1.8%
95,300 Sunbeam Corp., Inc. 2,644,575
- -------------------------------------------------------------
AUTO--ORIGINAL EQUIPMENT MANUFACTURER--0.7%
48,500 Exide Corp. 1,091,250
- -------------------------------------------------------------
BANKS--4.1%
27,600 Greenpoint Financial Corp. 1,504,200
40,700 Republic Bank of New York 3,607,038
Corp.
14,800 Unionbancal Corp. 791,800
5,903,038
- -------------------------------------------------------------
CHEMICALS--COMMODITY--1.2%
94,600 Geon Co. 1,773,750
- -------------------------------------------------------------
COMPUTERS AND PERIPHERALS--3.2%
124,300 Decisionone Corp. 2,175,250
48,000 Seagate Technology, Inc.* 2,472,000
4,647,250
- -------------------------------------------------------------
CONSUMER STAPLES--1.8%
56,135 Block Drug Company, Inc. 2,638,345
- -------------------------------------------------------------
DEFENSE--3.0%
76,600 Thiokol Corp. 4,289,600
DEPARTMENT STORES--2.5%
228,000 Shopko Stores, Inc. 3,619,500
- -------------------------------------------------------------
ELECTRIC UTILITIES--8.6%
242,100 Central Maine Power Co. 2,693,362
38,500 CMS Energy Corp. 1,289,750
158,100 Long Island Lighting Co. 3,596,775
147,500 Niagara Mohawk Power 1,493,437
Corp.*
145,900 Unicom Corp. 3,446,888
12,520,212
- -------------------------------------------------------------
FOOD--4.1%
161,900 Chiquita Brands 2,367,788
International, Inc.
197,000 International Multifoods 3,546,000
Corp.
5,913,788
- -------------------------------------------------------------
FOREST PRODUCTS--2.7%
31,000 Georgia-Pacific Corp. 2,282,375
130,000 Stone Container Corp. 1,755,000
4,037,375
- -------------------------------------------------------------
HEALTHCARE MANAGEMENT--4.8%
57,800 Health Systems 1,495,575
International, Inc.*
104,900 Horizon CMS Healthcare 1,442,375
Corp.
126,400 Tenet Healthcare Corp.* 3,412,800
33,000 Trigon Healthcare Inc. 585,750
6,936,500
- -------------------------------------------------------------
HOME BUILDERS--3.1%
46,000 Centex Corp. 1,794,000
104,600 Lennar Corp. 2,784,975
4,578,975
- -------------------------------------------------------------
INSURANCE--LIFE--3.8%
36,900 Reliastar Financial Corp. 2,047,950
84,700 US Life Corp. 3,472,700
5,520,650
- -------------------------------------------------------------
<CAPTION>
Shares Description Value
- -------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INSURANCE--PROPERTY AND CASUALTY--3.8%
90,100 Allmerica Financial Group $ 3,299,912
84,300 American States Financial 2,223,413
Corp.*
5,523,325
- -------------------------------------------------------------
INSURANCE BROKERS--1.5%
80,900 Old Republic 2,174,187
International
Corp.
- -------------------------------------------------------------
INVESTMENT BROKERS AND MANAGERS--1.0%
44,300 Lehman Brothers Holdings, 1,400,987
Inc.
- -------------------------------------------------------------
LOGISTICS/TRUCKING--1.9%
106,800 Consolidated Freightways, 2,710,050
Inc.
- -------------------------------------------------------------
LEISURE--2.1%
115,300 Royal Caribbean Cruise 3,041,038
Lines
- -------------------------------------------------------------
MACHINERY--0.9%
22,400 Tecumseh Products, Inc. 1,293,600
MEDIA--1.2%
76,200 Carmike Cinemas 1,809,750
- -------------------------------------------------------------
MEDICAL--2.5%
68,800 Owens and Minor, Inc. 705,200
272,700 Perrigo Co. 2,897,438
3,602,638
- -------------------------------------------------------------
OIL REFINING AND MARKETING--5.5%
59,400 Ashland Inc. 2,561,625
34,600 Tosco Corp. 3,062,100
71,700 Valero Energy Corp. 2,419,875
8,043,600
- -------------------------------------------------------------
PACKAGING--2.4%
144,000 Owens-Illinois Inc.* 3,420,000
- -------------------------------------------------------------
RECREATIONAL PRODUCTS--1.7%
149,300 Outboard Marine Corp. 2,482,112
RESTAURANTS--1.8%
369,800 Darden Restaurants 2,681,050
- -------------------------------------------------------------
SEMICONDUCTORS AND ELECTRONICS--7.8%
56,600 Avnet, Inc. 3,502,125
98,000 Imation Corp. 2,854,250
69,200 Silicon Valley Group, 1,859,750
Inc.*
124,250 Vishay Intertechnology, 2,997,531
Inc.*
11,213,656
- -------------------------------------------------------------
SOFTWARE--1.4%
62,900 Autodesk, Inc. 1,989,213
- -------------------------------------------------------------
STEEL--1.8%
63,600 AK Steel Holding Corp. 2,559,900
- -------------------------------------------------------------
SUPERMARKETS--1.9%
168,800 Fleming Companies, Inc. 2,721,900
TECHNOLOGY CAPITAL GOODS--1.9%
91,700 Teradyne, Inc.* 2,831,238
- -------------------------------------------------------------
TEXTILES--4.1%
141,100 Angelica Corp. 2,698,537
82,300 Fruit of the Loom, Inc.* 3,302,287
6,000,824
- -------------------------------------------------------------
TIRE AND OTHER RELATED
RUBBER PRODUCTS--2.5%
66,200 Goodyear Tire & Rubber Co. 3,607,900
- -------------------------------------------------------------
TOBACCO--1.4%
67,000 Universal Corp. 2,077,000
- -------------------------------------------------------------
TOTAL COMMON STOCKS (Cost $118,250,113) $ 140,165,976
- -------------------------------------------------------------
</TABLE>
6
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS (continued)
January 31, 1997
<TABLE>
<CAPTION>
Principal Amount
Interest Rate Maturity Date Value
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
REPURCHASE AGREEMENT--2.8%
Joint Repurchase Agreement Account
$4,100,000 5.63% 02/03/97 $ 4,100,000
- -----------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENT
(Cost $4,100,000) $ 4,100,000
TOTAL INVESTMENTS (COST $122,350,113)** $144,265,976
- -----------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION:
Gross unrealized gain for investments in which value exceeds cost
$ 27,053,378
Gross unrealized loss for investments in which cost exceeds value
(5,196,819)
- -----------------------------------------------------------------------------------
Net unrealized gain $ 21,856,559
- -----------------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
** The aggregate cost for federal income tax purposes is $122,409,417.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
7
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
January 31, 1997
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investment in securities, at value (identified cost $144,265,976
$122,350,113)
Cash 31,121
Receivables:
Fund shares sold 87,576
Investment securities sold 4,552,534
Dividends and interest 56,999
Deferred organization expenses, net 60,056
Other assets 10,218
TOTAL ASSETS 149,064,480
LIABILITIES:
Payables:
Investment securities purchased 3,687,585
Investment advisory fees 71,762
Administration fees 18,370
Transfer agent fees 4,807
Accrued expenses and other liabilities 28,626
TOTAL LIABILITIES 3,811,150
NET ASSETS:
Paid-in capital 115,859,949
Distributions in excess of net investment income (25,142)
Accumulated undistributed net realized gain on investment and 7,502,660
option transactions
Net unrealized gain on investments 21,915,863
NET ASSETS $145,253,330
Total shares of beneficial interest outstanding, $.001 par 7,755,774
value (50,000,000 shares authorized)
Net asset value, offering and redemption price per share (net $18.73
assets/shares outstanding)
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Goldman Sachs Mid-Cap Fund
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the Year Ended January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Dividends $ 2,631,906
Interest 188,358
TOTAL INCOME 2,820,264
- -----------------------------------------------------
EXPENSES:
Investment adviser fees 771,956
Administration fees 192,989
Professional fees 68,906
Transfer agent fees 51,464
Custodian fees 29,506
Amortization of deferred organization 17,213
expenses
Directors' fees 2,234
Other 31,778
- -----------------------------------------------------
TOTAL EXPENSES $1,166,046
Less Expenses reimbursable by Goldman (72,441)
Sachs
NET EXPENSES 1,093,605
NET INVESTMENT INCOME 1,726,659
- -----------------------------------------------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENT AND OPTION TRANSACTIONS:
Net realized gain on investment 13,627,039
transactions
Net realized gain on options written 40,466
Net change in unrealized gain on 14,749,074
investments
- -----------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON 28,416,579
INVESTMENT AND OPTION TRANSACTIONS
- -----------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING $30,143,238
FROM OPERATIONS
- -----------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Share Outstanding throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED PERIOD ENDED
JANUARY 31, 1997 JANUARY 31, 1996 (A)
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income $ 1,726,659 $ 1,088,855
Net realized gain on investment 13,627,039 547,655
transactions
Net realized gain (loss) on options 40,466 (83,442)
written
Net change in unrealized gain on 14,749,074 7,166,789
investments
- ------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting
from operations 30,143,238 8,719,857
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (1,837,675) (986,293)
In excess of net investment income (25,142) ---
From net realized gains (6,629,058) ---
Total distributions to shareholders (8,491,875) (986,293)
- ------------------------------------------------------------------------------------------------------------
FROM SHARE TRANSACTIONS: SHARES SHARES
- ------------------------------------------------------------------------------------------------------------
Proceeds from sales of shares 227,071 3,933,239 9,029,858 135,730,361
Reinvestment of dividends and 483,747 8,489,760 64,045 986,293
distributions
Cost of shares repurchased (1,480,859) (24,491,993) (568,088) (8,779,257)
Net increase (decrease) in net assets
resulting from share transactions (770,041) (12,068,994) 8,525,815 127,937,397
- ------------------------------------------------------------------------------------------------------------
TOTAL INCREASE 9,582,369 135,670,961
NET ASSETS:
Beginning of period 135,670,961 ---
End of period $145,253,330 $135,670,961
- ------------------------------------------------------------------------------------------------------------
Accumulated undistributed
(distributions in excess of) net $ (25,142) $ 102,562
investment income
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(a) For the period from August 1, 1995 (commencement of operations) to January
31, 1996.
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED PERIOD ENDED
JANUARY 31, 1997 JANUARY 31, 1996 (a)
------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $ 15.91 $ 15.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.24 0.13
Net realized and unrealized gain on investments 3.77 0.90
and options
- ------------------------------------------------------------------------------------------------------------
Total income (loss) from investment operations 4.01 1.03
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.24) (0.12)
- ------------------------------------------------------------------------------------------------------------
In excess of net investment income (0.02) --
Net realized gain on investments and option (0.93) --
transactions
- ------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1.19) (0.12)
- ------------------------------------------------------------------------------------------------------------
Net increase in net asset value 2.82 0.91
- ------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 18.73 $ 15.91
Total return /(b)/ 25.63% 6.89% /(d)/
Portfolio turnover rate 74.03% 58.77% /(d)/
Average commission rate /(e)/ $ 0.0547 --
Net assets at end of period $145,253,330 $135,670,961
Ratio of net expenses to average net assets /(c)/ 0.85% 0.85%
Ratio of net investment income to average net assets /(c)/ 1.35% 1.67%
Ratios assuming no expense limitations:
Ratio of expenses to average net assets /(c)/ 0.91% 0.98%
Ratio of net investment income to average net assets /(c)/ 1.29% 1.54%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ For the period from August 1, 1995 (commencement of operations) to January
31, 1996.
/(b)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption
of the investment at the net asset value at the end of the period.
/(c)/ Annualized.
/(d)/ Not annualized.
/(e)/ For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
January 31, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION
Goldman Sachs Mid-Cap Equity Fund ("the Fund") is a separate diversified
portfolio of Goldman SachsEquity Portfolios, Inc. (the "Company"). The Company
consists of eight funds and is a Marylandcorporation registered under the
Investment Company Act of 1940, as amended, as an open-end,management investment
company. The Fund offers two classes of shares - Institutional shares
andService shares. No Service shares were outstanding as of January 31, 1997.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significantaccounting policies consistently
followed by the Fund. The preparation of financial statements inconformity with
generally accepted accounting principles requires management to make
estimatesand assumptions that may affect the reported amounts.
A. Investment Valuation
- -- --------------------
Investments in securities traded on a U.S. or foreignsecurities exchange or the
NASDAQ system are valued daily at their last sale or closing price on
theprincipal exchange on which they are traded or NASDAQ. If no sale occurs,
securities traded on aU.S. exchange or NASDAQ are valued at the mean between the
closing bid and asked price, andsecurities traded on a foreign exchange will be
valued at the official bid price. Unlisted equity anddebt securities for which
market quotations are available are valued at the mean between the mostrecent
bid and asked prices. Debt securities are valued at prices supplied by an
independent pricingservice, which reflect broker/dealer-supplied valuations and
matrix pricing systems. Short-termdebt obligations maturing in sixty days or
less are valued at amortized cost. Restricted securities, andother securities
for which quotations are not readily available, are valued at fair value using
methodsapproved by the Board of Directors of the Company.
B. Securities Transactions and Investment Income
- -- ---------------------------------------------
Securities transactions are recorded on the tradedate. Realized gains and
losses on sales of investments are calculated on the identified-costbasis.
Dividend income is recorded on the ex-dividend date. Dividends for which the
Fund hasthe choice to receive either cash or stock are recognized as investment
income in an amountequal to the cash dividend. This amount is also used as an
estimate of the fair value of the stockreceived. Interest income is determined
on a basis of interest accrued, premium amortized anddiscount earned.
C. Federal Taxes
- -- -------------
It is the Fund's policy to comply with the requirements of the Internal Revenue
Codeapplicable to regulated investment companies and to distribute substantially
all of its investmentcompany taxable income and capital gains to its
shareholders. Accordingly, no federal tax provisionis required. The
characterization of distributions to shareholders for financial reporting
purposes isdetermined in accordance with income tax rules. Therefore, the source
of a portfolio's distributionsmay be shown in the accompanying financial
statements as either from or in excess of netinvestment income or net realized
gain on investment transactions, or from capital, dependingon the type of
book/tax differences that may exist.
D. Deferred Organization Expenses
- -- ------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
12
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
January 31, 1997
- --------------------------------------------------------------------------------
E. Expenses
- -- --------
Expenses incurred by the Company which do notspecifically relate to an
individual fund of the Company are allocated to the funds based on eachfund's
relative average net assets for the period.
F. Option Accounting Principles
- -- ----------------------------
When the Fund writes call or put options, an amount equal to the premium
received is recordedas an asset and as an equivalent liability. The amount of
the liability is subsequently marked-to-market to reflect the current market
value of the option written. When a written option expires onits stipulated
expiration date or the Fund enters into a closing purchase transaction, the Fund
realizes again or loss without regard to any unrealized gain or loss on the
underlying security, and the liabilityrelated to such option is extinguished.
When a written call option is exercised, the Fund realizes again or loss from
the sale of the underlying security, and the proceeds of the sale are
increasedby the premium originally received. When a written put option is
exercised, the amount of thepremium originally received will reduce the cost of
the security which the Fund purchases uponexercise. There is a risk of loss
from a change in value of such options which may exceed the relatedpremiums
received.
Upon the purchase of a call option or aprotective put option by the Fund, the
premium paid is recorded as an investment and subsequentlymarked-to-market to
reflect the current market value of the option. If an option which the Fundhas
purchased expires on the stipulated expiration date, the Fund will realize a
loss in the amount ofthe cost of the option. If the Fund enters into a closing
sale transaction, the Fund will realize a gainor loss, depending on whether the
sale proceeds from the closing sale transaction are greater or lessthan the cost
of the option. If the Fund exercises a purchased put option, the Fund will
realize a gainor loss from the sale of the underlying security, and the proceeds
from such sale will be decreased bythe premium originally paid. If the Fund
exercises a purchased call option, the cost of the securitywhich the Fund
purchases upon exercise will be increased by the premium originally paid.
G. Futures Contracts
- -- -----------------
The Fund may enter into financial futures contracts for hedging purposes or to
increase total return. Upon entering into a futures contract, the Fund is
required to deposit with a broker an amount of cashor securities equal to the
minimum "initial margin" requirement of the futures exchange on which
thecontract is traded. Subsequent payments ("variation margin") are made or
received by theFund each day, dependent on the daily fluctuations in the value
of the underlying index, and arerecorded for financial reporting purposes as
unrealized gains or losses by the Fund. Whenentering into a closing
transaction, for book purposes, the Fund will realize a gain or loss equalto the
difference between the value of the futures contract to sell and the futures
contract to buy. Futures contracts are valued at the most recent settlement
price, unless such price does not reflectthe fair market value of the contract,
in which case the position will be valued using methods approvedby the Board of
Directors of the Company.
Certain risks may arise upon entering intofutures contracts. The predominant
risk is that the changes in the value of the futures contract may notdirectly
correlate with changes in the value of the underlying securities. This risk may
decrease theeffectiveness of the Fund's hedging strategies and may also result
in a loss to the Fund.
13
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
January 31, 1997
- --------------------------------------------------------------------------------
3. AGREEMENTS
Goldman Sachs Asset Management ("GSAM"), aseparate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), acts as the Fund'sinvestment adviser
pursuant to an Investment Advisory Agreement. Under the InvestmentAdvisory
Agreement, GSAM, subject to the general supervision of the Company's Board of
Directors,manages the Fund's portfolio. As compensation for the services
rendered under the AdvisoryAgreement and the assumption of the expenses related
thereto, GSAM is entitled to a fee,computed daily and payable monthly, at an
annual rate equal to .60% of the Fund's average daily netassets.
GSAM also acts as the Fund's administratorpursuant to an Administration
Agreement. Under the Administration Agreement, GSAM administersthe Fund's
business affairs, including providing facilities. As compensation for the
servicesrendered pursuant to the Administration Agreement, the Fund pays GSAM a
fee, computeddaily and payable monthly, at an annual rate equal to .15% of the
Fund's average daily net assets.
Goldman Sachs has voluntarily agreed to reduce or limit certain "Other
Expenses" (excludingadvisory, administration, service plan and transfer agent
fees and litigation, indemnification, taxes,interest, brokerage commissions and
extraordinary expenses) until further notice to the extent suchexpenses exceed
..06% of the average daily net assets of the Fund. For the year ended January
31,1997, these expense reimbursements amounted to $72,441 and Goldman Sachs owed
the Fund $8,717at year end.
Goldman Sachs serves as the Distributor ofshares of the Fund pursuant to a
distribution agreement and receives no fee. Goldman Sachsalso serves as the
Transfer Agent of the Fund for a fee.
4. LINE OF CREDIT FACILITY
The Fund participates in a $250,000,000 uncommitted, unsecured revolving line of
creditfacility. In addition, the Fund participates in a $50,000,000 committed,
unsecured revolving lineof credit facility. Both facilities are to be used
solely for temporary or emergency purposes. Under the most restrictive
arrangement, the Fund must own securities having a market value inexcess of 300%
of the total bank borrowings. The interest rate on the borrowings is based on
theFederal Funds rate. The committed facility also requires a fee to be paid
based on the amount of thecommitment which has not been utilized. During the
year ended January 31, 1997, the Fund did nothave any borrowings under these
facilities.
5. PORTFOLIO SECURITIES TRANSACTIONS
Purchases and proceeds of sales or maturities ofsecurities (excluding short-term
investments and options) for the year ended January 31, 1997 were$92,601,511 and
$112,186,001, respectively.
For the year ended January 31, 1997, optiontransactions in the Fund were as
follows:
<TABLE>
<CAPTION>
Put Options written Contracts Premium Received
- ----------------------------------------------------
<S> <C> <C>
Balance outstanding,
beginning of period -- $ --
Options written 240 40,466
Options expired (240) (40,466)
- ----------------------------------------------------
Balance outstanding,
end of period -- $ 0
- ----------------------------------------------------
</TABLE>
Certain risks arise related to written call or put options from the possible
inability of counterpartiesto meet terms of their contracts.
For the year ended January 31, 1997, GoldmanSachs earned approximately $22,000
of brokerage commissions from portfolio transactions executedon behalf of the
Fund.
14
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
January 31, 1997
- --------------------------------------------------------------------------------
6. REPURCHASE AGREEMENTS
During the term of a repurchase agreement, thevalue of the underlying
securities, including accrued interest, is required to equal or exceed thevalue
of the repurchase agreement. The underlying securities for all repurchase
agreements are held insafekeeping at the Fund's custodian.
7. JOINT REPURCHASE AGREEMENT ACCOUNT
The Fund, together with other registered investment companies having advisory
agreements withGSAM, transfer uninvested cash balances into joint accounts, the
daily aggregate balance of which isinvested in one or more repurchase
agreements. The underlying securities for the repurchaseagreements are U.S.
Treasury obligations. At January 31, 1997, the Fund had an undividedinterest
in the repurchase agreements in the following joint account which equaled
$4,100,000in principal amount. At January 31, 1997, the repurchase agreements
held in this joint account,along with the corresponding underlying securities
(including the type of security, market value,interest rate and maturity date)
were as follows:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Bear Stearns Securities, dated 01/31/97, repurchase price
$800,375,333 (GNMA: $26,604,837, 7.50%, 10/15/26; FNMA:
$720,411,516, 5.50% - 8.00%, 02/01/09 -09/01/26; FHLMC:
77,372,676, 6.0% -$ 8.0%, 04/01/98 - 07/01/26)
$800,000,000 5.63% 02/03/97 $ 800,000,000
Nomura Securities, dated 01/31/97, repurchase price
$100,047,083 (GNMA: $102,007,864, 5.5% - 10.25%
01/15/20 - 01/20/27)
100,000,000 5.65 02/03/97 100,000,000
Lehman Government Securities, dated 01/31/97, repurchase
price $201,894,173 (U.S. Treasury Notes: $191,656,654,
6.375%, 01/15/00-08/15/02; U.S. Treasury Stripped
Securities: $14,095,535 05/15/02 - 11/15/03)
201,800,000 5.60 02/03/97 201,800,000
TOTAL JOINT REPURCHASE AGREEMENT ACCOUNT $1,101,800,000
- --------------------------------------------------------------------------------
</TABLE>
8. CERTAIN RECLASSIFICATIONS
In accordance with Statement of Position 93-2, theMid-Cap Equity Fund has
reclassified $8,454 from paid-in capital to distributions in excess of
netinvestment income. These reclassifications have no impact on the net asset
value of the Fund and isdesigned to present the Fund's capital accounts on a tax
basis.
9. OTHER MATTERS
As of January 31, 1997, The Goldman, Sachs & Co. Employees Profit Sharing and
Retirement IncomePlan was the beneficial owner of approximately 98% of the
outstanding shares of the Fund.
15
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of GoldmanSachs Mid-Cap Equity Fund:
We have audited the accompanying statement ofassets and liabilities of Goldman
Sachs Mid-Cap Equity Fund, one of the portfolios constituting Goldman Sachs
Equity Portfolios, Inc., including the statement of investments, as of January
31, 1997, and the relatedstatement of operations and the statement of changes in
net assets and the financial highlights for the periodspresented. These
financial statements and the financial highlights are the responsibility of the
fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlightsbased on our audits.
We conducted our audits in accordance withgenerally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtainreasonable assurance about whether the financial statements and the
financial highlights are free ofmaterial misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts anddisclosures in
the financial statements. Our procedures included confirmation of securities
owned as of January 31, 1997 by correspondence with the custodian and brokers.
An audit also includes assessing the accountingprinciples used and significant
estimates made by management, as well as evaluating the overall
financialstatement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in allmaterial respects, the financial position of
Goldman Sachs Mid-Cap Equity Fund as of January 31, 1997, theresults of its
operations and the changes in its net assets and the financial highlights for
the periods presented, inconformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 15, 1997
16
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
DIRECTORS
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
OFFICERS
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
GOLDMAN SACHS
Investment Adviser, Administrator,
Distributor and Transfer Agent
17
<PAGE>
Appendix A
DESCRIPTION OF BOND RATINGS*
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 edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than 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 some time 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 system described herein are believed to be the most recent ratings
systems available from Moody's Investors Service, Inc. and Standard and 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 do not necessarily
represent ratings which will be given to these securities on the date of the
Fund's fiscal year end.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
1-A
<PAGE>
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Unrated: 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 or companies that
are not rated as a matter 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 judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believe
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
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 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.
BB, B, CCC, CC, C: Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal. BB indicates the least degree of speculation and C the
highest. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
D: Bonds rated D are in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
2-A
<PAGE>
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
N.R.: Not rated.
3-A
<PAGE>
Appendix B
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 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-B
<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 partners' capital of approximately $5.3 billion as of November
29, 1996.
. With thirty-four offices around the world, Goldman Sachs employs over
9,000 professionals focused on opportunities in major markets.
. A research budget of $200 million for 1997.
. The number one lead manager of U.S. common stock offerings for the
past eight years (1989-1996).*
* Source: Securities Data Corporation. Common stock ranking excludes REITs,
====================================
Investment Trusts and Rights.
2-B
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs
1890 Dow Jones Industrial Average first published
1896 Goldman Sachs joins New York Stock Exchange
1906 Goldman Sachs takes Sears Roebuck public (oldest ongoing client)
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
1996 Dow Jones Industrial Average breaks 6000
3-B
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
SERVICE SHARES
GOLDMAN SACHS BALANCED FUND
GOLDMAN SACHS GROWTH AND INCOME FUND
GOLDMAN SACHS CORE U.S. EQUITY FUND
GOLDMAN SACHS CORE LARGE CAP GROWTH FUND
GOLDMAN SACHS CORE SMALL CAP EQUITY FUND
GOLDMAN SACHS CORE INTERNATIONAL EQUITY FUND
GOLDMAN SAHCS CAPITAL GROWTH FUND
GOLDMAN SACHS MID CAP EQUITY FUND
GOLDMAN SACHS INTERNATIONAL EQUITY FUND
GOLDMAN SACHS SMALL CAP EQUITY FUND
GOLDMAN SACHS EMERGING MARKETS EQUITY FUND
GOLDMAN SACHS ASIA GROWTH FUND
GOLDMAN SACHS REAL ESTATE SECURITIES FUND
(EQUITY PORTFOLIOS OF GOLDMAN SACHS TRUST) One New York Plaza
New York, New York 10004
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 Institutional Shares of Goldman Sachs Balanced Fund,
Goldman Sachs Growth and Income Fund, Goldman Sachs CORE U.S. Equity Fund,
Goldman Sachs CORE Large Cap Growth Fund, Goldman Sachs CORE Small Cap Equity
Fund, Goldman Sachs CORE International Equity Fund, Goldman Sachs Capital Growth
Fund, Goldman Sachs Mid Cap Equity Fund, Goldman Sachs International Equity
Fund, Goldman Sachs Small Cap Equity Fund, Goldman Sachs Emerging Markets Equity
Fund, Goldman Sachs Asia Growth Fund and Goldman Sachs Real Estate Securities
Fund dated August __, 1997, as amended and/or supplemented from time to time
(the "Prospectus"), which may be obtained without charge from Goldman, Sachs &
Co. at the telephone number, or writing to one of the addresses, listed below.
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TABLE OF CONTENTS
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Introduction........................................................... B-3
Investment Policies.................................................... B-4
Investment Restrictions................................................ B-33
Management............................................................. B-35
Portfolio Transactions and Brokerage................................... B-48
Net Asset Value........................................................ B-54
Performance Information................................................ B-56
Shares of the Trust.................................................... B-62
Taxation............................................................... B-66
Financial Statements................................................... B-72
Other Information...................................................... B-72
Appendix A:............................................................ 1-A
Appendix B:............................................................ 1-B
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Subject to Completion dated _________
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY STATE.
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GOLDMAN, SACHS & CO. GOLDMAN SACHS FUNDS
Distributor MANAGEMENT, L.P.
85 Broad Street Investment Adviser to:
New York, New York 10004 Goldman Sachs CORE U.S. Equity Fund and
Goldman Sachs Capital Growth Fund
One New York Plaza
GOLDMAN, SACHS & CO. New York, New York 10004
Transfer Agent
4900 Sears Tower GOLDMAN SACHS ASSET MANAGEMENT
Chicago, Illinois 60606 Investment Adviser to:
Goldman Sachs Balanced Fund,
Goldman Sachs CORE Large Cap Growth Fund,
GOLDMAN SACHS ASSET Goldman Sachs CORE Small Cap Equity Fund,
MANAGEMENT INTERNATIONAL Goldman Sachs CORE International Equity
Fund,
Investment Adviser to: Goldman Sachs Growth and Income Fund,
Goldman Sachs International Equity Fund, Goldman Sachs Mid Cap Equity Fund,
Goldman Sachs Asia Growth Fund, and Goldman Sachs Small Cap Equity Fund, and
Goldman Sachs Emerging Markets Equity Fund Goldman Sachs Real Estate
Securities Fund
133 Peterborough Court One New York Plaza
London, England EC4A 2BB New York, New York 10004
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Toll free (in U.S.).......800-621-2550
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INTRODUCTION
Goldman Sachs Trust (the "Trust") is an open-end, management investment
company. The following series of the Trust are described in this Additional
Statement: Goldman Sachs Balanced Fund ("Balanced Fund"), Goldman Sachs Growth
and Income Fund ("Growth and Income Fund"), CORE U.S. Equity Fund ("CORE U.S.
Equity Fund")(formerly known as "Goldman Sachs Select Equity Fund"), Goldman
Sachs CORE Large Cap Growth Fund ("CORE Large Cap Growth Fund"), Goldman Sachs
CORE Small Cap Equity Fund ("CORE Small Cap Equity Fund"), Goldman Sachs CORE
International Equity Fund ("CORE International Equity Fund"), Goldman Sachs Mid
Cap Equity Fund ("Mid Cap Equity Fund"), Goldman Sachs Capital Growth Fund
("Capital Growth Fund"), Goldman Sachs International Equity Fund
("International Equity Fund"), Goldman Sachs Small Cap Equity Fund ("Small Cap
Equity Fund"), Goldman Sachs Emerging Markets Equity Fund ("Emerging Markets
Equity Fund"), Goldman Sachs Asia Growth Fund ("Asia Growth Fund") and Goldman
Sachs Real Estate Securities Fund ("Real Estate Securities Fund") (collectively
referred to herein as the "Funds").
The Funds were initially organized as a series of a corporation formed
under the laws of the State of Maryland on September 27, 1989 and were
reorganized as a Delaware business trust as of April 30, 1997. The Trustees
have authority under the Trust's charter to create and classify shares into
separate series and to classify and reclassify any series or portfolio of shares
into one or more classes without further action by shareholders. Pursuant
thereto, the Trustees have created the Funds and other series. Additional
series may be added in the future from time to time. The Balanced, Growth and
Income, CORE U.S. Equity, CORE Large Cap Growth, CORE Small Cap Equity Fund,
CORE International Equity Fund, Capital Growth Fund, International Equity, Small
Cap Equity, Emerging Markets Equity, Asia Growth and Real Estate Securities
Funds currently offer five classes of shares: Class A Shares, Class B Shares,
Class C Shares, Institutional Shares and Service Shares. The Mid Cap Equity
Fund currently offers two classes of shares: Institutional Shares and Service
Shares. See "Shares of the Trust."
Goldman Sachs Asset Management, ("GSAM") a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as investment adviser to the
Balanced, Growth and Income, CORE Large Cap Growth, CORE Small Cap Equity, CORE
International Equity, Real Estate Securities, Mid Cap Equity and Small Cap
Equity Funds. Goldman Sachs Fund Management, L.P., ("GSFM") an affiliate of
Goldman Sachs, serves as investment adviser to the CORE U.S. Equity and Capital
Growth Funds. Goldman Sachs Asset Management International ("GSAMI"), an
affiliate of Goldman Sachs, serves as investment adviser to the International
Equity, Emerging Markets Equity and Asia Growth Funds. GSAM, GSFM and GSAMI
are sometimes referred to collectively herein as the "Advisers." Goldman Sachs
serves as each Fund's distributor and transfer agent. Each Fund's custodian is
State Street Bank and Trust Company ("State Street").
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 the Funds' investment objectives and policies.
There is no assurance that each Fund will achieve its objective.
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INVESTMENT POLICIES
Each Fund's share price will fluctuate with market, economic and, to the
extent applicable, foreign exchange conditions, so that an investment in any of
the Funds may be worth more or less when redeemed than when purchased. None of
the Funds should be relied upon as a complete investment program.
BALANCED FUND
=============
The investment objective of the Balanced Fund is to provide shareholders
with long-term capital growth and current income. The Balanced Fund seeks to
achieve its investment objective by investing in a balanced portfolio
diversified among both equity and fixed income securities.
Balanced Fund is intended to provide a foundation on which an investor can
build an investment portfolio or to serve as the core of an investment program,
depending on the investor's goals. Balanced Fund is designed for relatively
conservative investors who seek a combination of long-term capital growth and
current income in a single investment. Balanced Fund offers a portfolio of
equity and fixed income securities intended to provide less volatility than a
portfolio completely invested in equity securities and greater diversification
than a portfolio invested in only one asset class. Balanced Fund may be
appropriate for people who seek capital appreciation but are concerned about the
volatility typically associated with a fund that invests solely in stocks and
other equity securities.
FIXED INCOME STRATEGIES DESIGNED TO MAXIMIZE RETURN AND MANAGE RISK
GSAM's approach to managing the fixed income portion of Balanced Fund's
portfolio seeks to provide high returns relative to a market benchmark, the
Lehman Brothers Aggregate Bond Index, while also seeking to provide high current
income. This approach emphasizes (1) sector allocation strategies which enable
GSAM to tactically overweight or underweight one sector of the fixed-income
market (i.e., mortgages, corporate bonds, U.S. Treasuries, non-dollar bonds,
emerging market debt) versus another; (2) individual security selection based on
identifying relative value (fixed income securities inexpensive relative to
others in their sector); and (3) to a lesser extent, strategies based on GSAM's
expectation of the direction of interest rates or the spread between short-term
and long-term interest rates such as yield curve strategy.
GSAM seeks to manage fixed income portfolio risk in a number of ways.
These include diversifying the fixed income portion of the Balanced Fund's
portfolio among various types of fixed income securities and utilizing
sophisticated quantitative models to understand how the fixed income portion of
the portfolio will perform under a variety of market and economic scenarios.
In addition, GSAM uses extensive credit analysis to select and to monitor any
investment-grade or non-investment grade bonds that may be included in the
Balanced Fund's portfolio. In employing this and other investment strategies,
the GSAM team has access to extensive fundamental research and analysis
available through Goldman Sachs and a broad range of other sources.
A number of investment strategies will be used in selecting fixed income
securities for the Fund's portfolio. GSAM's fixed income investment philosophy
is to actively manage the portfolio within a risk-controlled framework. The
Adviser de-emphasizes interest rate anticipation by monitoring the duration of
the portfolio within a narrow range of the Adviser's target duration, and
instead focuses on seeking to add value through sector selection, security
selection and yield curve strategies.
MARKET SECTOR SELECTION. Market sector selection is the underweighting or
overweighting of one or more market sectors (i.e., U.S. Treasuries, U.S.
Government agency securities, corporate securities,
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mortgage-backed securities and asset-backed securities). GSAM may decide to
overweight or underweight a given market sector or subsector (e.g., within the
corporate sector, industrials, financial issuers and utilities) based on, among
other things, expectations of future yield spreads between different sectors or
subsectors.
ISSUER SELECTION. Issuer selection is the purchase and sale of corporate
securities based on a corporation's current and expected credit standing (within
the constraints imposed by Balanced Fund's minimum credit quality requirements).
This strategy focuses on four types of investment-grade corporate issuers.
Selection of securities from the first type of issuers -those with low but
stable credit - is intended to enhance total returns by providing incremental
yield. Selecting securities from the second type of issuers - those with low
and intermediate but improving credit quality - is intended to enhance total
returns in two stages. Initially, these securities are expected to provide
incremental yield. Eventually, price appreciation should occur relative to
alternative securities as credit quality improves, the nationally recognized
statistical rating organizations upgrade credit ratings, and credit spreads
narrow. Securities from the third type of issuers - issuers with deteriorating
credit quality - will be avoided, since total returns are typically enhanced by
avoiding the widening of credit spreads and the consequent relative price
depreciation. Finally, total returns can be enhanced by focusing on securities
that are rated differently by different rating organizations. If the securities
are trading in line with the higher published quality rating while GSAM concurs
with the lower published quality rating, the securities would generally be sold
and any potential price deterioration avoided. On the other hand, if the
securities are trading in line with the lower published quality rating while the
higher published quality rating is considered more realistic, the securities may
be purchased in anticipation of the expected market reevaluation and relative
price appreciation.
YIELD CURVE STRATEGY. Yield curve strategy consists of overweighting or
underweighting different maturity sectors relative to a benchmark to take
advantage of the shape of the yield curve. Three alternative maturity sector
selections are available: a "barbell" strategy in which short and long maturity
sectors are overweighted while intermediate maturity sectors are underweighted;
a "bullet" strategy in which, conversely, short-and long-maturity sectors are
underweighted while intermediate-maturity sectors are overweighted; and a
"neutral yield curve" strategy in which the maturity distribution mirrors that
of a benchmark.
CORE U.S. EQUITY, CORE LARGE CAP GROWTH, CORE SMALL CAP EQUITY AND CORE
=======================================================================
INTERNATIONAL EQUITY FUNDS
===========================
Under normal circumstances, the Funds will invest at least 90% of their
total assets in equity securities.
The investment strategy of the CORE U.S. Equity, CORE Large Cap Growth,
CORE Small Cap Equity and CORE International Equity Funds will be implemented to
the extent it is consistent with maintaining a Fund's qualification as a
regulated investment company under the Internal Revenue Code. A Fund's strategy
may be limited, in particular, by the requirement for such qualification that
less than 30% of the Fund's gross income for its taxable year be derived from
the sale or other disposition of stocks or securities or certain other
investments (generally including options and futures contracts) held for less
than three months.
Since normal settlement for equity securities is three trading days (for
certain international markets settlement may be longer), the Funds will need to
hold cash balances to satisfy shareholder redemption requests. Such cash
balances will normally range from 2% to 5% of a Fund's net assets. The Funds
may purchase futures contracts only with respect to the S&P 500 Index (in the
case of CORE U.S. Equity Fund) and a representative index (in the case of CORE
Large Cap Growth, CORE Small Cap Equity and CORE International Equity Funds) in
order to keep a Fund's effective equity exposure close to 100%. For exam-
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ple, if cash balances are equal to 10% of the net assets, the Fund may enter
into long futures contracts covering an amount equal to 10% of the Fund's net
assets. As cash balances fluctuate based on new contributions or withdrawals, a
Fund may enter into additional contracts or close out existing positions.
THE MULTIFACTOR MODEL. The Multifactor Model is a rigorous computerized
=====================
rating system for evaluating equity securities according to a variety of
investment characteristics (or factors). The factors used by the Multifactor
Model incorporate many variables studied by traditional fundamental analysts and
cover measures of value, growth, momentum, risk (e.g. price/earnings ratio,
book/price ratio, growth forecasts, earning estimate revisions, price momentum,
volatility and earnings stability). All of these factors have been shown to
significantly impact the performance of equity securities.
Because it includes many disparate factors, the Adviser believes that the
Multifactor Model is broader in scope and provides a more thorough evaluation
than most conventional, value-oriented quantitative models. As a result, the
securities ranked highest by the Multifactor Model do not have one dominant
investment characteristic (such as a low price/earnings ratio); rather, such
securities possess many different investment characteristics. By using a
variety of relevant factors to select securities, the Adviser believes that the
Fund will be better balanced and have more consistent performance than an
investment portfolio that uses only one or two factors to select securities.
The Adviser will monitor, and may occasionally suggest and make changes to,
the method by which securities are selected for or weighted in the Fund. Such
changes (which may be the result of changes in the Multifactor Model or the
method of applying the Multifactor Model) may include: (i) evolutionary changes
to the structure of the Multifactor Model (e.g., the addition of new factors or
a new means of weighting the factors); (ii) changes in trading procedures (e.g.,
trading frequency or the manner in which the Fund uses futures); or (iii)
changes in the method by which securities are weighted in the Fund. Any such
changes will preserve the Fund's basic investment philosophy of combining
qualitative and quantitative methods of selecting securities using a disciplined
investment process.
INTERNATIONAL EQUITY FUND
=========================
International Equity Fund will seek to achieve its investment objective by
investing primarily in equity and equity-related securities of issuers that are
organized outside the United States or whose securities are principally traded
outside the United States. Because research coverage outside the United States
is fragmented and relatively unsophisticated, many foreign companies that are
well-positioned to grow and prosper have not come to the attention of investors.
GSAMI believes that the high historical returns and less efficient pricing of
foreign markets create favorable conditions for International Equity Fund's
highly focused investment approach. For a description of the risks of the
International Equity Fund's investments in Asia, see "Investing in Emerging
Markets, including Asia."
A RIGOROUS PROCESS OF STOCK SELECTION. Using fundamental industry and
company research, GSAMI's equity team in London, Singapore and Tokyo seeks to
identify companies that may achieve superior long-term returns. Stocks are
carefully selected for International Equity Fund's portfolio through a three-
stage investment process. Because International Equity Fund is a long-term
holder of stocks, the portfolio managers adjust International Equity Fund's
portfolio only when expected returns fall below acceptable levels or when the
portfolio managers identify substantially more attractive investments.
Using the research of Goldman Sachs as well as information gathered from
other sources in Europe and the Asia-Pacific region, the Adviser seeks to
identify attractive industries around the world. Such industries are expected
to have favorable underlying economics and allow companies to generate
sustainable and predictable high returns. As a rule, they are less economically
sensitive, relatively free of regulation and favor strong franchises.
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Within these industries the Adviser seeks to identify well-run companies
that enjoy a stable competitive advantage and are able to benefit from the
favorable dynamics of the industry. This stage includes analyzing the current
and expected financial performance of the company; contacting suppliers,
customers and competitors; and meeting with management. In particular, the
portfolio managers look for companies whose managers have a strong commitment to
both maintaining the high returns of the existing business and reinvesting the
capital generated at high rates of return. Management should act in the
interests of the owners and seek to maximize returns to all stockholders.
GSAMI's currency team manages the foreign exchange risk embedded in foreign
equities by means of a currency overlay program. The program may be utilized to
protect the value of foreign investments in sustained periods of dollar
appreciation and to add returns by seeking to take advantage of foreign exchange
fluctuations.
The members of GSAMI's international equity team bring together years of
experience in analyzing and investing in companies in Europe and the Asia-
Pacific region. Their expertise spans a wide range of skills including
investment analysis, investment management, investment banking and business
consulting. GSAM's worldwide staff of over 300 professionals includes portfolio
managers based in London, Singapore and Tokyo who bring firsthand knowledge of
their local markets and companies to every investment decision.
CORPORATE DEBT OBLIGATIONS
==========================
Each Fund may, under normal market conditions, invest in corporate debt
obligations, including obligations of industrial, utility and financial issuers.
CORE U.S. Equity, CORE Large Cap Growth, CORE Small Cap Equity and CORE
International Equity Funds may only invest in debt securities that are cash
equivalents. Corporate debt obligations are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations and may
also be subject to price volatility due to such factors as market interest
rates, market perception of the creditworthiness of the issuer and general
market liquidity.
An economic downturn could severely affect the ability of highly leveraged
issuers of junk bond securities to service their debt obligations or to repay
their obligations upon maturity. Factors having an adverse impact on the market
value of junk bonds will have an adverse effect on a Fund's net asset value to
the extent it invests in such securities. In addition, a Fund may incur
additional expenses to the extent it is required to seek recovery upon a default
in payment of principal or interest on its portfolio holdings.
The secondary market for junk bonds, which is concentrated in relatively
few market makers, may not be as liquid as the secondary market for more highly
rated securities. This reduced liquidity may have an adverse effect on the
ability of Balanced, Growth and Income, Capital Growth, Mid Cap Equity, Small
Cap Equity, Emerging Markets Equity, Asia Growth and Real Estate Securities
Funds to dispose of a particular security when necessary to meet their
redemption requests or other liquidity needs. Under adverse market or economic
conditions, the secondary market for junk bonds could contract further,
independent of any specific adverse changes in the condition of a particular
issuer. As a result, the Advisers could find it difficult to sell these
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Prices realized upon the sale of such lower
rated or unrated securities, under such circumstances, may be less than the
prices used in calculating a Fund's net asset value.
Since investors generally perceive that there are greater risks associated
with the medium to lower rated securities of the type in which Balanced, Growth
and Income, Capital Growth, Mid Cap Equity, Small Cap Equity, Emerging Markets
Equity, Asia Growth and Real Estate Securities Funds may invest, the yields and
prices of such securities may tend to fluctuate more than those for higher rated
securities. In
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the lower quality segments of the fixed-income securities market, changes in
perceptions of issuers' creditworthiness tend to occur more frequently and in a
more pronounced manner than do changes in higher quality segments of the fixed-
income securities market, resulting in greater yield and price volatility.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In
addition, the prices of fixed-income securities fluctuate in response to the
general level of interest rates. Fluctuations in the prices of portfolio
securities subsequent to their acquisition will not affect cash income from such
securities but will be reflected in a Fund's net asset value.
Medium to lower rated and comparable non-rated securities tend to offer
higher yields than higher rated securities with the same maturities because the
historical financial condition of the issuers of such securities may not have
been as strong as that of other issuers. Since medium to lower rated securities
generally involve greater risks of loss of income and principal than higher
rated securities, investors should consider carefully the relative risks
associated with investment in securities which carry medium to lower ratings and
in comparable unrated securities. In addition to the risk of default, there are
the related costs of recovery on defaulted issues. The Advisers will attempt to
reduce these risks through portfolio diversification and by analysis of each
issuer and its ability to make timely payments of income and principal, as well
as broad economic trends and corporate developments.
ZERO COUPON BONDS
=================
A Fund's investments in fixed income securities may include zero coupon
bonds, which are debt obligations issued or purchased at a significant discount
from face value. The discount approximates the total amount of interest the
bonds would have accrued and compounded over the period until maturity. Zero
coupon bonds do not require the periodic payment of interest. Such investments
benefit the issuer by mitigating its need for cash to meet debt service but also
require a higher rate of return to attract investors who are willing to defer
receipt of such cash. Such investments may experience greater volatility in
market value than debt obligations which provide for regular payments of
interest. In addition, if an issuer of zero coupon bonds held by a Fund
defaults, the Fund may obtain no return at all on its investment. Each Fund
will accrue income on such investments for each taxable year which (net of
deductible expenses, if any) is distributable to shareholders and which, because
no cash is generally received at the time of accrual, may require the
liquidation of other portfolio securities to obtain sufficient cash to satisfy
the Fund's distribution obligations. See "Taxation."
VARIABLE AND FLOATING RATE SECURITIES
=====================================
The interest rates payable on certain fixed income securities in which a
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.
CUSTODIAL RECEIPTS
==================
Each Fund may invest up to 5% of its net assets in custodial receipts in
respect of securities issued or guaranteed as to principal and interest by the
U.S. Government, its agencies, instrumentalities, political subdivisions or
authorities. Such custodial receipts evidence ownership of future interest
payments, principal payments or both on certain notes or bonds issued by the
U.S. Government, its agencies, instrumentalities, political subdivisions or
authorities. These custodial receipts are known by
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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.
MUNICIPAL SECURITIES
====================
Balanced Fund may invest up to 5% of its net assets in municipal
securities. Municipal securities consist of bonds, notes and other instruments
issued by or on behalf of states, territories and possessions of the United
States (including the District of Columbia) and their political subdivisions,
agencies or instrumentalities, the interest on which is exempt from regular
federal income tax. Municipal securities are often issued to obtain funds for
various public purposes. Municipal securities also include "private activity
bonds" or industrial development bonds, which are issued by or on behalf of
public authorities to obtain funds for privately operated facilities, such as
airports and waste disposal facilities, and, in some cases, commercial and
industrial facilities.
The yields and market values of municipal securities are determined
primarily by the general level of interest rates, the creditworthiness of the
issuers of municipal securities and economic and political conditions affecting
such issuers. Due to their tax exempt status, the yields and market prices of
municipal securities may be adversely affected by changes in tax rates and
policies, which may have less effect on the market for taxable fixed income
securities. Moreover, certain types of municipal securities, such as housing
revenue bonds, involve prepayment risks which could affect the yield on such
securities.
Investments in municipal securities are subject to the risk that the issuer
could default on its obligations. Such a default could result from the
inadequacy of the sources or revenues from which interest and principal payments
are to be made or the assets collateralizing such obligations. Revenue bonds,
including private activity bonds, are backed only by specific assets or revenue
sources and not by the full faith and credit of the governmental issuer.
MORTGAGE-BACKED SECURITIES
==========================
GENERAL CHARACTERISTICS. Each Fund (other than CORE U.S. Equity, CORE
Large Cap Growth, CORE Small Cap Equity and CORE International Equity Funds) may
invest in mortgage-backed securities. 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, multifamily (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, multifamily 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, if a Fund purchases mortgage-backed securities
at a premium, a faster than expected prepayment rate will reduce both the market
value and the yield to maturity from those which were anticipated. A prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity and market value. Conversely, if a Fund purchases mortgage-
backed securities at a discount, faster than expected prepayments will increase,
while slower
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than expected prepayments will reduce yield to maturity and market values. To
the extent that a Fund invests in mortgage-backed securities, the Advisers may
seek to manage these potential risks by investing in a variety of mortgage-
backed securities and by using certain hedging techniques.
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"), collateralized mortgage obligations and stripped
mortgage-backed securities. A Fund is permitted to invest in other types of
mortgage-backed securities that may be available in the future to the extent
consistent with its investment policies and objective.
A Fund's investments in mortgage-backed securities may include securities
issued or guaranteed by the U.S. Government or one of its agencies, authorities,
instrumentalities or sponsored enterprises, such as the Government National
Mortgage Association ("Ginnie Mae"), the Federal National Mortgage Association
("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac").
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate
instrumentality of the United States. Ginnie Mae is authorized to guarantee the
timely payment of the principal of and interest on certificates that are based
on and backed by a pool of mortgage loans insured by the Federal Housing
Administration ("FHA Loans"), or guaranteed by the Veterans Administration ("VA
Loans"), or by pools of other eligible mortgage loans. In order to meet its
obligations under any guaranty, Ginnie Mae is autho rized to borrow from the
United States Treasury in an unlimited amount.
FANNIE MAE CERTIFICATES. Fannie Mae is a stockholder-owned corporation
chartered under an act of the United States 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 conven tional Mortgage Loans (i.e., not
insured or guaranteed by any U.S. Government agency) or Mortgage Loans that are
either insured by the Federal Housing Administration ("FHA") or guaranteed by
the Veterans Administration ("VA"). However, the Mortgage Loans in Fannie Mae
Pools are primarily conventional Mortgage Loans. The lenders originating and
servicing the Mortgage Loans are subject to certain eligibility requirements
established by Fannie Mae.
Fannie Mae has certain contractual responsibilities. With respect to each
Pool, Fannie Mae is obligated to distribute scheduled monthly installments of
principal and interest after Fannie Mae's servicing and guaranty fee, whether or
not received, to Certificate holders. Fannie Mae also is obligated to distrib-
ute 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. 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
participation 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
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of all principal of the related mortgage loans, without any offset or deduction,
but does not, generally, guarantee the timely payment of scheduled principal.
The obligations of Freddie Mac under its guaranty of Freddie Mac Certificates
are obligations solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed rate mortgage 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
multifamily 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 and
undivided interests in whole loans and participations comprising another Freddie
Mac Certificate group.
MORTGAGE PASS-THROUGH SECURITIES. Each Fund (other than CORE U.S. Equity,
CORE Large Cap Growth, CORE Small Cap Equity and CORE International Equity
Funds) may invest in both government guaranteed and privately issued mortgage
pass-through securities ("Mortgage Pass-Throughs"); that is, 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 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.
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-
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holders under the agreements pursuant to which such certificates are issued. A
rating organization's ratings take into consideration the credit quality of the
related mortgage pool, including any credit support providers, structural and
legal aspects associated with such certificates, and the extent to which the
payment stream on such mortgage pool is adequate to make payments required by
such certificates. A rating organization's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans. In addition, the rating assigned by a rating
organization to a certificate does not address the remote possibility that, in
the event of the insolvency of the issuer of certificates where a subordinated
interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization,
payments on such certificates may be affected.
CREDIT ENHANCEMENT. Credit support falls generally into two categories:
(i) liquidity protection and (ii) protection against losses resulting from
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pools of
mortgages, the provision of a reserve fund, or a combination thereof, to ensure,
subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such credit support can be provided by among other things, payment
guarantees, letters of credit, pool insurance, subordination, or any combination
thereof.
SUBORDINATION; SHIFTING OF INTEREST; RESERVE FUND. In order to achieve
ratings on one or more classes of Mortgage Pass-Throughs, one or more classes of
certificates may be subordinate certificates which provide that the rights of
the subordinate certificate-holders to receive any or a specified portion of
distributions with respect to the underlying mortgage loans may be subordinated
to the rights of the senior certificate-holders. If so structured, the
subordination feature may be enhanced by distributing to the senior certificate-
holders on certain distribution dates, as payment of principal, a specified
percentage (which generally declines over time) of all principal payments
received during the preceding prepayment period ("shifting interest credit
enhancement"). This will have the effect of accelerating the amortization of
the senior certificates while increasing the interest in the trust fund
evidenced by the subordinate certificates. Increasing the interest of the
subordinate certificates relative to that of the senior certificates is intended
to preserve the availability of the subordination provided by the subordinate
certificates. In addition, because the senior certificate-holders in a shifting
interest credit enhancement structure are entitled to receive a percentage of
principal prepayments which is greater than their proportionate interest in the
trust fund, the rate of principal prepayments on the mortgage loans will have an
even greater effect on the rate of principal payments and the amount of interest
payments on, and the yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a
reserve fund may be established relating to such certificates (the "Reserve
Fund"). The Reserve Fund may be created with an initial cash deposit by the
originator or servicer and augmented by the retention of distributions otherwise
available to the subordinate certificate-holders or by excess servicing fees
until the Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate-holders of the full
amount of scheduled monthly payments of principal and interest due them and will
protect the senior certificate-holders against certain losses; however, in
certain circumstances the Reserve Fund could be depleted and 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
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certificates or, to the extent specified, in the Reserve Fund will generally be
used to offset the amount of any losses realized with respect to the mortgage
loans ("Realized Losses"). Realized Losses remaining after application of such
amounts will generally be applied to reduce the ownership interest of the
subordinate certificates in the mortgage pool. If the subordinated amount has
been reduced to zero, Realized Losses generally will be allocated pro rata among
--------
all certificate-holders in proportion to their respective outstanding interests
in the mortgage pool.
ALTERNATIVE CREDIT ENHANCEMENT. As an alternative, or in addition to the
credit enhancement afforded by subordination, credit enhancement for Mortgage
Pass-Throughs may be provided by mortgage insurance, hazard insurance, by the
deposit of cash, certificates of deposit, letters of credit, a limited guaranty
or by such other methods as are acceptable to a rating agency. In certain
circumstances, such as where credit enhancement is provided by guarantees or a
letter of credit, the security is subject to credit risk because of its exposure
to an external credit enhancement provider.
VOLUNTARY ADVANCES. Generally, in the event of delinquencies in payments
on the mortgage loans underlying the Mortgage Pass-Throughs, the servicer agrees
to make advances of cash for the benefit of certificate-holders, but only to the
extent that it determines such voluntary advances will be recoverable from
future payments and collections on the mortgage loans or otherwise.
OPTIONAL TERMINATION. Generally, the servicer may, at its option with
respect to any certificates, repurchase all of the underlying mortgage loans
remaining outstanding at such time as the aggregate outstanding principal
balance of such mortgage loans is less than a specified percentage (generally 5-
10%) of the aggregate outstanding principal balance of the mortgage loans as of
the cut-off date specified with respect to such series.
MULTIPLE CLASS MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE
OBLIGATIONS. A Fund may invest in multiple class securities including
collateralized mortgage obligations ("CMOs") and REMIC Certificates. These
securities may be issued by U.S. Government agencies and instrumentalities such
as Fannie Mae or Freddie Mac 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 mortgages or participation 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
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<PAGE>
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 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 class ("PAC") certificates, which are parallel pay REMIC
Certificates that generally require that specified amounts of principal be
applied on each payment date to one or more classes or REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments of
the Mortgage Assets are then required to be applied to one or more other classes
of the Certificates. The scheduled principal payments for the PAC Certificates
generally have the highest priority on each payment date after interest due has
been paid to all classes entitled to receive interest currently. Shortfalls, if
any, are added to the amount payable on the next payment date. The PAC
Certificate payment schedule is taken into account in calculating the final
distribution date of each class of PAC. In order to create PAC tranches, one or
more tranches generally must be created that absorb most of the volatility in
the underlying mortgage assets. These tranches tend to have market prices and
yields that are much more volatile than other PAC classes.
STRIPPED MORTGAGE-BACKED SECURITIES. The Balanced and Real Estate
Securities Funds may invest in stripped mortgage-backed securities ("SMBS"),
which are derivative multiclass mortgage securities. Although the market for
such securities is increasingly liquid, certain SMBS may not be readily
marketable and will be considered illiquid for purposes of the Fund's limitation
on investments in illiquid securities. The market value of the class consisting
entirely of principal payments generally is unusually volatile in response to
changes in interest 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.
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INVERSE FLOATING RATE SECURITIES
================================
Balanced Fund may invest up to 5% of its net assets in leveraged inverse
floating rate debt instruments ("inverse floaters"). The interest rate on an
inverse floater 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 degree of leverage inherent in inverse floaters is
associated with greater volatility in their market values. 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 the
Fund's 15% limitation on investments in such securities.
ASSET-BACKED SECURITIES
=======================
Asset-backed securities represent participation in, or are secured by and
payable from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property, receivables
from revolving credit (credit card) agreements and other categories of
receivables. Such assets are securitized through the use of trusts and special
purpose corporations. Payments or distributions of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution unaffiliated
with the trust or corporation, or other credit enhancements may be present.
Like mortgage-backed securities, asset-backed 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.
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. To the
extent that a Fund invests in asset-backed securities, the values of such Fund's
portfolio securities will vary with changes in market interest rates generally
and the differentials in yields among various kinds of asset-backed securities.
Asset-backed securities present certain additional risks that are not
presented by mortgage-backed securities because asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to mortgage assets. Credit card receivables are generally unsecured
and the debtors on such receivables are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set-off certain amounts owed on the credit cards, thereby reducing the
balance due. Automobile receivables generally are secured, but by automobiles
rather than residential real property. Most issuers of automobile receivables
permit the loan servicers to retain possession of the underlying obligations.
If the servicer were to sell these obligations to 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.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
==================================================
Each Fund may purchase and sell futures contracts and may also purchase and
write options on futures contracts. CORE U.S. Equity, CORE Large Cap Growth and
CORE Small Cap Equity Funds may only enter into such transactions with respect
to the S&P 500 Index, for the CORE U.S. Equity Fund and a representative index
in the case of the CORE Large Cap Growth and CORE Small Cap Equity
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<PAGE>
Funds. The other Funds may purchase and sell futures contracts based on various
securities (such as U.S. Government securities), securities indices, foreign
currencies and other financial instruments and indices. Each Fund will engage in
futures and related options transactions, 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 Commodity Futures Trading Commission ("CFTC").
All futures contracts entered into by a Fund are traded 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
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 through the sale of futures contracts to offset a decline in the value of
its current portfolio securities. When rates are falling or 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. Similarly, each Fund (other than CORE U.S. Equity, CORE
Large Cap Growth and CORE Small Cap Equity Funds) can sell futures contracts on
a specified currency to protect against a decline in the value of such currency
and its portfolio securities which are quoted or denominated in such currency.
Each Fund (other than CORE U.S. Equity, CORE Large Cap Growth and CORE Small Cap
Equity Funds) can purchase futures contracts on foreign currency to establish
the price in U.S. dollars of a security quoted or denominated in such currency
that such Fund has acquired or expects to acquire.
Positions taken in the futures market are not normally held to maturity,
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While each Fund will usually liquidate futures contracts on
securities or currency in this manner, a Fund may instead make or take delivery
of the underlying securities or currency whenever it appears economically
advantageous for the Fund to do so. A clearing corporation associated with the
exchange on which futures 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, rate of return or currency exchange rate on portfolio securities or
securities that a Fund owns or proposes to acquire. A Fund may, for example,
take a "short" position in the futures market by selling futures contracts to
seek to hedge against an anticipated rise in interest rates or a decline in
market prices or (other than CORE U.S. Equity, CORE Large Cap Growth and CORE
Small Cap Equity Funds) foreign currency rates that would adversely affect the
dollar value of such Fund's portfolio securities. Similarly, each Fund (other
than CORE U.S. Equity, CORE Large Cap Growth and CORE Small Cap Equity Funds)
may sell futures contracts on a currency in which its portfolio securities are
quoted or denominated or in one currency to seek to hedge against fluctuations
in the value of securities quoted or denominated in a different currency if
there is an established historical pattern of correlation between the two
currencies. If, in the opinion of the applicable 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, a 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 a Fund enter into a greater or lesser number of futures contracts or
by attempting to achieve only a partial hedge against price changes affecting a
Fund's securities portfolio. When hedging of this character is successful, any
depreciation in the value of portfolio securities will be substantially offset
by appreciation in the value of the futures position. On the other hand, any
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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 such
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 or rates 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, 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, a Fund
becomes obligated to purchase a futures contract if the option is exercised,
which may have a value lower than the exercise price. Thus, the loss incurred
by a Fund in writing options on futures is potentially unlimited and may exceed
the amount of the premium received. A Fund 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 financial
instrument. 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 transactions and
will engage in related options transactions only for bona fide hedging as
defined in the regulations of the CFTC or to seek to increase total return to
the extent permitted by such regulations. A 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 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 the
Fund owns, or futures contracts will be purchased to protect the 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 quoted or denominated in the related
currency) in the cash market at the time when the futures or options 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 literal compliance with the bona fide hedging
definition, a CFTC regulation permits a Fund to elect to comply with a different
test. Under this test the aggregate initial margin and premiums required to
establish positions in futures contracts and options on futures to seek to
increase total return may not exceed 5% of the net asset value of such Fund's
portfolio, after taking into account
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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. A Fund will engage
in transactions in currency forward contracts futures contracts and, for a Fund
permitted to do so, related options transactions only to the extent such
transactions are consistent with the requirements of the Code for maintaining
its qualification as a regulated investment company for federal income tax
purposes (see "Taxation").
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
segregate with its custodian cash or liquid assets in an amount equal to the
underlying value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
unanticipated changes in interest rates, 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.
Perfect correlation between a Fund's futures positions and portfolio
positions will be difficult to achieve because no futures contracts based on
individual equity or corporate fixed-income securities are currently available.
The only futures contracts available to hedge a Fund's portfolio are various
futures on U.S. Government securities, securities indices and foreign
currencies. In addition, it is not possible for a Fund 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.
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 (other than CORE U.S. Equity
and CORE Large Cap Growth Funds). A call option written by a Fund obligates
such 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 such
Fund will own the securities subject to the option as long as the option is
outstanding or such Fund will use the other methods described below. A Fund's
purpose in writing covered call options is to realize greater income than would
be realized on portfolio securities transactions alone. However, 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 would obligate such Fund to purchase
specified securities from the option holder at a specified price if the option
is exercised at any time before the expiration date. All put options written by
a Fund would be covered, which means that such Fund would have deposited with
its custodian cash or liquid assets with a value at least equal to the exercise
price of the put option. The purpose of writing such options is to generate
additional income for the Fund. However, in return for the option premium, each
Fund accepts the risk that it may be required to purchase the underlying
securities at a price in excess of the securities' market value at the time of
purchase.
Call and put options written by a Fund will also be considered to be
covered to the extent that the Fund's liabilities under such options are wholly
or partially offset by its rights under call and put options purchased by the
Fund.
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<PAGE>
In addition, a written call option or put option may be covered by
maintaining cash or liquid assets (either of which may be quoted or denominated
in any currency) in a segregated account, by entering into an offsetting forward
contract and/or by purchasing an offsetting option which, by virtue of its
exercise price or otherwise, reduces a Fund's net exposure on its written option
position.
A 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 payments and does not involve the actual
purchase or sale of securities. In addition, securities index options are
designed to reflect price fluctuations in a group of securities or segment of
the securities market rather than price fluctuations in a single security.
A Fund 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 its custodian) upon conversion or exchange of other
securities in its portfolio. A Fund may cover call and put options on a
securities index by maintaining cash or liquid assets with a value equal to the
exercise price in a segregated account with its custodian.
A Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
PURCHASING OPTIONS. Each Fund (other than the CORE U.S. Equity and CORE
Large Cap Growth Funds) may purchase put and call options on any securities in
which it may invest or options on any securities index composed of securities in
which it may invest. A Fund would also be able to 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
in the market value of securities of the type in which it may invest. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified securities at a specified price during the option period.
A Fund would ordinarily realize a gain if, during the option period, the value
of such securities exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise such a Fund would realize either no gain or a loss
on the purchase of the call option.
A Fund would normally purchase put options in anticipation of a decline in
the market value of securities in its portfolio ("protective puts") or in
securities in which it may invest. 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 more than cover the premium and transaction costs; otherwise
such a 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 the underlying portfolio
securities.
A Fund would purchase put and call options on securities indices for the
same purposes as it would purchase options on individual securities. For a
description of options on securities indices, see "Writing Covered Options"
above.
B-19
<PAGE>
YIELD CURVE OPTIONS. Balanced Fund, with respect to up to 5% of its net
assets, may enter into options on the yield "spread" or differential between two
securities. Such transactions are referred to as "yield curve" options. In
contrast to other types of options, a yield curve option is based on the
difference between the yields of designated securities, rather than the prices
of the individual securities, and is settled through cash payments.
Accordingly, a yield curve option is profitable to the holder if this
differential widens (in the case of a call) or narrows (in the case of a put),
regardless of whether the yields of the underlying securities increase or
decrease.
Balanced Fund may purchase or write yield curve options for the same
purposes as other options on securities. For example, Balanced 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.
Balanced Fund may also purchase or write yield curve options in an effort to
increase its current income if, in the judgment of the Adviser, Balanced 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 risk of loss even if the yield of one of the
underlying securities remains constant, if the spread moves in a direction or to
an extent which was not anticipated.
Yield curve options written by the Balanced Fund will be "covered." A call
(or put) option is covered if the Balanced 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 assets sufficient to cover
the Balanced Fund's net liability under the two options. Therefore, the
Balanced Fund's liability for such a covered option is generally limited to the
difference between the amount of the Balanced Fund's liability under the option
written by the Balanced Fund less the value of the option held by the Balanced
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 an options exchange will exist for any particular
exchange-traded option or at any particular time. If a Fund is unable to effect
a closing purchase transaction with respect to covered options it has written,
the Fund will not be able to sell the underlying securities or dispose of assets
held in a segregated account until the options expire or are exercised.
Similarly, if a Fund is unable to effect a closing sale transaction with respect
to options it has purchased, it will have to exercise the options in order to
realize any profit and will incur transaction costs upon the purchase or sale of
underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening 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.
B-20
<PAGE>
Each Fund may purchase and sell both options that are traded on U.S. and
foreign exchanges and options traded over-the-counter with broker-dealers who
make markets in these options. The ability to terminate over-the-counter
options is more limited than with exchange-traded options and may involve the
risk that broker-dealers participating in such transactions will not fulfill
their obligations. Until such time as the staff of the Securities and Exchange
Commission ("SEC") changes its position, each Fund 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 the formula.
Transactions by each Fund in options on securities and indices will be
subject to limitations established by each of the exchanges, boards of trade or
other trading facilities governing the maximum number of options in each class
which may be written or purchased by a single investor or group of investors
acting in concert. Thus, the number of options which a Fund may write or
purchase may be affected by options written or purchased by other investment
advisory clients of the Advisers. An exchange, board of trade or other trading
facility may order the liquidation of positions found to be in excess of these
limits, and it may impose certain other sanctions.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of protective
puts for hedging purposes depends in part on the Adviser's ability to predict
future price fluctuations and the degree of correlation between the options and
securities markets.
REAL ESTATE INVESTMENT TRUSTS
=============================
Each Fund may invest in shares of REITs. The Real Estate Securities Fund
expects that a substantial portion of its total assets will be invested in
REITs. REITs are pooled investment vehicles which invest primarily in income
producing real estate or real estate related loans or interest. REITs are
generally classified as equity REITs, mortgage REITs or a combination of equity
and mortgage REITs. Equity REITs invest the majority of their assets directly
in real property and derive income primarily from the collection of rents.
Equity REITs can also realize capital gains by selling properties that have
appreciated in value. Mortgage REITs invest the majority of their assets in
real estate mortgages and derive income from the collection of interest
payments. Like regulated investment companies such as the Funds, REITs are not
taxed on income distributed to shareholders provided they comply with certain
requirements under the Code. A Fund will indirectly bear its proportionate
share of any expenses paid by REITs in which it invests in addition to the
expenses paid by a Fund.
Investing in REITs involves certain unique risks. Equity REITs may be
affected by changes in the value of the underlying property owned by such REITs,
while mortgage REITs may be affected by the quality of any credit extended.
REITs are dependent upon management skills, are not diversified (except to the
extent the Code requires), and are subject to the risks of financing projects.
REITs are subject to heavy cash flow dependency, default by borrowers, self-
liquidation, and the possibilities of failing to qualify for the exemption from
tax for distributed income under the Code and failing to maintain their
exemptions from the Investment Company Act of 1940, as amended (the "Act").
REITs (especially mortgage REITs) are also subject to interest rate risks.
WARRANTS AND STOCK PURCHASE RIGHTS
==================================
Each Fund may invest up to 5% of its net assets, calculated at the time of
purchase, in warrants or rights (other than those acquired in units or attached
to other securities) which entitle the holder to buy equity securities at a
specific price for a specific period of time. A Fund will invest in warrants
and rights only if such equity securities are deemed appropriate by the Adviser
for investment by the Fund. CORE
B-21
<PAGE>
U.S. Equity, CORE Large Cap Growth, CORE Small Cap Equity and CORE International
Equity Funds have no present intention of acquiring warrants or rights. Warrants
and rights have no voting rights, receive no dividends and have no rights with
respect to the assets of the issuer.
B-22
<PAGE>
FOREIGN SECURITIES
==================
Investments in foreign securities may offer potential benefits not
available from investments solely in U.S. dollar-denominated or quoted
securities of domestic issuers. Such benefits may include the opportunity to
invest in foreign issuers that appear, in the opinion of the applicable Adviser,
to offer better opportunity for long-term growth of capital and income than
investments in U.S. securities, the opportunity to invest in foreign countries
with economic policies or business cycles different from those of the United
States and the opportunity to reduce fluctuations in portfolio value by taking
advantage of foreign stock markets that do not necessarily move in a manner
parallel to U.S. markets.
Investing in foreign securities involves certain special considerations,
including those set forth below, which are not typically associated with
investing in U.S. dollar-denominated or quoted securities of U.S. issuers.
Investments in foreign securities usually involve currencies of foreign
countries. Accordingly, any Fund that invests in foreign securities 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. Balanced, CORE International Equity, International Equity,
Emerging Markets Equity and Asia Growth Funds may be subject to currency
exposure independent of their securities positions.
Currency exchange rates may fluctuate significantly over short periods of
time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or anticipated changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates
also can be affected unpredictably by intervention by U.S. or foreign
governments or central banks or the failure to intervene or by currency controls
or political developments in the United States or abroad.
Since foreign issuers generally are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. companies, there may be less publicly
available information about a foreign company than about a U.S. company. Volume
and liquidity in most foreign securities markets are less than in the United
States and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Fixed commissions on
foreign securities exchanges are generally higher than negotiated commissions on
U.S. exchanges, although each Fund endeavors to achieve the most favorable net
results on its portfolio transactions. There is generally less government
supervision and regulation of foreign securities exchanges, brokers, dealers and
listed and unlisted companies than in the United States.
Foreign markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when some of a Fund's assets are uninvested and no return is earned on
such assets. The inability of a 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 the Fund due to subsequent declines in
value of the portfolio securities or, if the 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 affect a 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, resource self-sufficiency and
balance of payments position.
Each Fund may invest in foreign securities which take the form of sponsored
and unsponsored American Depository Receipts ("ADRs") and Global Depository
Receipts ("GDRs") and (except for CORE
B-23
<PAGE>
U.S. Equity, CORE Large Cap Growth and CORE Small Cap Equity Funds) may also
invest in European Depository Receipts ("EDRs") or other similar instruments
representing securities of foreign issuers (together, "Depository Receipts").
ADRs represent the right to receive securities of foreign issuers deposited
in a domestic bank or a correspondent bank. ADRs are traded on domestic
exchanges or in the U.S. over-the-counter market and, generally, are in
registered form. EDRs and GDRs are receipts evidencing an arrangement with a
non-U.S. bank similar to that for ADRs and are designed for use in the non-U.S.
securities markets. EDRs and GDRs are not necessarily quoted in the same
currency as the underlying security.
To the extent a Fund acquires Depository Receipts through banks which do
not have a contractual relationship with the foreign issuer of the security
underlying the Depository Receipts to issue and service such Depository Receipts
(unsponsored), there may be an increased possibility that the Fund would not
become aware of and be able to respond to corporate actions such as stock splits
or rights offerings involving the foreign issuer in a timely manner. In
addition, the lack of information may result in inefficiencies in the valuation
of such instruments.
Each Fund (except CORE U.S. Equity, CORE Large Cap Growth and CORE Small
Cap Equity Funds) may invest in countries with emerging economies or securities
markets. Political and economic structures in many of such countries may be
undergoing significant evolution and rapid development, and such countries may
lack the social, political and economic stability characteristic of more
developed countries. Certain of such countries may have in the past failed to
recognize private property rights and have at times nationalized or expropriated
the assets of private companies. As a result, the risks described above,
including the risks of nationalization or expropriation of assets, may be
heightened. See "Investing in Emerging Markets, including Asia," below.
A Fund (other than CORE U.S. Equity, CORE Large Cap Growth and CORE Small
Cap Equity Funds) may invest in securities of issuers domiciled in a country
other than the country in whose currency the instrument is denominated or
quoted. The Funds may also invest in securities quoted or denominated in the
European Currency Unit ("ECU"), which is a "basket" consisting of specified
amounts of the currencies of certain of the member states of the European
Community. The specific amounts of currencies comprising the ECU may be
adjusted by the Council of Ministers of the European Community from time to time
to reflect changes in relative values of the underlying currencies. In
addition, the Funds may invest in securities quoted or denominated in other
currency "baskets."
INVESTING IN EMERGING MARKETS, INCLUDING ASIA. CORE International Equity,
International Equity, Asia Growth and Emerging Markets Equity Funds are intended
for long-term investors who can accept the risks associated with investing
primarily in equity and equity-related securities of foreign issuers, including
Emerging Countries issuers (in the case of Emerging Markets Equity and
International Equity Funds) and Asian Companies (as defined in the Prospectus)
(in the case of Asia Growth Fund), as well as the risks associated with
investments quoted or denominated in foreign currencies. Balanced, Growth and
Income, CORE International Equity, Small Cap Equity, Mid Cap Equity and Capital
Growth Funds may invest, to a lesser extent, in equity and equity-related
securities of foreign issuers; including Emerging Countries issuers. In
addition, certain of Balanced, CORE International Equity, International Equity,
Emerging Markets Equity and Asia Growth Fund's potential investment and
management techniques entail special risks. Asia Growth Fund concentrates on
companies that the Advisers believe are taking full advantage of the region's
growth and that have the potential for long-term capital appreciation. The
Advisers believe that Asia offers an attractive investment environment and that
new opportunities will continue to emerge in the years ahead.
B-24
<PAGE>
The pace of change in many Emerging Countries, and in particular those in
Asia, over the last 10 years has been rapid. Accelerating economic growth in
the region has combined with capital market development, high government
expenditure, increasing consumer wealth and taxation policies favoring company
expansion. As a result, stock market returns in many Emerging Countries have
been relatively attractive. See "Risk Factors" in the Prospectus.
Each of the securities markets of the Emerging Countries is less liquid and
subject to greater price volatility and has a smaller market capitalization than
the U.S. securities markets. Issuers and securities markets in such countries
are not subject to as extensive and frequent accounting, financial and other
reporting requirements or as comprehensive government regulations as are issuers
and securities markets in the U.S. In particular, the assets and profits
appearing on the financial statements of Emerging Country issuers may not
reflect their financial position or results of operations in the same manner as
financial statements for U.S. issuers. Substantially less information may be
publicly available about Emerging Country issuers than is available about
issuers in the United States.
Certain of the Emerging Country securities markets are marked by a high
concentration of market capitalization and trading volume in a small number of
issuers representing a limited number of industries, as well as a high
concentration of ownership of such securities by a limited number of investors.
The markets for securities in certain Emerging Countries are in the earliest
stages of their development. Even the markets for relatively widely traded
securities in Emerging Countries may not be able to absorb, without price
disruptions, a significant increase in trading volume or trades of a size
customarily undertaken by institutional investors in the securities markets of
developed countries. Additionally, market making and arbitrage activities are
generally less extensive in such markets, which may contribute to increased
volatility and reduced liquidity of such markets. The limited liquidity of
Emerging Country markets may also affect a Fund's ability to accurately value
its portfolio securities or to acquire or dispose of securities at the price and
time it wishes to do so or in order to meet redemption requests.
Transaction costs, including brokerage commissions or dealer mark-ups, in
Emerging Countries may be higher than in the United States and other developed
securities markets. In addition, existing laws and regulations are often
inconsistently applied. As legal systems in Emerging Countries develop, foreign
investors may be adversely affected by new or amended laws and regulations. In
circumstances where adequate laws exist, it may not be possible to obtain swift
and equitable enforcement of the law.
Foreign investment in the securities markets of several of the Asian
countries is restricted or controlled to varying degrees. These restrictions
may limit a Fund's investment in certain of the Asian countries and may increase
the expenses of the Fund. Certain Emerging Countries require governmental
approval prior to investments by foreign persons or limit investment by foreign
persons to only a specified percentage of an issuer's outstanding securities or
a specific class of securities which may have less advantageous terms (including
price) than securities of the company available for purchase by nationals. In
addition, the repatriation of both investment income and capital from several of
the Emerging Countries is subject to restrictions such as the need for certain
governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of the operation of the Balanced, CORE International Equity,
International Equity, Emerging Markets Equity and Asia Growth Funds. A Fund may
be required to establish special custodial or other arrangements before
investing in certain emerging countries.
Each of the Emerging Countries may be subject to a greater degree of
economic, political and social instability than is the case in the United
States, Japan and most Western European countries. Such instability may result
from, among other things, the following: (i) authoritarian governments or
military involvement in political and economic decision making, including
changes or attempted changes in governments through extra-constitutional means;
(ii) popular unrest associated with demands for improved political, economic or
social conditions; (iii) internal insurgencies; (iv) hostile relations with
neighboring
B-25
<PAGE>
countries; and (v) ethnic, religious and racial disaffection or conflict. Such
economic, political and social instability could disrupt the principal financial
markets in which the Funds may invest and adversely affect the value of the
Funds' assets.
The economies of Emerging Countries may differ unfavorably from the U.S.
economy in such respects as growth of gross domestic product, rate of inflation,
capital reinvestment, resources, self-sufficiency and balance of payments. Many
Emerging Countries have experienced in the past, and continue to experience,
high rates of inflation. In certain countries inflation has at times
accelerated rapidly to hyperinflationary levels, creating a negative interest
rate environment and sharply eroding the value of outstanding financial assets
in those countries. The economies of many Emerging Countries are heavily
dependent upon international trade and are accordingly affected by protective
trade barriers and the economic conditions of their trading partners. In
addition, the economies of some Emerging Countries are vulnerable to weakness in
world prices for their commodity exports.
A Fund's income and, in some cases, capital gains from foreign stocks and
securities will be subject to applicable taxation in certain of the countries in
which it invests, and treaties between the U.S. and such countries may not be
available in some cases to reduce the otherwise applicable tax rates. See
"Taxation."
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 a Fund is uninvested and no return is
earned on such assets. The inability of a Fund to make intended security
purchases or sales due to settlement problems could result either in losses to
the Fund due to subsequent declines in value of the portfolio securities or, if
the Fund has entered into a contract to sell the securities, could result in
possible liability to the purchaser.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Growth and Income, Mid Cap
Equity, Capital Growth and Small Cap Equity Funds may enter into forward foreign
currency exchange contracts for hedging purposes. Balanced, CORE International
Equity, International Equity, Emerging Markets Equity and Asia Growth Funds 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 a Fund may either accept or make
delivery of the currency specified in the contract or, at or prior to maturity,
enter into a closing transaction involving the purchase or sale of an offsetting
contract. Closing transactions with respect to forward contracts are usually
effected with the currency trader who is a party to the original forward
contract.
A Fund may enter into forward foreign currency exchange contracts in
several circumstances. First, when a Fund enters into a contract for the
purchase or sale of a security denominated or quoted in a foreign currency, or
when a Fund anticipates the receipt in a foreign currency of dividend or
interest payments on such a security which it holds, the Fund may desire to
"lock in" the U.S. dollar price of the security or the U.S. dollar equivalent of
such dividend or interest payment, as the case may be. By entering into a
forward contract for the purchase or sale, for a fixed amount of dollars, of the
amount of foreign currency involved in the underlying transactions, the Fund
will attempt to protect itself against an
B-26
<PAGE>
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 U.S. dollars, the
amount of foreign currency approximating the value of some or all of such Fund's
portfolio securities quoted or denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of 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 U.S. dollar value of only a portion of a Fund's foreign
assets.
Balanced, CORE International Equity, International Equity, Emerging Markets
Equity and Asia Growth Funds may engage in cross-hedging by using forward
contracts in one currency to hedge against fluctuations in the value of
securities quoted or denominated in a different currency if GSAM or GSAMI
determines that there is a pattern of correlation between the two currencies.
Balanced, CORE International Equity, International Equity, Emerging Markets
Equity and Asia Growth Funds may also purchase and sell forward contracts to
seek to increase total return when GSAM or GSAMI 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 Fund's portfolio.
A Fund's custodian will place cash or liquid assets into a segregated
account of such 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 Balanced,
CORE International Equity, International Equity, Emerging Markets Equity and
Asia Growth Funds forward contracts entered into to seek to increase total
return. If the value of the securities placed in the segregated account
declines, additional cash or liquid assets will be placed in the account on a
daily basis so that the value of the account will equal the amount of a 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.
While a Fund will enter into forward contracts to reduce currency exchange
rate risks, transactions in such contracts involve certain other risks. Thus,
while the Fund may benefit from such transactions, unanticipated changes in
currency prices may result in a poorer overall performance for the 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 quoted or
denominated in a particular currency and forward contracts entered into by such
Fund. Such imperfect correlation may cause a Fund to sustain losses which will
prevent the Fund from achieving a complete hedge or expose the Fund to risk of
foreign exchange loss.
Markets for trading foreign forward currency contracts offer less
protection against defaults than is available when trading in currency
instruments on an exchange. 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 or force the Fund to cover its
commitments for purchase or resale, if any, at the current market price.
B-27
<PAGE>
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS. Each Fund (except
CORE U.S. Equity, CORE Large Cap Growth and CORE Small Cap Equity Funds) may
write covered put and call options and purchase put and call options on foreign
currencies for the purpose of protecting against declines in the U.S. dollar
value of portfolio securities and against increases in the U.S. dollar cost of
securities to be acquired. As with other kinds of option transactions, however,
the writing of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received. If and when a Fund seeks to
close out an option, the Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against exchange rate fluctuations; however, in the event of exchange rate
movements adverse to a Fund's position, the Fund may forfeit the entire amount
of the premium plus related transaction costs. Options on foreign currencies to
be written or purchased by a Fund will be traded on U.S. and foreign exchanges
or over-the-counter.
Balanced, CORE International Equity, International Equity, Emerging Markets
Equity and Asia Growth Funds may use options on currency to cross-hedge, which
involves writing or purchasing options on one currency to hedge against changes
in exchange rates for a different currency with a pattern of correlation. In
addition, Balanced, International Equity, Emerging Markets Equity and Asia
Growth Funds 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 quoted or denominated in that currency do not present
attractive investment opportunities and are not included in the Fund's
portfolio.
A call option written by a Fund obligates a 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 would
obligate a 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.
For a description of how to cover written put and call options, see "Written
Covered Options" above.
A Fund may terminate its obligations under a call or put option by
purchasing an option identical to the one it has 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 options purchased by the Fund.
A Fund would normally purchase call options on foreign currency in
anticipation of an increase in the U.S. dollar value of currency in which
securities to be acquired by a Fund are quoted or denominated. The purchase of
a call option would entitle the 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.
A Fund would normally purchase put options in anticipation of a decline in
the U.S. dollar value of currency in which securities in its portfolio are
quoted or denominated ("protective puts"). The purchase of a put option would
entitle a 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
B-28
<PAGE>
and losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying currency or portfolio
securities.
In addition to using options for the hedging purposes described above,
Balanced, CORE International Equity, International Equity, Emerging Markets
Equity and Asia Growth Funds may use options on currency to seek to increase
total return. Balanced, CORE International Equity, International Equity,
Emerging Markets Equity and Asia Growth Funds may write (sell) covered put and
call options on any currency in order to realize greater income than would be
realized on portfolio securities transactions alone. However, in writing
covered call options for additional income, Balanced, CORE International Equity,
International Equity, Emerging Markets Equity and Asia Growth Funds may forego
the opportunity to profit from an increase in the market value of the
underlying currency. Also, when writing put options, Balanced, CORE
International Equity, International Equity, Emerging Markets Equity and Asia
Growth Funds accept, in return for the option premium, the risk that they may be
required to purchase the underlying currency at a price in excess of the
currency's market value at the time of purchase.
Balanced, CORE International Equity, International Equity, Emerging Markets
Equity and Asia Growth Funds would normally purchase call options to seek to
increase total return in anticipation of an increase in the market value of a
currency. Balanced, CORE International Equity, International Equity, Emerging
Markets Equity and Asia Growth Funds 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 Balanced, CORE
International Equity, International Equity, Emerging Markets Equity and Asia
Growth Funds would realize either no gain or a loss on the purchase of the call
option. Put options may be purchased by a Fund for the purpose of benefiting
from a decline in the value of currencies which it does not own. 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.
SPECIAL RISKS ASSOCIATED WITH OPTIONS ON CURRENCY. An exchange traded
options position may be closed out only on an options exchange which provides a
secondary market for an option of the same series. Although a Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange will exist for any particular option, or at any particular time.
For some options no secondary market on an exchange may exist. In such event,
it might not be possible to effect closing transactions in particular options,
with the result that a Fund would have to exercise its options in order to
realize any profit and would incur transaction costs upon the sale of underlying
securities pursuant to the exercise of put options. If a Fund as a covered call
option writer is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying currency (or security quoted
or denominated in that currency) until the option expires or it delivers the
underlying currency upon exercise.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Options Clearing Corporation inadequate, and thereby result in the
institution by an exchange of special procedures which may interfere with the
timely execution of customers' orders.
A Fund may purchase and write over-the-counter options to the extent
consistent with its limitation on investments in illiquid securities. Trading
in over-the-counter options is subject to the risk that the other party will be
unable or unwilling to close out options purchased or written by a Fund.
B-29
<PAGE>
The amount of the premiums which a Fund may pay or receive may be adversely
affected as new or existing institutions, including other investment companies,
engage in or increase their option purchasing and writing activities.
CURRENCY SWAPS, MORTGAGE SWAPS, INDEX SWAPS AND INTEREST RATE SWAPS, CAPS,
==========================================================================
FLOORS AND COLLARS
==================
The Balanced, CORE International Equity, International Equity, Emerging
Markets Equity and Asia Growth Funds may, with respect to up to 5% of their net
assets, enter into currency swaps for both hedging purposes and to seek to
increase total return. In addition, the Balanced and Real Estate Securities
Funds may, with respect to 5% of its net assets, enter into mortgage, index and
interest rate swaps and other interest rate swap arrangements such as rate caps,
floors and collars, for hedging purposes or to seek to increase total return.
Currency swaps involve the exchange by a Fund with another party of their
respective rights to make or receive payments in specified currencies. 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. Index swaps involve the exchange by a Fund with another party of the
respective amounts payable with respect to a notional principal amount at
interest rates equal to two specified indices. 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.
A Fund will enter into interest rate, mortgage and index swaps only on a
net basis, which means that the two payment streams are netted out, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate, index 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, index and mortgage swaps is limited to the
net amount of interest payments that the Fund is contractually obligated to
make. If the other party to an interest rate, index or mortgage swap defaults,
the Fund's risk of loss consists of the net amount of interest payments that the
Fund is contractually entitled to receive. In contrast, currency swaps usually
involve the delivery of a gross payment stream in one designated currency in
exchange for the gross payment stream in another designated currency.
Therefore, the entire payment stream under a currency swap is subject to the
risk that the other party to the swap will default on its contractual delivery
obligations. To the extent that the net amount payable under an interest rate,
index or mortgage swap and the entire amount of the payment stream payable by a
Fund under a currency swap or an interest rate floor, cap or collar is held in a
segregated account consisting of cash or liquid assets 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
restrictions.
A Fund will not enter into swap transactions unless the unsecured
commercial paper, senior debt or claims paying ability of the other party
thereto is considered to be investment grade by the Adviser.
The use of interest rate, mortgage, index 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 an 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. The staff of the SEC currently take
the position that swaps, caps, floors and collars are illiquid and thus subject
to a Fund's 15% limitation on investments in illiquid securities.
B-30
<PAGE>
LENDING OF PORTFOLIO SECURITIES
===============================
Each Fund may lend portfolio securities. Under present regulatory
policies, such loans may be made to institutions such as brokers or dealers and
would be required to be secured continuously by collateral in cash, cash
equivalents or U.S. Government securities maintained on a current basis at an
amount at least equal to the market value of the securities loaned. A Fund
would be required to have 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
would continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities loaned and would also receive 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 a Fund
would call the loan in anticipation of an important vote to be taken among
holders of the securities or the giving or withholding of their consent on a
material matter affecting the investment. As with other extensions of credit
there are risks of delay in recovering, or even loss of rights in, the
collateral should the borrower of the securities fail financially. However, the
loans would be made only to firms deemed by the Advisers to be of good standing,
and when, in the judgment of the Advisers, the consideration which can be
earned currently from securities loans of this type justifies the attendant
risk. If the Advisers determine to make securities loans, it is intended that
the value of the securities loaned would not exceed one-third of the value of
the total assets of a Fund.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
==============================================
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. A Fund will purchase
securities on a when-issued basis or purchase or sell securities on a forward
commitment basis only with the intention of completing the transaction and
actually purchasing or selling the securities. If deemed advisable as a matter
of investment strategy, however, a Fund may dispose of or negotiate a commitment
after entering into it. A Fund may realize a capital gain or loss in connection
with these transactions. For purposes of determining a Fund's duration, the
maturity of when-issued or forward commitment securities will be calculated from
the commitment date. A Fund is required to hold and maintain in a segregated
account with the Fund's custodian until three days prior to the settlement date,
cash and liquid assets in an amount sufficient to meet the purchase price.
Alternatively, a 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.
INVESTMENT IN UNSEASONED COMPANIES
==================================
Each Fund may invest up to 5% of its net assets, calculated at the time of
purchase, in companies (including predecessors) which have operated less than
three years, except that this limitation does not apply to debt securities which
have been rated 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.
B-31
<PAGE>
OTHER INVESTMENT COMPANIES
==========================
A Fund reserves the right to invest up to 5% of its net assets in the
securities of other investment companies but may not 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 an 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
the Fund invests in a money market fund for which an Adviser or any of its
affiliates acts as adviser, the advisory and administration fees payable by the
Fund to an 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.
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 is maintained by a 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 a Fund
or as being collateral for a loan by a 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, a 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 a Fund, the Advisers
seek 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), a 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, a Fund, 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-32
<PAGE>
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Trust as
fundamental policies that cannot be changed without the affirmative vote of the
holders of a majority (as defined in the Act) of the outstanding voting
securities of the affected Fund. The investment objective of each Fund and all
other investment policies or practices of each Fund are considered by the Trust
not to be fundamental and accordingly may be changed without shareholder
approval. See "Investment Objectives and Policies" in the Prospectus. For
purposes of the Act, "majority" means the lesser of (a) 67% or more of the
shares of the Trust or a Fund present at a meeting, if the holders of more than
50% of the outstanding shares of the Trust or a Fund are present or represented
by proxy, or (b) more than 50% of the shares of the Trust or a Fund. For
purposes of the following 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, a Fund. With respect to the Funds'
fundamental investment restriction no. 3, asset coverage of at least 300% (as
defined in the Act), inclusive of any amounts borrowed, must be maintained at
all times.
A Fund may not:
(1) make any investment inconsistent with the Fund's classification
as a diversified company under the Investment Company Act of
1940, as amended (the "Act"). This restriction does not, however,
apply to any Fund classified as a non-diversified company under
the Act.
(2) invest 25% or more of its total assets in the securities of one
or more issuers conducting their principal business activities in
the same industry (other than the Goldman Sachs Real Estate
Securities Fund, which will invest at least 25% or more of its
total assets in the real estate industry) (excluding the U.S.
Government or any of its agencies or instrumentalities).
(3) borrow money, except (a) the Fund may borrow from banks (as
defined in the Act) or through reverse repurchase agreements in
amounts up to 33-1/3% of its total assets (including the amount
borrowed), (b) the Fund may, to the extent permitted by
applicable law, borrow up to an additional 5% of its total assets
for temporary purposes, (c) the Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and
sales of portfolio securities, (d) the Fund may purchase
securities on margin to the extent permitted by applicable law
and (e) the Fund may engage transactions in mortgage dollar rolls
which are accounted for as financings.
(4) make loans, except through (a) the purchase of debt obligations
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 as permitted
by applicable law.
(5) underwrite securities issued by others, except to the extent that
the sale of portfolio securities by the Fund may be deemed to be
an underwriting.
(6) purchase, hold or deal in real estate, although a Fund may
purchase and sell securities that are secured by real estate or
interests therein, securities of real estate investment trusts
and mortgage-related securities and may hold and sell real estate
acquired by a Fund as a result of the ownership of securities.
B-33
<PAGE>
(7) invest in commodities or commodity contracts, except that the
Fund may invest in currency and financial instruments and
contracts that are commodities or commodity contracts.
(8) issue senior securities to the extent such issuance would violate
applicable law.
Each Fund may, notwithstanding any other fundamental investment restriction
or policy, invest some or all of its assets in a single open-end investment
company or series thereof with substantially the same investment objective,
restrictions and policies as the Fund.
In addition to the fundamental policies mentioned above, the Trustees have
adopted the following non-fundamental policies which can be changed or amended
by action of the Trustees without approval of shareholders.
A Fund may not:
(a) Invest in companies for the purpose of exercising control or
management.
(b) Invest 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.
(c) Purchase additional securities if the Fund's borrowings (excluding
covered mortgage dollar rolls) exceed 5% of its net assets.
(d) Make short sales of securities, except short sales against the box.
B-34
<PAGE>
MANAGEMENT
Information pertaining to the Trustees and officers of the Trust is set
forth below. Trustees and officers deemed to be "interested persons" of the
Trust for purposes of the Act are indicated by an asterisk.
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
Ashok N. Bakhru, 53 Chairman Executive Vice President- Finance and
1325 Ave. of Americas & Trustee Administration and Chief Financial Officer,
New York, NY 10019 Coty Inc. (since April 1996); President,
ABN Associates (June 1994 through March
1996); Senior Vice President of Scott
Paper Company until June 1994; Director
of Arkwright Mutual Insurance Company;
Trustee of International House of
Philadelphia; Member of Cornell
University Council; Trustee of the Walnut
Street Theater.
*David B. Ford, 51 Trustee Managing Director, Goldman Sachs (since 1996);
One New York Plaza General Partner, Goldman Sachs (1986-1996);
New York, NY 10004 Co-Head of Goldman Sachs Asset Management
(since December 1994).
*Douglas C. Grip, 35 Trustee Vice President, Goldman Sachs (since May 1996);
One New York Plaza & President President, MFS Retirement Services Inc., of
New York, NY 10004 Massachusetts Financial Services (prior thereto).
*John P. McNulty, 44 Trustee Managing Director, Goldman Sachs (since 1996);
One New York Plaza General Partner of Goldman Sachs (1990-1994
New York, NY 10004 and 1995-1996); Co-Head of Goldman Sachs Asset
Management (since November 1995); Limited Partner
of Goldman Sachs (1994 to November 1995).
Mary P. McPherson, 60 Trustee President of Bryn Mawr College (since 1978);
Taylor Hall Director of Josiah Macy, Jr, Foundation (since
Bryn Mawr, PA 19010 1977); Director of the Philadelphia Contributionship
(since 1985); Director of Amherst College
(since 1986); Director of Dayton Hudson
Corporation (since 1988); Director of the
Spencer Foundation (since 1993); and member
of PNC Advisory Board (since 1993).
</TABLE>
B-35
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
*Alan A. Shuch, 48 Trustee Limited Partner, Goldman Sachs (since 1994);
One New York Plaza Director and Vice President of Goldman Sachs
New York, NY 10004 Funds Management Inc. (from April 1990 to
November 1994); President and Chief Operating
Officer, GSAM (from September 1988 to November 1994).
Jackson W. Smart, 66 Trustee Chairman, Executive Committee, First
One Northfield Plaza # 218 Commonwealth, Inc. (a managed dental care
Northfield, IL 60093 company, since January 1996); Chairman and Chief
Executive Officer, MSP Communications Inc. (a company
engaged in radio broadcasting) (since November 1988),
Director, Federal Express Corporation (since 1976),
Evanston Hospital Corporation (since 1980), First
Commonwealth, Inc. (since 1988) and North American
Private Equity Group (a venture capital fund).
William H. Springer, 67 Trustee Vice Chairman and Chief Financial and
701 Morningside Drive Administrative Officer, (February 1987 to June
Lake Forest, IL 60045 1991) of Ameritech (a telecommunications holding company;
Director, Walgreen Co. (a retail drug store business);
Director of Baker, Fentress & Co. (a closed-end,
non-diversified management investment company)
(April 1992 to present).
Richard P. Strubel, 57 Trustee Managing Director, Tandem Partners, Inc.
70 West Madison St. Ste 1400 (since 1990); President and Chief Executive Officer,
Chicago, IL 60602 Microdot, Inc. (a diversified manufacturer of fastening
systems and connectors) (January 1984 to October 1994).
*Scott M. Gilman, 37 Treasurer Director, Mutual Funds Administration,
One New York Plaza Goldman Sachs Asset Management (since April 1994);
New York, NY 10004 Assistant Treasurer, Goldman Sachs Funds Management, Inc.
(since March 1993); Vice President, Goldman Sachs
(since March 1990).
*John M. Perlowski, 32 Assistant Vice President, Goldman Sachs (since July 1995);
One New York Plaza Treasurer Director, Investors Bank and Trust, November 1993
New York, NY 10004 to July 1995); Audit Manager of Arthur Andersen LLP (prior thereto).
*Pauline Taylor, 50 Vice Vice President of Goldman Sachs (since June
4900 Sears Tower President 1992); Director Shareholder Servicing
Chicago, IL 60606 (since June 1992).
</TABLE>
B-36
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
*John W. Mosior, 58 Vice Vice President, Goldman Sachs and Manager
4900 Sears Tower President of Shareholder Servicing of GSAM (since
Chicago, IL 60606 November 1989).
*Nancy L. Mucker, 47 Vice Vice President, Goldman Sachs (since April
4900 Sears Tower President 1985); Manager of Shareholder Servicing of
Chicago, IL 60606 GSAM since November 1989).
*Michael J. Richman, 36 Secretary Associate General Counsel of Goldman Sachs Asset
85 Broad Street Management (since February 1994);
New York, NY 10004 Vice President and Assistant General Counsel
of Goldman Sachs (since June 1992); Counsel
to the Funds Group, GSAM (since June 1992);
Partner, Hale and Dorr (September 1991 to
June 1992).
*Howard B. Surloff, 31 Assistant Assistant General Counsel and Vice President,
85 Broad Street Secretary Goldman Sachs (since November 1993 and May
New York, NY 10004 1994 respectively); Counsel to the Funds Group,
Goldman Sachs Asset Management (since November 1993);
Associate of Shereff Friedman, Hoffman & Goodman (prior thereto).
*Valerie A. Zondorak, 31 Assistant Vice President, Goldman Sachs (since March
85 Broad Street Secretary 1997); Counsel to the Funds Group, Goldman
New York, New York 10004 Sachs Asset Management (since March 1997);
Associate of Shereff Friedman, Hoffman &
Goodman (prior thereto).
*Steven E. Hartstein, 33 Assistant Legal Products Analyst, Goldman Sachs (June
85 Broad Street Secretary 1993 to present); Funds Compliance Officer,
New York, NY 10004 Citibank Global Asset Management (August 1991
to June 1993).
*Deborah Farrell, 25 Assistant Administrative Assistant, Goldman Sachs since
85 Broad Street Secretary January 1994. Formerly at Cleary Gottlieb, Steen
New York, NY 10004 and Hamilton.
*Kaysie P. Uniacke, 36 Assistant Vice President and Senior Portfolio Manager,
One New York Plaza Secretary Goldman Sachs Asset Management (since 1988).
New York, NY 10004
</TABLE>
B-37
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
*Elizabeth D.
Anderson, 2 7 Assistant Portfolio Manager, GSAM (since April 1996);
One New York Plaza Secretary Junior Portfolio Manager, Goldman Sachs
New York, NY 10004 Asset Management (since 1993); Funds Trading
Assistant, GSAM (1993-1995); Compliance Analyst,
Prudential Insurance (1991-1993).
</TABLE>
As of March 24, 1997, the Trustees and officers of the Trust as a group
owned less than 1% of the outstanding shares of beneficial interest of each
Fund.
The Trust pays each Trustee, other than those who are "interested persons"
of Goldman Sachs, a fee for each Trustee meeting attended and an annual fee.
Such Trustees are also reimbursed for travel expenses incurred in connection
with attending such meetings.
B-38
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust (or its predecessors) for the one-year
period ended January 31, 1997:
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits from Goldman Sachs
Aggregate Accrued as Mutual Funds
Compensation Part of (including the
Name of Trustee from the Funds*** Funds' Expenses Funds)*
- ---------------------- ------------------ --------------- ------------------
<S> <C> <C> <C>
Paul C. Nagel, Jr.** $3,775 $0 $62,450
Ashok N. Bakhru 3,969 0 69,299
Marcia L. Beck 0 0 0
David B. Ford 0 0 0
Douglas C. Grip 0 0 0
Alan A. Shuch 0 0 0
Jackson W. Smart 3,388 0 58,954
William H. Springer 3,388 0 58,954
Richard P. Strubel 3,388 0 58,954
</TABLE>
______________
* The Goldman Sachs Mutual Funds consisted of 29 mutual funds on January
31, 1997.
** Retired as of June 30, 1996.
*** Effective May 1, 1997, the Funds were reorganized from series of
Goldman Sachs Equity Portfolios, Inc. (the "Corporation") into the
Trust. The amounts shown in the column reflect compensation paid to
the Trustees by the Corporation.
B-39
<PAGE>
MANAGEMENT SERVICES
===================
As stated in the Funds' Prospectus, GSFM, One New York Plaza, New York, New
York, a Delaware limited partnership and an affiliate of Goldman Sachs, 85 Broad
Street, New York, New York, serves as investment adviser to CORE U.S. Equity and
Capital Growth Funds. GSAM, One New York Plaza, New York, New York, a separate
operating division of Goldman Sachs, serves as investment adviser to Balanced,
Growth and Income, CORE Large Cap Growth, CORE Small Cap Equity, CORE
International Equity, Real Estate Securities, Mid Cap Equity and Small Cap
Equity Funds. GSAMI, 133 Peterborough Court, London, England, EC4A 2BB serves
as investment adviser to International Equity, Emerging Markets Equity and Asia
Growth Funds. See "Management" in the Funds' Prospectus for a description of the
applicable Adviser's duties to the Funds.
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 also 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 U.S. and in Beijing,
Frankfurt, George Town, Hong Kong, London, Madrid, Mexico City, Milan, Montreal,
Osaka, Paris, Sao Paulo, 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, the Goldman Sachs Global Investment Research Department covers
approximately 1,700 companies, including approximately 1,000 U.S. corporations
in 60 industries. The in-depth information and analyses generated by Goldman
Sachs' research analysts are available to the Advisers. For more than a decade,
Goldman Sachs has been among the top-ranked firms in Institutional Investor's
annual "All-America Research Team" survey. In addition, many of Goldman Sachs'
economists, securities analysts, portfolio strategists and credit analysts have
consistently been highly ranked in respected industry surveys conducted in the
U.S. and abroad. Goldman Sachs is also among the leading investment firms using
quantitative analytics (now used by a growing number of investors) to structure
and evaluate portfolios.
In managing the Funds, the Advisers have access to Goldman Sachs' economics
research. The Economics Research Department conducts economic, financial and
currency markets research which analyzes economic trends and interest and
exchange rate movement 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 Institutional Investor's
annual "All British Research Team Survey" in the following categories:
Economics (U.K.) 1986-1993; Economics/International 1989-1993; and Currency
Forecasting 1986-1993. In addition, the team has also 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; and
Currency Movements 1986-1993.
In allocating assets among foreign countries and currencies for the Funds
which can invest in foreign securities (in particular, the CORE International
Equity, International Equity, Emerging Markets Equity and Asia Growth Funds),
the Advisers will have access to the Global Asset Allocation Model. The
B-40
<PAGE>
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 the expectations of Goldman
Sachs' research professionals to produce an optimal currency and asset
allocation for the level of risk suitable for a Fund given its investment
objectives and criteria.
Each Fund's management agreement provides that the Advisers may render
similar services to others as long as the services provided by the Advisers
thereunder are not impaired thereby.
The CORE Small Cap Equity, CORE International Equity and Real Estate
Securities Funds management agreements were initially approved by the Trustees,
including a majority of the non-interested Trustees (as defined below) who are
not parties to the management agreement, on July 22, 1997. The CORE Large Cap
Growth and Emerging Markets Equity Funds management agreements were initially
approved by the Trustees, including a majority of the non-interested Trustees
(as defined below) who are not parties to the management agreement, on April 23,
1997. The other Funds' management agreements were most recently approved by the
Trustees, including a majority of the Trustees who are not parties to the
management agreement or "interested persons" (as such term is defined in the
Act) of any party thereto (the "non-interested Trustees"), on April 23, 1997.
These arrangements were most recently approved by the shareholders of each Fund
(other than CORE Large Cap Growth, CORE Small Cap Equity, CORE International
Equity, Real Estate Securities and Emerging Markets Equity Funds) on April 21,
1997. The sole shareholder of the CORE Large Cap Growth Fund approved these
arrangements on April 30, 1997. Each management agreement will remain in effect
until June 30, 1998 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, and
(b) the vote of a majority of the non-interested Trustees, cast in person at a
meeting called for the purpose of voting on such approval. Each management
agreement will terminate automatically if assigned (as defined in the Act) and
is terminable at any time without penalty by the Trustees or by vote of a
majority of the outstanding voting securities of the affected Fund on 60 days'
written notice to the Adviser and by the Adviser on 60 days' written notice to
the Trust.
Pursuant to the management agreements the Advisers are entitled to receive
the fees listed below, payable monthly of such Fund's average daily net assets.
In addition, the Advisers voluntarily agreed to limit its management fee to an
annual rate also listed below:
<TABLE>
<CAPTION>
Management Management
With Fee Without Fee
Fund Limitations Limitations
- ---- ------------ ------------
<S> <C> <C>
GSAM
Balanced Fund 0.65% 0.65%
Growth and Income Fund 0.70% 0.70%
CORE Large Cap Growth Fund 0.60% 0.75%
CORE Small Cap Equity Fund ____% ____%
CORE International Equity Fund ____% ____%
Mid Cap Equity Fund 0.75% 0.75%
Small Cap Equity Fund 1.00% 1.00%
Real Estate Securities Fund ____% ____%
</TABLE>
B-41
<PAGE>
<TABLE>
<S> <C> <C>
GSFM
CORE U.S. Equity Fund 0.75% 0.59%
Capital Growth Fund 1.00% 1.00%
GSAMI
International Equity Fund 1.00% 0.89%
Emerging Markets Equity Fund 1.20% 1.10%
Asia Growth Fund 1.00% 0.86%
</TABLE>
GSAM, GSFM and GSAMI may discontinue or modify the above limitations in the
future at their discretion, although they have no current intention to do so.
Prior to May 1, 1997, the Funds then in operation had separate investment
advisory (and subadvisory, in the case of the International Equity Fund) and
administration agreements. Effective May 1, 1997, the services under such
agreements were combined in the management agreement. The services required to
be performed for the Funds and the combined advisory (and subadvisory, in the
case of the International Equity Fund) and administration fees payable by the
Funds under the former advisory (and subadvisory, in the case of the
International Equity Fund) and administration agreements are identical to the
services and fees under the management agreement.
For the last three fiscal years the amounts of the combined investment
advisory (and subadvisory, in the case of the International Equity Fund) and
administration fees incurred by each Fund then in existence were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
============= ============= =============
<S> <C> <C> <C>
Balanced Fund $ 402,183 $ 193,041 $ 8,858
Growth and Income Fund 3,541,318 2,225,553 790,893
CORE U.S. Equity Fund 1,667,381/3/ 817,563/3/ 693,383/2/
CORE Large Cap Growth Fund/1/ N/A N/A N/A
CORE Small Cap Equity Fund/1/ N/A N/A N/A
CORE International Equity Fund/1/ N/A N/A N/A
Capital Growth Fund 8,697,265 9,335,745 8,724,828
Mid Cap Equity Fund/4/ 964,945 489,043 N/A
International Equity Fund 4,124,076/3/ 2,794,872/2/ 3,186,509/2/
Small Cap Equity Fund 2,130,703 2,908,839 3,385,899
Emerging Market Equity Fund/1/ N/A N/A N/A
Asia Growth Fund 2,221,857/3/ 1,563,641/2/ 553,084/2/
Real Estate Securities Fund/1/ N/A N/A N/A
</TABLE>
- ----------------------------
1 Not Operational.
2 Does not give effect to the agreement (which was not in effect during such
fiscal years) by GSFM, GSAM and GSAMI to limit management fees to 0.59%,
0.89% and 0.86%, respectively of CORE U.S. Equity, International Equity and
Asia Growth Fund's average daily net assets.
3 Gives effect to the agreement (which was in effect as of June 15, 1995) by
GSFM to limit management fees to 0.59%, 0.89% and 0.86%, respectively, of
the CORE U.S. Equity, International Equity and Asia Growth Fund's average
daily net assets. For the fiscal year ended January 31, 1996, had
limitations not been in effect, CORE U.S. Equity Fund would have paid
$1,019,639 in investment management fees. For the fiscal year ended
January 31, 1997, had limitations not been in effect, CORE U.S. Equity,
International Equity and Asia Growth Funds
B-42
<PAGE>
would have paid $2,119,552, $4,638,203 and $2,583,555, respectively, in
investment management fees.
4 Commenced operations on August 1, 1995.
Under the Management Agreement, each Adviser also: (i) supervises all non-
advisory operations of each Fund that it advisers; (ii) provides personnel to
perform such executive, administrative and clerical services as are reasonably
necessary to provide effective administration of each Fund; (iii) arranges for
at each Fund's expense (a) the preparation of all required tax returns, (b) the
preparation and submission of reports to existing shareholders, (c) the periodic
updating of prospectuses and statements of additional information and (d) the
preparation of reports to be filed with the SEC and other regulatory
authorities; (iv) maintains each Fund's records; and (v) provides office space
and all necessary office equipment and services.
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.
Goldman Sachs and its affiliates, including, without limitation, the
Advisers and their advisory affiliates, have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
objectives similar to those of the Funds and/or which engage in transactions in
the same types of securities, 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 both 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 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 the Advisers and/or their
affiliates are performing services or when position limits have been reached.
In connection with their management of the Funds, the Advisers may have
access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf of the Funds in
accordance with such analysis and models. In addition, neither Goldman Sachs
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information
B-43
<PAGE>
for the purpose of managing the Funds. The proprietary activities or portfolio
strategies of Goldman Sachs and its affiliates or the activities or strategies
used for accounts managed by them or other customer accounts could conflict with
the transactions and strategies employed by the Advisers in 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.
The investment activities of Goldman Sachs and its affiliates for their
proprietary accounts and accounts under their management may also limit the
investment opportunities for the Fund in certain emerging markets in which
limitations are imposed upon the aggregate amount of investment, in the
aggregate or individual issuers, by affiliated foreign investors.
An investment policy committee which may include partners of Goldman Sachs
and its affiliates may develop general policies regarding a Fund's activities
but will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any
such member of an investment policy committee will have direct or indirect
interests in the activities of Goldman Sachs and its affiliates in securities
and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Advisers are also principals or employees of Goldman Sachs or their affiliated
entities. As a result, the performance by these principals and employees of
their obligations to such other entities may be a consideration of which
investors in the Funds should be aware.
Each Adviser may enter into transactions and invest in currencies or
instruments on behalf of a Fund 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 a Fund, and such party may have
no incentive to assure that the Funds obtain the best possible prices or terms
in connection with the transactions. Goldman Sachs and its affiliates may also
create, write or issue derivative instruments for customers of Goldman Sachs or
its affiliates, the underlying securities or instruments of which may be those
in which a Fund invests 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 transactions with other clients of Goldman Sachs or its
affiliates where such other clients have interests adverse to those of the
Funds. At times, these activities may cause departments of the Firm to give
advice to clients that may cause these clients to take actions adverse to the
interests of the client. To the extent affiliated transactions are permitted,
the Funds will deal with Goldman Sachs and its affiliates on an arms-length
basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
B-44
<PAGE>
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of a Fund in order to increase the assets
of the Fund. Increasing a Fund's assets may enhance investment flexibility and
diversification and may contribute to economies of scale that tend to reduce the
Fund's expense ratio. Goldman Sachs reserves the right to redeem at any time
some or all of the shares of a Fund acquired for its own account. A large
redemption of shares of a Fund by Goldman Sachs could significantly reduce the
asset size of the Fund, which might have an adverse effect on the Fund's
investment flexibility, portfolio diversification and expense ratio. Goldman
Sachs will consider the effect of redemptions on a Fund and other shareholders
in deciding whether to redeem its shares.
It is possible that a Fund's holdings will include securities of entities
for which Goldman Sachs performs investment banking services as well as
securities of entities in which Goldman Sachs makes a market. From time to
time, Goldman Sachs' activities may limit the Funds' flexibility in purchases
and sales of securities. When Goldman Sachs is engaged in an underwriting or
other distribution of securities of an entity, the Advisers may be prohibited
from purchasing or recommending the purchase of certain securities of that
entity for the Funds.
DISTRIBUTOR AND TRANSFER AGENT
==============================
Goldman Sachs serves as the exclusive distributor of shares of the Funds
pursuant to a "best efforts" arrangement as provided by a distribution agreement
with the Trust on behalf of each Fund. Pursuant to the distribution agreement,
after the Prospectus 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 may enter into sales agreements with certain
investment dealers and other financial service firms (the "Authorized Dealers")
to solicit subscriptions for Class A, Class B and Class C Shares of the Funds.
Goldman Sachs receives a portion of the sales charge imposed on the sale, in the
case of Class A Shares, or redemption in the case of Class B and Class C Shares,
of such Fund shares. No Class B Shares were outstanding during the fiscal years
ended January 31, 1995 and 1996. No Class C Shares were outstanding during the
fiscal years ended January 31, 1995, 1996 and 1997.
Goldman Sachs retained the following commissions on sales of Class A and
Class B Shares during the following periods:
<TABLE>
<CAPTION>
1997 1996 1995
========== ======== ========
<S> <C> <C> <C>
Balanced Fund $ 94,000 $ 28,000 $ 14,000
Growth and Income Fund 555,000 771,000 361,000
CORE U.S. Equity Fund 380,000 108,000 58,000
CORE Large Cap Growth Fund/1/ N/A N/A N/A
CORE Small Cap Equity Fund/1/ N/A N/A N/A
CORE International Equity Fund/1/ N/A N/A N/A
Capital Growth Fund 323,000 523,000 815,000
International Equity Fund 1,563,000 211,000 660,000
Small Cap Equity Fund 219,000 202,000 868,000
Emerging Market Equity Fund/1/ N/A N/A N/A
Asia Growth Fund 1,397,000 507,000 829,000
Real Estate Securities Fund/1/ N/A N/A N/A
</TABLE>
______________________________
B-45
<PAGE>
1 Not operational.
Goldman Sachs serves as the Trust's transfer agent. Under its transfer
agency agreement with the Trust, Goldman Sachs has undertaken with the Trust 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 sub-custodian 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 agent and the assumption by Goldman Sachs of
the expenses related thereto. For the last three fiscal years the amounts paid
to Goldman Sachs by each Fund then in existence for transfer agency services
performed were as follows:
<TABLE>
<CAPTION>
Class A & B Class A Class A
1997 1996 1995
=========== ======== ========
<S> <C> <C> <C>
Balanced Fund $148,576 $ 72,067 $ 20,000
Growth and Income Fund 870,527 542,671 262,158
CORE U.S. Equity Fund 319,246 103,682 151,230
CORE Large Cap Growth Fund/1/ N/A N/A N/A
CORE Small Cap Equity Fund/1/ N/A N/A N/A
CORE International Equity Fund/1/ N/A N/A N/A
Capital Growth Fund 908,310 549,844 694,014
International Equity Fund 586,243 129,313 481,169
Small Cap Equity Fund 511,883 254,292 600,618
Emerging Markets Equity Fund/1/ N/A N/A N/A
Asia Growth Fund 385,114 192,097 120,000
Real Estate Securities Fund/1/ N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
Institutional Shares Service Shares Institutional Shares
1997 1997 1996
==================== ============== ====================
<S> <C> <C> <C>
Balanced Fund/1/ $ N/A $ N/A $ N/A
Growth and Income Fund 15 488 N/A
CORE U.S. Equity Fund/2/ N/A N/A 11,571
CORE Large Cap Growth Fund/1/ N/A N/A N/A
CORE Small Cap Equity Fund/1/ N/A N/A N/A
CORE International Equity Fund/1/ N/A N/A N/A
Capital Growth Fund/1/ N/A N/A N/A
Mid Cap Equity Fund/3/ 51,464 N/A 26,082
International Equity Fund/2/ N/A N/A N/A
Small Cap Equity Fund/1/ N/A N/A N/A
Emerging Markets Equity Fund/1/ N/A N/A N/A
Asia Growth Fund/2/ N/A N/A N/A
Real Estate Securities Fund/1/ N/A N/A N/A
</TABLE>
___________________________
B-46
<PAGE>
1 Not operational.
2 Contractually set to 0.
3 Commenced operations on August 1, 1995.
The Trust's distribution and transfer agency agreements each provide
that Goldman Sachs may render similar services to others so long as the services
Goldman Sachs provides thereunder are not impaired thereby. Such agreements
also provide that the Trust will indemnify Goldman Sachs against certain
liabilities.
EXPENSES
========
Except as set forth in the Prospectus under "Management," the Trust is
responsible for the payment of its expenses. The expenses include, without
limitation, the fees payable to the Advisers, the fees and expenses payable to
the Trust's custodian and subcustodians, 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 and auditing fees and
expenses (including the cost of legal and certain accounting services rendered
by employees of GSAM, GSAMI and Goldman Sachs with respect to the Trust),
expenses of preparing and setting in type prospectuses, statements of additional
information, proxy material, reports and notices and the printing and
distributing of the same to the Trust's shareholders and regulatory authorities,
any expenses assumed by a Fund pursuant to its distribution, authorized dealer,
service and administration plans, 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.
The Adviser to the Balanced, Growth and Income, CORE U.S. Equity, CORE
Large Cap Growth, CORE Small Cap Equity, CORE International Equity, Real Estate
Securities, Mid Cap Equity, International Equity, Emerging Markets Equity and
Asia Growth Funds has voluntarily agreed to reduce or limit certain "Other
Expenses" of such Funds (excluding management, distribution, authorized dealer,
administration and service fees, taxes, interest and brokerage fees and
litigation, indemnification and other extraordinary expenses, and in the case of
each Fund other than Balanced and CORE Large Cap Growth Funds, transfer agency
fees) to the extent such expenses exceed 0.10%, 0.11%, 0.06%, 0.05%, ___%, ___%,
___%, 0.06%, 0.20%, 0.16% and 0.24% per annum of such Funds' average daily net
assets, respectively. Such reductions or limits, if any, are calculated monthly
on a cumulative basis and may be discontinued or modified by the applicable
Adviser in its discretion at any time.
Fees and expenses of legal counsel, registering shares of a 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 applicable Adviser's costs
of performing certain accounting services not being provided by a Fund's
Custodian.
For the last three fiscal years the amounts of certain "Other
Expenses" of each Fund then in existence that were reduced or otherwise limited
were as follows:
B-47
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
======== ======== ========
<S> <C> <C> <C>
Balanced Fund $319,552 $192,405 $ 95,906
Growth and Income Fund 0 0 106,725
CORE U.S. Equity Fund 104,833 110,581 N/A
CORE Large Cap Growth Fund/1/ N/A N/A N/A
CORE Small Cap Equity Fund/1/ N/A N/A N/A
CORE International Equity Fund/1/ N/A N/A N/A
Capital Growth Fund N/A N/A N/A
Mid Cap Equity Fund/2/ 72,441 85,515 N/A
International Equity Fund 144,265 N/A N/A
Small Cap Equity Fund N/A N/A N/A
Emerging Markets Equity Fund/1/ N/A N/A N/A
Asia Growth Fund 50,407 0 35,905
Real Estate Securities Fund/1/ N/A N/A N/A
</TABLE>
________________________________
1 Not operational.
2 Commenced operations on August 1, 1995.
CUSTODIAN AND SUB-CUSTODIANS
============================
State Street, P.O. Box 1713, Boston, Massachusetts 02105, is the custodian
of the Trust's portfolio securities and cash. State Street also maintains the
Trust's accounting records. State Street may appoint sub-custodians from time
to time to hold certain securities purchased by the Trust and to hold cash for
the Trust.
INDEPENDENT PUBLIC ACCOUNTANTS
==============================
Arthur Andersen, LLP, independent public accountants, One International
Place, 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 AND BROKERAGE
The Advisers are responsible for decisions to buy and sell securities for
the Funds, the selection of brokers and dealers to effect the transactions and
the negotiation of brokerage commissions, if any. Purchases and sales of
securities on a securities exchange are effected through brokers who charge a
commission for their services. Orders may be directed to any broker including,
to the extent and in the manner permitted by applicable law, Goldman Sachs.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of a security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
B-48
<PAGE>
In placing orders for portfolio securities of a Fund, the Advisers are
generally required to give primary consideration to obtaining the most favorable
price and efficient execution under the circumstances. This means that an
Adviser will seek to execute each transaction at a price and commission, if any,
which provides the most favorable total cost or proceeds reasonably attainable
in the circumstances. As permitted by Section 28(e) of the Securities Exchange
Act of 1934, the Fund may pay a broker which provides brokerage and research
services to the Fund an amount of disclosed commission in excess of the
commission which another broker would have charged for effecting that
transaction. Such practice is subject to a good faith determination by the
Trustees that such commission is reasonable in light of the services provided
and to such policies as the Trustees may adopt from time to time. While the
Advisers generally seek reasonably competitive spreads or commissions, a Fund
will not necessarily be paying the lowest spread or commission available. Within
the framework of this policy, the Advisers will consider research and investment
services provided by brokers or dealers who effect or are parties to portfolio
transactions of a Fund, the Advisers and their affiliates, or their other
clients. Such research and investment services are those which brokerage houses
customarily provide to institutional investors and include research reports on
particular industries and companies, economic surveys and analyses,
recommendations as to specific securities and other products or services (e.g.,
quotation equipment and computer related costs and expenses), advice concerning
the value of securities, the advisability of investing in, purchasing or selling
securities, the availability of securities or the purchasers or sellers of
securities, furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy and performance of
accounts, effecting securities transactions and performing functions incidental
thereto (such as clearance and settlement) and providing lawful and appropriate
assistance to the Advisers in the performance of their decision-making
responsibilities. Such services are used by the Advisers in connection with all
of their investment activities, and some of such services obtained in connection
with the execution of transactions for a Fund may be used in managing other
investment accounts. Conversely, brokers furnishing such services may be
selected for the execution of transactions of such other accounts, whose
aggregate assets are far larger than those of a Fund, and the services furnished
by such brokers may be used by the Advisers in providing management services for
the Trust.
In circumstances where two or more broker-dealers offer comparable prices
and execution capability, preference may be given to a broker-dealer which has
sold shares of the Fund as well as shares of other investment companies or
accounts managed by the Advisers. This policy does not imply a commitment to
execute all portfolio transactions through all broker-dealers that sell shares
of the Fund.
On occasions when an Adviser deems the purchase or sale of a security to be
in the best interest of a Fund as well as its other customers (including any
other fund or other investment company or advisory account for which such
Adviser acts as investment adviser or subadviser), the Adviser, to the extent
permitted by applicable laws and regulations, may aggregate the securities to be
sold or purchased for the Fund with those to be sold or purchased for such other
customers in order to obtain the best net price and most favorable execution
under the circumstances. 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 equitable and
consistent with its fiduciary obligations to such Fund and such other customers.
In some instances, this procedure may adversely affect the price and size of the
position obtainable for a Fund.
Commission rates in the U.S. are established pursuant to negotiations with
the broker based on the quality and quantity of execution services provided by
the broker in the light of generally prevailing rates. The allocation of orders
among brokers and the commission rates paid are reviewed periodically by the
Trustees.
Subject to the above considerations, the Advisers may use Goldman Sachs as
a broker for a Fund. In order for Goldman Sachs to effect any portfolio
transactions for each Fund, the commissions, fees or
B-49
<PAGE>
other remuneration received by Goldman Sachs must be reasonable and fair
compared to the commissions, fees or other remuneration paid to other brokers in
connection with comparable transactions involving similar securities being
purchased or sold on a securities exchange during a comparable period of time.
This standard would allow Goldman Sachs to receive no more than the remuneration
which would be expected to be received by an unaffiliated broker in a
commensurate arm's-length transaction. Furthermore, the Trustees, including a
majority of the Trustees who are not "interested" Trustees, have adopted
procedures which are reasonably designed to provide that any commissions, fees
or other remuneration paid to Goldman Sachs are consistent with the foregoing
standard. Brokerage transactions with Goldman Sachs are also subject to such
fiduciary standards as may be imposed upon Goldman Sachs by applicable law.
B-50
<PAGE>
For the past three fiscal years, each Fund in existence paid brokerage
commissions as follows:
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons Paid Research
=========== ================== =================== ===========
<S> <C> <C> <C> <C>
Fiscal Year Ended
January 31, 1997:
Balanced Fund $ 62,072 $ 5,112 (8%)/1/ $ 1,057,742(15%)/2/ $ 0
Growth and Income Fund 779,396 77,587(10%)/1/ 13,310,208(9%)/2/ 0
CORE U.S. Equity Fund 279,620 0(0%)/1/ 6,706,824(0%)/2/ 0
CORE Large Cap Growth Fund/ 3/ N/A N/A N/A N/A
CORE Small Cap Equity Fund/ 3/ N/A N/A N/A N/A
CORE International Equity Fund/ 3/ N/A N/A N/A N/A
Capital Growth Fund 1,460,140 304,052(21%)/1/ 29,920,578(1%)/2/ 42,039
Mid Cap Equity Fund 364,294 22,134(6%)/1/ 6,655,100(7%)/2/ 0
International Equity Fund 1,529,436 0(0%) 48,059,958(0%)/2/ 0
Small Cap Equity Fund 758,205 36,087(5%)/1/ 16,439,842(1%)/2/ 0
Emerging Markets Equity Fund/3/ N/A N/A N/A N/A
Asia Growth Fund 1,554,313 50,624(3%)/1/ 102,609,295(4%)/2/ 0
Real Estate Securities Fund/ 3/ N/A N/A N/A N/A
</TABLE>
B-51
<PAGE>
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons Paid Research
=========== ================ ====================== ===========
<S> <C> <C> <C> <C>
Fiscal Year Ended
January 31, 1996:
Balanced Fund $ 56,860 $ 7,391(13%)/1/ $ 29,697,202(13%)/2/ $0
Growth and Income Fund 841,605 71,218(8%)/1/ 425,040,430(9%)/2/ 0
CORE U.S. Equity Fund 121,424 0(0%)/1/ 148,427,497(0%)/2/ 0
CORE Large Cap Growth Fund/3 / N/A N/A N/A N/A
CORE Small Cap Equity Fund/ 3/ N/A N/A N/A N/A
CORE International Equity Fund/ 3/ N/A N/A N/A N/A
Capital Growth Fund 1,979,949 284,660(14%)/1/ 1,034,755,196(11%)/2/ 0
Mid Cap Equity Fund 315,212 40,935(13%)/1/ 142,547,552(11%)/2/ 0
International Equity Fund 1,260,992 13,629(1%)/1/ 359,700,166(1%)/2/ 0
Small Cap Equity Fund 690,234 72,980(11%)/1/ 170,616,044(6%)/2/ 0
Emerging Markets Equity Fund/3 / N/A N/A N/A N/A
Asia Growth Fund 1,676,525 3,778(0%)/1/ 247,662,049(2%)/2/ 0
Real Estate Securities Fund/ 3/ N/A N/A N/A N/A
</TABLE>
B-52
<PAGE>
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons Paid Research
=========== ================ ==================== ===========
<S> <C> <C> <C> <C>
Fiscal Year Ended
January 31, 1995:
Balanced Fund $ 9,652 $ 1,522(16%)/1/ $ 7,216,224(10%)/2/ $0
Growth and Income Fund 637,080 77,404(12%)/1/ 468,165,610(7%)/2/ 0
CORE U.S. Equity Fund 119,192 0(0%)/1/ 99,616,396(0%)/2/ 0
CORE Large Cap Growth Fund/3/ N/A N/A N/A N/A
CORE Small Cap Equity Fund/ 3/ N/A N/A N/A N/A
CORE International Equity Fund/ 3/ N/A N/A N/A N/A
Capital Growth Fund 1,427,413 273,076(19%)/1/ 786,135,073(13%)/2/ 0
Mid Cap Equity Fund N/A N/A N/A N/A
International Fund 1,799,525 0(0%)/1/ 546,364,113(0%)/2/ 0
Small Cap Equity Fund 555,667 23,137(4%)/1/ 392,235,715(2%)/2/ 0
Emerging Markets Equity Fund/3/ N/A N/A N/A N/A
Asia Growth Fund 1,002,148 67,754(7%)/1/ 171,880,775(2%)/2/ 0
Real Estate Securities Fund/ 3/ N/A N/A N/A N/A
</TABLE>
- ----------------------------
1 Percentage of total commissions paid.
2 Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
3 Not operational.
B-53
<PAGE>
During the fiscal year ended January 31, 1997, the Trust acquired and sold
securities of its regular broker-dealers: all brokers below and JP Morgan. As
of January 31, 1997, the Trust held the following amounts of securities of its
regular broker/dealers, as defined in Rule 10b-1 under the Act, or their parents
($ in thousands):
<TABLE>
<CAPTION>
Fund Broker/Dealer Amount
- ------------------------ ---------------- -------
<S> <C> <C>
Balanced Fund Bear Stearns $ 6,679
Lehman Brothers 2,098
Chase Securities 490
Growth and Income Fund Chase Securities $ 6,003
Lehman Brothers 11,099
Bear Stearns 19,457
Core US Equity Fund Chase Securities 1,193
Smith Barney 6,439
Merrill Lynch 4,423
Morgan Stanley 2,188
Salomon Brothers 4,249
Bear Stearns 2,614
Lehman Brothers 659
Capital Growth Fund Bear Stearns 13,286
Lehman Brothers 3,349
Mid Cap Equity Fund Lehman Brothers 2,151
Bear Stearns 2,977
Small Cap Equity Fund Bear Stearns 12,052
Lehman Brothers 3,038
</TABLE>
NET ASSET VALUE
Under the Act, the Trustees are responsible for determining in good
faith the fair value of securities of each Fund. In accordance with procedures
adopted by the Trustees, the net 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 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 the Prospectus).
In the event that the New York Stock Exchange or the national
securities exchange on which stock options are traded adopt different trading
hours on either a permanent or temporary basis, the Trustees will reconsider the
time at which net asset value is computed. In addition, each Fund may compute
its net asset value as of any time permitted pursuant to any exemption, order or
statement of the SEC or its staff.
Portfolio securities of the Fund for which accurate market quotations
are available are valued as follows: (a) securities listed on any U.S. or
foreign stock exchange or on the National Association of
B-54
<PAGE>
Securities Dealers Automated Quotations System ("NASDAQ") will be valued at the
last sale price on the exchange or system in which they are principally traded,
on the valuation date. If there is no sale on the valuation day, securities
traded principally: (i) on a U.S. exchange or NASDAQ will be valued at the mean
between the closing bid and asked prices; and (ii) on a foreign exchange will be
valued at the last sale price (also referred to as the close price). The last
sale price for securities traded principally on a foreign exchange will be
determined as of the close of the London Stock Exchange or, for securities
traded on exchanges located in the Asia Pacific region, noon London time; (b)
debt securities will be valued using a pricing service approved by the Trustees
if such prices are believed by the investment adviser to accurately represent
market value; (c) overnight repurchase agreements will be valued by the
investment adviser at cost; (d) term repurchase agreements (i.e., those whose
maturity exceeds seven days) and interest rate swaps, caps, collars and floors
will be valued at the average of the bid quotations obtained daily from at least
two dealers or, for term repurchase agreements, recognized counterparties; (e)
debt securities with a remaining maturity of 60 days or less are valued by the
investment adviser at amortized cost, which the Trustees have determined to
approximate fair value; (e) spot and forward foreign currency exchange contracts
will be valued using a pricing service such as Reuters then calculating the mean
between the last bid and asked quotations supplied by certain independent
dealers in such contracts; (g) exchange-traded options and futures contracts
will be valued by the custodian bank at the last sale price on the exchange
where such contracts and options are principally traded; and (h) over-the-
counter options will be valued by an independent unaffiliated broker identified
by the portfolio manager/trader and contacted by the custodian bank; and (i) all
other securities, including those for which a pricing service supplies no
exchange quotation or a quotation that is believed by the portfolio
manager/trader to be inaccurate; will be valued at fair value as stated in the
valuation procedures which were approved by the Board of Trustees. For all
brokers used in this process, the custodian bank will send a letter to the
broker furnishing the quotation. If accurate quotations are not readily
available, such contracts will be valued by an independent unaffiliated broker
identified by the portfolio manager/trader and contacted by the custodian bank.
If broker quotes are used, the portfolio manager/trader will identify one
independent unaffiliated broker from whom the custodian bank will obtain prices
daily and another independent unaffiliated broker from whom the custodian bank
will obtain quotes at least weekly. The custodian bank will promptly notify the
portfolio manager/trader and a member of the GSAM Valuation Committee or a
designee thereof of any deviations equal to or greater than 3% between the
weekly quote and the daily quotes for the date that the weekly quotes were
obtained. The investment adviser will promptly provide instructions to the
custodian bank. For all brokers used in this process, the custodian bank will
send a letter to the broker furnishing the quotation.
Generally, trading in securities on European and Far Eastern
securities exchanges and on over-the-counter markets is substantially completed
at various times prior to the close of business on each Business Day in New York
(i.e., a day on which the New York Stock Exchange is open for trading). In
addition, European or Far Eastern securities trading generally or in a
particular country or countries may not take place on all Business Days in New
York. Furthermore, trading takes place in various foreign markets on days which
are not Business Days in New York and days on which the Funds' net asset values
are not calculated. Such calculation does not take place contemporaneously with
the determination of the prices of the majority of the portfolio securities used
in such calculation. Events affecting the values of portfolio securities that
occur between the time their prices are determined and the close of regular
trading on the New York Stock Exchange will not be reflected in a Fund's
calculation of net asset values unless the Trustees deem that the particular
event would materially affect net asset value, in which case an adjustment will
be made.
The proceeds received by each Fund and each other series of the Trust
from the issue or sale of its shares, and all net investment income, realized
and unrealized gain and proceeds thereof, subject only to the rights of
creditors, will be specifically allocated to such Fund and constitute the
underlying assets of that Fund or series. The underlying assets of each Fund
will be segregated on the books of account, and will be charged with the
liabilities in respect of such Fund and with a share of the general
B-55
<PAGE>
liabilities of the Trust. Expenses of the Trust with respect to the Funds and
the other series of the Trust are generally allocated in proportion to the net
asset values of the respective Funds or series except where allocations of
direct expenses can otherwise be fairly made.
PERFORMANCE INFORMATION
A Fund may from time to time quote or otherwise use total return,
yield and/or distribution rate information in advertisements, shareholder
reports or sales literature. Average annual total return and yield are computed
pursuant to formulas specified by the SEC.
Yield is computed by dividing net investment income earned during a
recent thirty-day period by the product of the average daily number of shares
outstanding and entitled to receive dividends during the period and the maximum
public offering price per share on the last day of the relevant period. The
results are compounded on a bond equivalent (semi-annual) basis and then
annualized. 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.
The 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 or maximum public offering price 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 at the beginning of the
period, and then calculating the annual compounded rate of return which would
produce that amount, assuming a redemption at the end of the period. This
calculation assumes a complete redemption of the investment. It also assumes
that all dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period.
Year-by-year total return and cumulative total return for a specified
period are each derived by calculating the percentage rate required to make a
$1,000 investment (made at the maximum public offering price 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
indicates the total return (capital changes plus reinvestment of all
distributions) on a hypothetical investment of $1,000 in a Fund for the periods
indicated.
Occasionally statistics may be used to specify Fund 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.
From time to time the Trust may publish an indication of a Fund's past
performance as measured by independent sources such as (but not limited to)
Lipper Analytical Services, Inc., Morningstar Mutual Funds, Weisenberger
Investment Companies Service, Donoghue's Money Fund Report, Micropal, Barron's,
Business Week, Consumer's Digest, Consumer's Report, Investors Business Daily,
The New York Times, Kiplinger's Personal Finance Magazine, Changing Times,
Financial World, Forbes, Fortune, Money, Personal Investor, Sylvia Porter's
Personal Finance and The Wall Street Journal. The Trust may also
B-56
<PAGE>
advertise information which has been provided to the NASD for publication in
regional and local newspapers. In addition, the Trust may from time to time
advertise a Fund's performance relative to certain indices and benchmark
investments, including: (a) the Lipper Analytical Services, Inc. Mutual Fund
Performance Analysis, Fixed Income Analysis and Mutual Fund Indices (which
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) Donoghues' Money Fund Report (which provides industry averages
for 7-day annualized and compounded yields of taxable, tax-free and U.S.
Government money funds); (k) the Hambrecht & Quist Growth Stock Index; (l) the
NASDAQ OTC Composite Prime Return; (m) the Russell Midcap Index; (n) the Russell
2000 Index - Total Return; (o) Russell 1000 Growth Index-Total Return; (p) the
Value-Line Composite-Price Return; (q) the Wilshire 4500 Index; (r) the FT-
Actuaries Europe and Pacific Index, and (s) historical investment data supplied
by the research departments of Goldman Sachs, Lehman Brothers, First Boston
Corporation, Morgan Stanley including (EAFE), and the Morgan Stanley Capital
International Combined Asia ex Japan Free Index, the Morgan Stanley Capital
International Emerging Markets Free Index, Salomon Brothers, Merrill Lynch,
Donaldson Lufkin and Jenrette or other providers of such data; (t) the FT-
Actuaries Europe and Pacific Index; (u) CDA/Wiesenberger Investment Companies
Services or Wiesenberger Investment Companies Service; (v) The Goldman Sachs
Commodities Index; and (w) information produced by Micropal, Inc.. The
composition of the investments in such indices and the characteristics of such
benchmark investments are not identical to, and in some cases are very different
from, those of the Fund's portfolio. These indices and averages are generally
unmanaged and the items included in the calculations of such indices and
averages may not be identical to the formulas used by a Fund to calculate its
performance figures.
Information used in advertisements and materials furnished to present
and prospective investors may include statements or illustrations relating to
the appropriateness of certain types of securities and/or mutual funds to meet
specific financial goals. Such information may address:
. cost associated with aging parents;
. funding a college education (including its actual and estimated cost);
. health care expenses (including actual and projected expenses);
. long-term disabilities (including the availability of, and coverage
provided by, disability insurance);
. retirement (including the availability of social security benefits, the
tax treatment of such benefits and statistics and other information
relating to maintaining a particular standard of living and outliving
existing assets);
. asset allocation strategies and the benefits of diversifying among asset
classes;
B-57
<PAGE>
. the benefits of international and emerging market investments;
. the effects of inflation on investing and saving;
. the benefits of establishing and maintaining a regular pattern of
investing and the benefits of dollar-cost averaging; and
. measures of portfolio risk, including but not limited to, alpha, beta and
standard deviation.
The Trust 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 (common stocks, small
company stocks, long-term government bonds, treasury bills and
certificates of deposit) over time. However, the characteristics of
these securities are not identical to, and may be very different from,
those of a Fund's portfolio;
. the dollar and non-dollar based returns of various market indices (i.e.,
Morgan Stanley Capital International EAFE Index, FT-Actuaries Europe &
Pacific Index and the Standard & Poor's Index of 500 Common Stocks) over
varying periods of time;
. total stock market capitalizations of specific countries and regions on a
global basis;
. performance of securities markets of specific countries and regions; and
. value of a dollar amount invested in a particular market or type of
security over different periods of time.
In addition, the Trust 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.
{CORE Small Cap?] The CORE Large Cap Growth Fund was organized on May 1,
1997 and has no operating or performance history prior thereto. However, in
accordance with interpretive positions expressed by the staff of the SEC, the
Fund has adopted the adjusted performance record of a separate account managed
by the Advisers for periods prior to the Funds' commencement of operations which
converted into Class A Shares as of the commencement date. Any quotation of
performance data of this Fund relating to this period will include the adjusted
performance record of the applicable separate account. The performance record of
the separate account quoted by the Fund have been adjusted downward based on the
expenses applicable to Class A Shares (the class into which the separate account
transferred) to reflect the expenses expected to be incurred by the Fund as
stated in the expense table in the Prospectus. These expenses include any sales
charges and asset-based charges (i.e., fees under Distribution and Authorized
Dealer Service Plans) imposed and other operating expenses. Total return
quotations will be calculated pursuant to SEC approved methodology. Prior to May
1, 1997, the separate account was a separate investment advisory account under
discretionary management by the Adviser and had substantially similar investment
objectives, policies and strategies as the Fund. Unlike the Fund, the separate
account was not registered as an investment company under the Act and therefore
was not subject to certain investment restrictions and operational requirements
that are imposed on investment companies by the Act. If the separate account had
been registered as an investment company under the Act, the separate account's
performance may have been adversely affected by such restrictions and
requirements. On May 1, 1997, the separate account transferred a portion of its
assets to the Fund in exchange for Fund shares. The performance record of each
other class has been linked to the
B-58
<PAGE>
performance of the separate account (based on Class A expenses) and the Class A
performance for any periods prior to commencement of operations of a class of
shares.
B-59
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Assuming no voluntary
waiver of fees and no
expense reimbursements
-----------------------
Assumes Assumes Assumes Assumes
5.5% sales no sales 5.5% sales no sales
Fund Class Time Period charge charge charge charge
- ------------------------- ------------- ---------------------------------- ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund A 10/12/94-1/31/97 - Since inception 17.41% 20.32% 15.50% 18.27%
Balanced Fund A 2/1/96-1/31/97 - One year 12.07% 18.59% 11.22% 17.69%
Balanced Fund B 5/1/96-1/31/97 - Since inception* N/A 16.22% N/A 15.79%
Growth and Income A 2/5/93-1/31/97 - Since inception 17.31% 18.98% 16.50% 18.17%
Growth and Income A 2/1/96-1/31/97 - One year 21.39% 28.42% 21.13% 28.14%
Growth and Income B 5/1/96-1/31/97 - Since inception* N/A 22.23% N/A 22.23%
Growth and Income Institutional 6/3/96-1/31/97 - Since inception* N/A 20.77% N/A 20.77%
Growth and Income Service 3/6/96-1/31/97 - Since inception* N/A 23.87% N/A 23.87%
CORE U.S. Equity A 5/24/91-1/31/97 - Since inception 13.54% 14.67% 13.25% 14.38%
CORE U.S. Equity A 2/1/92-1/31/97 - Five year 13.99% 15.29% 13.70% 15.00%
CORE U.S. Equity A 2/1/96-1/31/97 - One year 16.98% 23.75% 16.69% 23.44%
CORE U.S. Equity B 5/1/96-1/31/97 - Since inception* N/A 18.59% N/A 18.47%
CORE U.S. Equity Institutional 6/15/95-1/31/97 - Since inception N/A 28.04% N/A 27.74%
CORE U.S. Equity Institutional 2/1/96-1/31/97 - One year N/A 24.63% N/A 24.39%
CORE U.S. Equity Service 6/7/96-1/31/97 - Since inception* N/A 15.92% N/A 15.71%
CORE Small Cap Equity __ ___ __ __% __ __%
CORE Large Cap Growth A 11/1/91-1/31/97 - Since inception 18.46% 19.78% 17.30% 18.61%
CORE Large Cap Growth A 2/1/92-1/31/97 - Five year 17.53% 18.85% 16.38% 17.68%
CORE Large Cap Growth A 2/1/96-1/31/97 - One year 27.09% 34.54% 25.85% 33.23%
Capital Growth A 4/20/90-1/31/97 - Since inception 15.57% 16.54% 15.24% 16.21%
Capital Growth A 2/1/92-1/31/97 - Five year 15.42% 16.73% 15.14% 16.44%
</TABLE>
B-60
<PAGE>
<TABLE>
<CAPTION>
Assuming no voluntary
waiver of fees and no
expense reimbursements
----------------------
Assumes Assumes Assumes Assumes
5.5% sales no sales 5.5% sales no sales
Fund Class Time Period charge charge charge charge
- ------------------------ ------------- ---------------------------------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Capital Growth A 2/1/96-1/31/97 - One year 19.04% 25.97% 18.75% 25.66%
Capital Growth B 5/1/96-1/31/97 - Since inception* N/A 19.39% N/A 19.39%
Mid Cap Equity Institutional 8/1/95-1/31/97 - Since inception N/A 21.65% N/A 21.55%
Mid Cap Equity Institutional 2/1/96-1/31/97 - One year N/A 25.63% N/A 25.55%
International Equity A 12/1/92-1/31/97 - Since inception 9.66% 11.15% 9.40% 10.90%
International Equity A 2/1/96-1/31/97 - One year 7.26% 13.48% 7.05% 13.26%
International Equity B 5/1/96-1/31/97 - Since inception* N/A 2.83% N/A 2.75%
International Equity Institutional 2/7/96-1/31/97 - Since inception* N/A 12.53% N/A 12.38%
International Equity Service 3/6/96-1/31/97 - Since inception* N/A 10.42% N/A 10.28%
Small Cap A 10/22/92-1/31/97- Since inception 12.12% 13.61% 11.79% 13.28%
Small Cap A 2/1/96-1/31/97 - One year 20.27% 27.28% 19.98% 26.97%
Small Cap B 5/1/96-1/31/97 - Since inception* N/A 5.39% N/A 5.39%
Asia Growth A 7/8/94-1/31/97 - Since inception 4.46% 6.78% 4.15% 6.47%
Asia Growth A 2/1/96-1/31/97 - One year -6.44% -1.01% -6.59% -1.17%
Asia Growth B 5/1/96-1/31/97 - Since inception * N/A -6.02% N/A -6.06%
Asia Growth Institutional 2/2/96-1/31/97 - Since inception * N/A -1.09% N/A -1.24%
- --------------------------
</TABLE>
All returns are average annual total returns.
* Represents an aggregate total return (not annualized) since this class has
not completed a full twelve months of operations.
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From time to time, advertisements or information may include a
discussion of certain attributes or benefits to be derived by an investment in
the Fund. Such advertisements or information may include symbols, headlines or
other material which highlight or summarize the information discussed in more
detail in the communication.
The Trust may from time to time summarize the substance of discussions
contained in shareholder reports in advertisements and publish the adviser's
views as to markets, the rationale for a Fund's investments and discussions of a
Fund's current asset allocation.
In addition, from time to time, advertisements or information may
include a discussion of asset allocation models developed by GSAM and/or its
affiliates, certain attributes or benefits to be derived from asset allocation
strategies and the Goldman Sachs mutual funds that may be offered as investment
options for the strategic asset allocations. Such advertisements and
information may also include GSAM's current economic outlook and domestic and
international market views to suggest periodic tactical modifications to current
asset allocation strategies. Such advertisements and information may include
other materials which highlight or summarize the services provided in support of
an asset allocation program.
A Fund's performance data will be based on historical results and will
not be intended to indicate future performance. A Fund's total return and yield
will vary based on 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.
Total return will be calculated separately for each class of shares in
existence. Because each class of shares may be subject to different expenses,
total return with respect to each class of shares of a Fund will differ.
SHARES OF THE TRUST
The Funds were reorganized from series of a Maryland corporation as
part of Goldman Sachs Trust, a Delaware business trust, by a Declaration of
Trust dated January 28, 1997, on April 30, 1997.
The Act requires that where more than one class or series of shares
exists, each class or series must be preferred over all other classes or series
in respect of assets specifically allocated to such class or series. The
Trustees also have authority to classify and reclassify any series of shares
into one or more classes of shares. As of the date of this Additional
Statement, the Trustees have classified the shares of the Mid Cap Equity Fund
into two classes: Institutional and Service Shares. Balanced, Capital Growth,
Small Cap Equity, Growth and Income, CORE U.S. Equity, CORE Large Cap Growth,
CORE Small Cap Equity, CORE International Equity, Real Estate Securities,
International Equity, Emerging Markets Equity and Asia Growth Funds have been
classified into five classes: Institutional Shares, Service Shares, Class A
Shares, Class B Shares and Class C Shares.
Each Institutional Share, Service Share, Class A Share, Class B Share
and Class C Share of a Fund represents a proportionate interest in the assets
belonging to the applicable class of the Fund. All expenses of a Fund are borne
at the same rate by each class of shares, except that fees under Service Plans
are borne exclusively by Service Shares, fees under Distribution and Authorized
Dealer Service Plans are borne exclusively by Class A, Class B or Class C Shares
and transfer agency fees are borne at different rates by Class A, Class B or
Class C Shares than Institutional and Service Shares. The Trustees may
determine in the future that it is appropriate to allocate other expenses
differently between classes of shares and may do so to the extent consistent
with the rules of the SEC and positions of the
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Internal Revenue Service. Each class of shares may have different minimum
investment requirements and be entitled to different shareholder services.
Currently, shares of a class may only be exchanged for shares of the same or an
equivalent class of another fund. See "Exchange Privilege" in the Prospectus.
Institutional Shares may be purchased at net asset value without a
sales charge 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.
Service Shares may be purchased at net asset value without a sales
charge for accounts held in the name of an institution that, directly or
indirectly, provides certain account administration and shareholder liaison
services to its customers, including maintenance of account records and
processing orders to purchase, redeem and exchange Service Shares. Service
Shares bear the cost of account administration fees at the annual rate of up to
0.50% of the average daily net assets of the Fund attributable to Service
Shares.
Class A Shares are sold, with an initial sales charge of up to 5.5%,
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 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
the 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.
Class C Shares of the Funds are sold subject to a contingent deferred
sales charge of up to 1.0% 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 C 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 C Shares. Class C
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 C Shares.
It is possible that an institution or its affiliate may offer
different classes of shares (i.e., Institutional, Service, Class A Shares, Class
B Shares and Class C Shares) to its customers and thus receive different
compensation with respect to different classes of shares of each Fund.
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 the
same amount, except for differences caused by the differences in expenses
discussed above. 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, shares are fully paid and non-assessable. In the event
of liquidation, shareholders are entitled to share pro rata in the net assets of
the applicable class of the relevant Fund available for
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<PAGE>
distribution to such shareholders. All shares entitle their holders to one vote
per share, are freely transferable and have no preemptive, subscription or
conversion rights.
As of August 1, 1997, [State Street Bank & Trust Company as Trustee
(GS Profit Sharing Master Trust), Attn. Louis Pereira, P.O. Box 1992, Boston, MA
02105-1992, was recordholder of 97.88% of Mid Cap Equity Fund's outstanding
shares; Trukan and Co., Attn: K. Ufford, P.O. Box 3699, Wichita, KS 67201-3699,
was recordholder of 6.80% of Balanced Fund's outstanding shares; Frontier Trust
Co. Inc. Trustee (FBO Dade County Public Schools), Attn: Agnes R. McMurray,
Fringe Benefits Management Co., 1720 S. Gadsden St., Tallahassee, FL 32301-5547,
was recordholder of 6.80% of Balanced Fund's outstanding shares; and State
Street Bank & Trust Company as Trustee (Goldman Sachs Employees' Pension Plan),
Attn: Louis Pereria, P.O. Box 1992, Boston, MA 02105-1992, was recordholder of
5.10% of the Small Cap Equity Fund's outstanding shares.]
Rule 18f-2 under the Act provides that any matter required to be
submitted by the provisions of the Act or applicable state law, or otherwise, to
the holders of the outstanding voting securities of an investment company such
as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each class or
series affected by such matter. Rule 18f-2 further provides that a class or
series shall be deemed to be affected by a matter unless the interests of each
class or series in the matter are substantially identical or the matter does not
affect any interest of such class or series. However, Rule 18f-2 exempts the
selection of independent public accountants, the approval of principal
distribution contracts and the election of directors from the separate voting
requirements of Rule 18f-2.
The Trust is not required to hold annual meetings of shareholders and
does not intend to hold such meetings. In the event that a meeting of
shareholders is held, each share of the Trust will be entitled, as determined by
the Trustees, either to one vote for each share or to one vote for each dollar
of net asset value represented by such shares on all matters presented to
shareholders including the elections of Trustees (this method of voting being
referred to as "dollar based voting"). However, to the extent required by the
Act or otherwise determined by the Trustees, series and classes of the Trust
will vote separately from each other. Shareholders of the Trust do not have
cumulative voting rights in the election of Trustees. Meetings of shareholders
of the Trust, or any series or class thereof, may be called by the Trustees,
certain officers or upon the written request of holders of 10% or more of the
shares entitled to vote at such meetings. The shareholders of the Trust will
have voting rights only with respect to the limited number of matters specified
in the Declaration of Trust and such other matters as the Trustees may determine
or may be required by law.
The Declaration of Trust provides for indemnification of Trustees,
officers and agents of the Trust unless the recipient is adjudicated (i) to be
liable by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such person's office or (ii)
not to have acted in good faith in the reasonable belief that such person's
actions were in the best interest of the Trust. The Declaration of Trust
provides that, if any shareholder or former shareholder of any series is held
personally liable solely by reason of being or having been a shareholder and not
because of the shareholder's acts or omissions or for some other reason, the
shareholder or former shareholder (or heirs, executors, administrators, legal
representatives or general successors) shall be held harmless from and
indemnified against all loss and expense arising form such liability. The Trust,
acting on behalf of any affected series, must, upon request by such shareholder,
assume the defense of any claim made against such shareholder for any act or
obligation of the series and satisfy any judgment thereon from the assets of the
series.
The Declaration of Trust permits the termination of the Trust or of
any series or class of the Trust (i) by a majority of the affected shareholders
at a meeting of shareholders of the Trust, series or class;
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<PAGE>
or (ii) by a majority of the Trustees without shareholder approval if the
Trustees determine that such action is in the best interest of the Trust or its
shareholders. The factors and events that the Trustees may take into account in
making such determination include (i) the inability of the Trust or any
successor series or class to maintain its assets at an appropriate size; (ii)
changes in laws or regulations governing the Trust, series or class or affecting
assets of the type in which it invests; or (iii) economic developments or trends
having a significant adverse impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder
approval to cause the Trust, or any series thereof, to merge or consolidate with
any corporation, association, trust or their organization or sell or exchange
all or substantially all of the property belonging to the Trust or any series
thereof. In addition, the Trustees, without shareholder approval, may adopt a
master-feeder structure by investing all or a portion of the assets of a series
of the Trust in the securities of another open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration
of Trust without a shareholder vote. However, shareholders of the Trust have the
right to vote on any amendment (i) that would affect the voting rights of
shareholder, (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). Series Trustees
may, but are not required to, serve as Trustees of the Trust or any other series
or class of the Trust. The Series Trustees have, to the exclusion of any other
Trustees of the Delaware Trust, all the powers and authorities of Trustees under
the Trust Instrument with respect to any other series or class.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Delaware Law, the shareholders of the Funds are not generally
subject to liability for the debts or obligations of the Trust. Similarly,
Delaware law provides that a series of the Trust will not be liable for the
debts or obligations of any other series of the Trust. However, no similar
statutory or other authority limiting business trust shareholder liability
exists in other states. As a result, to the extent that a Delaware business
trust or a shareholder is subject to the jurisdiction of courts of such other
states, the courts may not apply Delaware law and may thereby subject the
Delaware business trust shareholders to liability. To guard against this risk,
the Declaration of Trust contains an express disclaimer of shareholder liability
for acts or obligations of a Fund. Notice of such disclaimer will normally be
given in each agreement, obligation or instrument entered into or executed by a
series or the Trustees. The Declaration of Trust provides for indemnification
by the relevant Fund for all loss suffered by a shareholder as a result of an
obligation of the series. The Declaration of Trust also provides that a series
shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the series and satisfy any judgment
thereon. In view of the above, the risk of personal liability of shareholders
of a Delaware business trust is remote.
In addition to the requirements under Delaware law, the Declaration of
Trust provides that shareholders of a series may bring a derivative action on
behalf of the series only if the following conditions are met: (a) shareholders
eligible to bring such derivative action under Delaware law who hold at least
10% of the outstanding shares of the series, or 10% of the outstanding shares of
the class to which such action relates, shall join in the request for the
Trustees to commence such action; and (b) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and to
investigate the basis and to employ other advisers in considering the merits of
the request and shall require an undertaking by the shareholders making such
request to reimburse the series for the expense of any such advisers in the
event that the Trustees determine not to bring such action.
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<PAGE>
The Declaration of Trust further provides that the Trustees will not
be liable for error of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
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 each Fund of the Trust. 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
each Fund. The summary is based on the laws in effect on the date of this
Additional Statement, which are subject to change.
GENERAL
=======
Each Fund is a separate taxable entity. CORE Large Cap Growth, CORE
Small Cap Equity, CORE International Equity, Real Estate Securities and Emerging
Markets Equity Funds each intend to elect and each other Fund has elected to be
treated and intends 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 gross
income for its taxable year 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) such Fund derive less than 30% of its 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 stocks or securities (the "short-short test"); and (c) such 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 such Fund's total (gross) assets
is comprised of cash, cash items, U.S. Government securities, securities of
other regulated investment companies and other securities limited in respect of
any one issuer to an amount not greater in value than 5% of the value of such
Fund's total assets and to not more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
(gross) assets is invested in the securities of any one issuer (other than U.S.
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 a 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 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. For purposes of the 90% gross income test, income that a Fund
earns from equity interests in certain entities that are not treated as
corporations (e.g., partnerships or trusts) for U.S. tax purposes will generally
have the same character for such Fund as in the hands of such an entity;
consequently, a Fund may be required to limit its equity investments in
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<PAGE>
such entities that earn fee income, rental income, or other nonqualifying
income. 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 a 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 or swap contracts for purposes
other than hedging currency risk with respect to securities in a Fund's
portfolio or anticipated to be acquired may not qualify as "directly-related"
under these tests.
If a Fund complies with such provisions, then in any taxable year in
which such Fund distributes, in compliance with the Code's timing and other
requirements, at least 90% of its "investment company taxable income" (which
includes dividends, taxable interest, taxable accrued original issue discount
and market discount income, income from securities lending, any net short-term
capital gain in excess of net long-term capital loss, certain net realized
foreign exchange gains 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 (if any) over certain
disallowed deductions, such Fund (but not its shareholders) will be relieved of
federal income tax on any income of the Fund, including long-term capital gains,
distributed to shareholders. However, if a Fund retains any investment company
taxable income or "net capital gain" (the excess of net long-term capital gain
over net short-term capital loss), it will be subject to a tax at regular
corporate rates on the amount retained. If the Fund retains any net capital
gain, the Fund may designate the retained amount as undistributed capital gains
in a notice to its shareholders who, if subject to U.S. federal income tax on
long-term capital gains, (i) will be required to include in income for federal
income tax purposes, as long-term capital gain, their shares of such
undistributed amount, and (ii) will be entitled to credit their proportionate
shares of the tax paid by the Fund against their U.S. federal income tax
liabilities, if any, and to claim refunds to the extent the credit exceeds such
liabilities. For U.S. federal income tax purposes, the tax basis of shares
owned by a shareholder of the Fund will be increased by an amount equal under
current law to 65% of the amount of undistributed net capital gain included in
the shareholder's gross income. Each Fund intends to distribute for each
taxable year to its shareholders all or substantially all of its investment
company taxable income, 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 the CORE International Equity, International
Equity, Emerging Markets Equity or Asia Growth Funds and may therefore make it
more difficult for such a Fund to satisfy the distribution requirements
described above, as well as the excise tax distribution requirements described
below. However, each 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, and its distributions to
shareholders will be taxable as ordinary dividends to the extent of its current
and accumulated earnings and profits.
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 capital gains over its capital losses (generally computed on the basis of
the one-year period ending on October 31 of such year), and all taxable ordinary
income and the excess of capital gains over capital losses for the previous year
that were not distributed for such year and on which the Fund paid no federal
income tax. For federal income tax purposes, dividends declared by a Fund in
October, November or December to shareholders of record on a specified date in
such a month and paid during January of the following year are taxable to such
shareholders as if received on December 31 of the year declared. The Funds
anticipate that they will generally make timely distributions of income and
capital gains in compliance with these requirements so that they will generally
not be required to pay the excise tax. For federal income tax purposes, each
Fund is permitted to carry forward a net capital loss in any year to offset its
own capital gains, if any, during the eight years following the year of the
loss. Asia Growth Fund had approximately $184,000, $5,487,000 and $9,825,000 at
January 31,
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1997 of capital loss carry forwards expiring in 2002, 2003, and 2004,
respectively, for federal tax purposes. These amounts are available to be
carried forward to offset future capital gains to the extent permitted by the
Code and applicable tax regulations.
Gains and losses on the sale, lapse, or other termination of options
and futures contracts, options thereon and certain forward contracts (except
certain foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gains 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.
These provisions may require a Fund to recognize income or gains without a
concurrent receipt of cash. Any gain or loss recognized on actual or deemed
sales of these futures contracts, forward contracts, or options will (except for
certain foreign currency options, forward contracts, and futures contracts) be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. As a result of certain hedging transactions entered into by a Fund, the
Fund may be required to defer the recognition of losses on futures contracts,
forward contracts, and options or underlying securities or foreign currencies to
the extent of any unrecognized gains on related positions held by such Fund and
the characterization of gains or losses as long-term or short-term may be
changed. 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. The short-short test described above may limit a
Fund's ability to use options, forward contracts, and futures transactions as
well as its ability to engage in short sales. Moreover, application of certain
requirements for qualification as a regulated investment company and/or these
tax rules to certain investment practices, such as dollar rolls, or certain
derivatives such as interest rate swaps, floors, caps and collars and currency,
mortgage or index swaps may be unclear in some respects, and a Fund may
therefore be required to limit its participation in such transactions. Certain
tax elections may be available to a Fund 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 and instruments that may affect the
amount, timing and character of income, gain or loss recognized by a Fund.
Under these rules, foreign exchange gain or loss realized 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 foregoing 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 a 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.
A Fund's investment in zero coupon securities, deferred interest
securities, certain structured securities or other securities bearing original
issue discount or, if a Fund elects to include market discount in income
currently, market discount, as well as any "mark to market" gain from 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 obtain cash to enable it to
distribute this income or gain, maintain its qualification as a regulated
investment company and avoid federal income or excise taxes, the Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold.
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Each Fund (other than CORE U.S. Equity, CORE Large Cap Growth and CORE
Small Cap Equity Funds) anticipates that it will be subject to foreign taxes on
its income (possibly including, in some cases, capital gains) from foreign
securities. Tax conventions between certain countries and the U.S. may reduce
or eliminate such taxes in some cases. If, as may occur for CORE International
Equity, International Equity, Emerging Markets Equity and Asia Growth Funds,
more than 50% of a Fund's total assets at the close of any taxable year consists
of stock or securities of foreign corporations, the Fund may file an election
with the Internal Revenue Service pursuant to which shareholders of the 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 the 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 by such
shareholders, and (ii) treat such respective pro rata portions as foreign income
taxes paid by them.
If the CORE International Equity, International Equity, Emerging
Markets Equity and Asia Growth Funds make this election, its respective
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 foreign
taxes paid by a Fund, although such shareholders will be required to include
their shares of such taxes in gross income if the election is made.
If a shareholder chooses to take credit for the foreign taxes deemed
paid by such shareholder as a result of any such election by CORE International
Equity, International Equity, Emerging Markets Equity or Asia Growth Funds, 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 a 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 CORE International Equity, International Equity, Emerging Markets Equity and
Asia Growth Funds may not be able to claim a credit for the full amount of their
proportionate share of the foreign taxes paid by such Fund even if the election
is made by such a 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 the CORE International Equity, International
Equity, Emerging Markets Equity or Asia Growth Funds files the election
described above, its shareholders will be notified of the amount of (i) each
shareholder's pro rata share of qualified foreign taxes paid by a Fund and (ii)
the portion of Fund dividends which represents income from each foreign country.
The other Funds will not be entitled to elect to pass foreign taxes and
associated credits or deductions through to their shareholders because they will
not satisfy the 50% requirement described above. If a Fund cannot or does not
make this election, it may deduct such taxes in computing the amount it is
required to distribute.
If a Fund acquires stock (including, under proposed regulations, an
option to acquire stock such as is inherent in a convertible bond) in certain
foreign corporations that receive at least 75% of their annual gross income from
passive sources (such as interest, dividends, rents, royalties or capital gain)
or hold at least 50% of their assets in investments producing such passive
income ("passive foreign investment companies"), the 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 stock in such companies,
even if all income or gain actually received by the Fund is timely distributed
to its shareholders. The Fund would not
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<PAGE>
be able to pass through to its shareholders any credit or deduction for such a
tax. In some cases, elections may be available that would ameliorate these
adverse tax consequences, but such elections would require the Fund to include
certain amounts as income or gain (subject to the distribution requirements
described above) without a concurrent receipt of cash. Each 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.
Investments in lower-rated securities may present special tax issues
for a Fund to the extent actual or anticipated defaults may be more likely with
respect to such securities. Tax rules are not entirely clear about issues such
as when a Fund may cease to accrue interest, original issue discount, or market
discount; when and to what extent deductions may be taken for bad debts or
worthless securities; how payments received on obligations in default should be
allocated between principal and income; and whether exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by a Fund, in the event it invests in such securities, in order to
seek to eliminate or minimize any adverse tax consequences.
TAXABLE U.S. SHAREHOLDERS - DISTRIBUTIONS
=========================================
For U.S. federal income tax purposes, distributions by a Fund, whether
reinvested in additional shares or paid in cash, generally will be taxable to
shareholders who are subject to tax. 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
they would have received had they elected to receive cash and will have a cost
basis in each share received equal to such amount divided by the number of
shares received.
Distributions from investment company taxable income for the year will
be taxable as ordinary income. Distributions designated as derived from a
Fund's dividend income, if any, that would be eligible for the dividends
received deduction if such Fund were not a regulated investment company may be
eligible, for the dividends received deduction for corporations. 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
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. Because eligible
dividends are limited to those a Fund receives from U.S. domestic corporations,
it is unlikely that a substantial portion of the distributions made by CORE
International Equity, International Equity, Asia Growth and Emerging Markets
Equity Funds will qualify for the dividends-received deduction. The entire
dividend, including the deducted amount, is considered in determining the
excess, if any, of a corporate shareholder's adjusted current earnings over its
alternative minimum taxable income, which may increase its liability for the
federal alternative minimum tax, and the dividend may, if it is treated as an
"extraordinary dividend" under the Code, reduce such shareholder's tax basis in
its shares of a Fund. Capital gain dividends (i.e., dividends from net capital
gain) if designated as such in a written notice to shareholders mailed not later
than 60 days after a Fund's taxable year closes, will be taxed to shareholders
as long-term capital gain regardless of how long shares have been held by
shareholders, but are not eligible for the dividends received deduction for
corporations. Distributions, if any, that are in excess of a Fund's current and
accumulated earnings and profits will first reduce a shareholder's tax basis in
his shares and, after such basis is reduced to zero, will generally constitute
capital gains to a shareholder who holds his shares as capital assets.
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.
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<PAGE>
TAXABLE U.S. SHAREHOLDERS - SALE OF SHARES
==========================================
When a shareholder's shares are sold, redeemed or otherwise disposed
of in a transaction that is treated as a sale for tax purposes, 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, 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, subject to the rules
described below. Shareholders should consult their own tax advisers with
reference to their particular circumstances to determine whether a redemption
(including an exchange) or other disposition of Fund shares is properly treated
as a sale for tax purposes, as is assumed in this discussion. If a shareholder
receives 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 a sale or redemption of
such shares, 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. All or a portion of any sales load paid upon the purchase of shares
of a Fund will not be taken into account in determining gain or loss on the
redemption or exchange of such shares within 90 days after their purchase to the
extent the redemption proceeds are reinvested, or the exchange is effected,
without payment of an additional sales load pursuant to the reinvestment or
exchange privilege. The load not taken into account will be added to the tax
basis of the newly-acquired 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 such Fund. If disallowed, the loss will be reflected in an adjustment
to the basis of the shares acquired.
Each Fund may be required to withhold, as "backup withholding,"
federal income tax at a rate of 31% from dividends (including capital gain
dividends) and share redemption and exchange proceeds to individuals and other
non-exempt shareholders who fail to furnish such Fund with a correct taxpayer
identification number ("TIN") certified under penalties of perjury, or if the
Internal Revenue Service or a broker notifies the Fund that the payee is subject
to backup withholding as a result of failing to properly report interest or
dividend income to the Internal Revenue Service or that the TIN furnished by the
payee to the Fund is incorrect, or if (when required to do so) the payee fails
to certify under penalties of perjury that it is not subject to backup
withholding. A Fund may refuse to accept an application that does not contain
any required TIN or certification that the TIN provided is correct. If the
backup withholding provisions are applicable, any such dividends and proceeds,
whether paid in cash or reinvested in additional 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.
NON-U.S. SHAREHOLDERS
=====================
The discussion above relates solely to U.S. federal income tax law as
it applies to "U.S. persons" subject to tax under such law. Shareholders who, as
to the United States, are not "U.S. persons," (i.e., are nonresident aliens,
foreign corporations, fiduciaries of foreign trusts or estates, foreign
partnerships or other non-U.S. investors) generally will be subject to U.S.
federal withholding tax at the rate of 30% on distributions treated as ordinary
income unless the tax is reduced or eliminated pursuant to a tax treaty or the
dividends are effectively connected with a U.S. trade or business of the
shareholder. In the latter 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 non-U.S.
shareholder will not be subject to U.S. federal 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
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year and certain other conditions are met. Non-U.S. shareholders may also be
subject to U.S. federal withholding tax on deemed income resulting from any
election by CORE International Equity, International Equity, Emerging Markets
Equity or Asia Growth Funds 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 capital gain realized by a non-U.S. shareholder 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 U.S., or in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the U.S. 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 an
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 the Funds.
STATE AND LOCAL
===============
Each Fund may be subject to state or local taxes in jurisdictions in
which such Fund may be deemed to be doing business. In addition, in those
states or localities which have income tax laws, the treatment of such Fund and
its shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in such 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.
FINANCIAL STATEMENTS
The audited financial statements and related Reports of Independent
Public Accountants, contained in the 1997 Annual Report of each of the Funds,
are incorporated herein by reference into this Additional Statement and attached
hereto.
OTHER INFORMATION
Each Fund will redeem shares solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Fund during any 90-day period for
any one shareholder. Each Fund, however, reserves the right to pay redemptions
exceeding $250,000 or 1% of the net asset value of the 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 the
Fund's net asset value per share. See "Net Asset Value." If a shareholder
receives redemption proceeds in kind, the shareholder should expect to incur
transaction costs upon the disposition of the securities received in the
redemption.
The right of a shareholder to redeem shares and the date of payment by
each 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
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not reasonably practicable for such 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 such Fund.
The Prospectus 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 Prospectus. Certain
portions of the Registration Statement have been omitted from the Prospectus and
this Additional Statement pursuant to the rules and regulations of the SEC. The
Registration Statement including the exhibits filed therewith may be examined
at the office of the SEC in Washington, D.C.
Statements contained in the Prospectus 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 Prospectus and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
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<PAGE>
SERVICE PLANS
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, each Fund enters 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 the Fund, working with the Fund to correct errors and
resolve problems and providing statistical and other information to a Fund. As
compensation for such services, each 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.
Each Fund has adopted its Plan pursuant to Rule 12b-1 under the Act in order to
avoid any possibility that payments to the Service Organizations pursuant to the
Service Agreements might violate the 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
distributing securities, although institutions such as national banks are
permitted to purchase and sell securities upon the order and for the account of
their customers. In addition, 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 a Fund, 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 the 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
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<PAGE>
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 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 Service Shares of a Fund. 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.
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, voted to approve
each Plan and related Service Agreements at a meeting called for the purpose of
voting on such Plans and Service Agreements on April 23, 1997. Each Plan will
be approved by the sole shareholder of Service Shares of each Fund, on April
23, 1997. The Plans and Service Agreements will remain in effect until June 30,
1997 and will continue in effect thereafter only if such continuance is
specifically approved annually by a vote of the Trustees in the manner described
above. The Plans may not be amended to increase materially the amount to be
spent for the services described therein without approval of the Service
Shareholders of the affected Fund and all material amendments of the Plan must
also be approved by the Trustees in the manner described above. The Plan may be
terminated at any time by a majority of the Trustees as described above or by a
vote of a majority of the outstanding Service Shares of the affected Fund. The
Service Agreements may be terminated at any time, without payment of any
penalty, by vote of a majority of the Trustees as described above or by a vote
of a majority of the outstanding Service Shares of the affected 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 Trustees. The Trustees has determined that, in its judgment,
there is a reasonable likelihood that the Plans will benefit the Funds and the
holders of Service Shares of the Funds. In the Trustees' quarterly review of
the Plans and Service Agreements, the Board will consider their continued
appropriateness and the level of compensation provided therein.
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<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
The U.S. equity market rewarded investors with excellent returns once
again in the 12-month period ended January 31, 1997. Most European markets
achieved significant gains as well, with several outpacing the U.S., while the
performance of Asian markets varied widely. We are pleased to report that most
of the Goldman Sachs equity funds performed very well in this generally
favorable global equity environment.
U.S. Stocks Continued to Climb Amid Heightened Volatility
The U.S. stock market surged to record levels during the period under
review, rising an impressive 26.3% (as measured by the Standard & Poor's 500
stock index). During 1996, the market advanced in a "staircase" pattern, where
notable gains are achieved within a relatively short time and are followed by a
period of choppy trading. For example, after a run-up from January through
mid-February, market volatility notably increased, as investor sentiment
vacillated between two contradictory concerns. With some economic news,
investors feared that the economy was growing too quickly, making higher
inflation a possibility, while other news caused them to worry that the economy
was slowing, putting earnings at risk. In May, investors briefly overcame their
fears and sent the market higher, but their concerns quickly re-emerged and
caused the market to settle into another choppy trading range that culminated in
a sharp sell-off in July.
By August, sentiment significantly improved when data indicated that
earnings growth was more resilient than generally expected and inflation
remained under control. Thus reassured, investors propelled stocks to record
highs during the second half of the period, with the Dow Jones Industrial
Average crossing the 6000 mark for the first time by mid-October. The ascent
continued through the end of the period, with the Dow climbing to 7000 by
mid-February 1997.
Though small-cap stocks led the market during the first half of the
year, the post-July rally was dominated by large-cap, growth companies.
Furthermore, the rally was very narrowly focused, with a handful of large-cap
stocks (primarily in the technology, finance and pharmaceutical sectors)
contributing substantially to the S&P 500 index's performance for the period.
After a Weak Start, Economic Growth Rebounded, Then Moderated
When the period began, lackluster consumer spending and the General
Motors strike restrained economic growth, but the economy still advanced faster
than expected, with first-quarter real GDP growth of 2.0% (annualized). Momentum
accelerated even more dramatically during the second quarter, as industrial
activity, automobile sales and home sales all showed significant improvement. As
a result, second-quarter real GDP rose a robust 4.7% (annualized), its highest
rate in two years.
The economy's torrid growth cooled markedly during the third quarter
with an annualized real GDP growth of 2.1%, largely due to lackluster consumer
spending and a widening U.S. trade deficit. This slowdown proved to be
temporary, however, as the economy strengthened from October through December.
Fourth-quarter real GDP
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Table of Contents
<S> <C>
Introduction/Market Overview............................................. 1
Goldman Sachs Balanced Fund.............................................. 4
Goldman Sachs Select Equity Fund......................................... 14
Goldman Sachs Growth and Income Fund..................................... 22
Goldman Sachs Capital Growth Fund........................................ 28
Goldman Sachs Small Cap Equity Fund...................................... 34
Goldman Sachs International Equity Fund.................................. 40
Goldman Sachs Asia Growth Fund........................................... 48
Financial Statements..................................................... 56
Notes to Financial Statements............................................ 64
Financial Highlights..................................................... 74
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
1
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
growth was revised to 3.9% (annualized), reflecting a narrowing trade deficit,
rising consumer spending and accelerating manufacturing activity. Despite firm
growth, underlying inflation remained surprisingly mild. For all of 1996,
consumer prices rose only 2.9%. In January 1997, most indicators suggested that
the economy would continue to advance.
The U.S. Federal Reserve cut the Federal funds rate by 25 basis
points in January 1996, just prior to the start of the period, in response to
generally poor year-end economic conditions. Though stronger than expected
growth shifted investor expectations from further Federal Reserve interest rate
cuts to potential tightening, the Fed then left rates unchanged. As of January
31, 1997, the Federal funds rate remained at 5.25%.
The Dollar Resumed Its Climb Against the Yen and the Mark Following a Brief July
Slide
During the period under review, the dollar continued to strengthen,
rising to a 47-month high against the yen and a 31-month high against the mark.
Though the dollar declined briefly in July along with the U.S. stock market, it
quickly rebounded in August and continued to rally through the end of the
period. The dollar's climb was reflective of several developments, including the
relative strength of the U.S. economy, reductions in the budget deficit and
controlled inflation. Despite the run-up, Goldman Sachs' economists do not
expect a major impact on U.S. growth in 1997, nor do they anticipate a major
decrease in exports, as the dollar's effect on U.S. trade flows is relatively
small and stretched out over time. Furthermore, domestic demand in Canada and
Mexico, which together accounted for nearly one-third of U.S. exports in 1996,
is expected to rise.
The International Market Environment: European Equities Performed Well, Japan
Declined Sharply and Asian Markets Were Mixed Amid Increased Volatility
During the period under review, most global economies experienced
modest growth, but long-awaited recoveries in Europe and Japan fell short of
expectations. In Europe, several major economies, such as Germany and France,
continued to be plagued by weaker than expected manufacturing activity and
record-high unemployment, while others, such as the U.K., clearly accelerated.
In contrast to the mixed economic conditions, most European equity markets
performed very well, buoyed by healthy corporate profits. Though the Japanese
economy strengthened, equities declined due to concerns regarding the
sustainability of earnings growth as well as fears that the newly elected
government would delay deregulation. In January 1997, the already weak Japanese
market sold off sharply when the government announced an austerity program that
was expected to curb growth. In other Asian countries, key elections heightened
political uncertainty throughout the region and a marked slowdown in economic
growth increased volatility.
Outlook in the U.S.: Economic Growth Is Expected to Continue to Strengthen
Goldman Sachs' economists expect first-quarter real GDP growth to
slow to just under 2.0% (annualized) due to a widening trade deficit. However,
this slowdown should not be interpreted as any change in economic fundamentals,
as underlying demand remains firm and consumer confidence, income and employment
trends continue to support consumer spending. The favorable economic environment
of moderate growth and low inflation appears likely to persist in the near term,
which could translate to a seventh year of profit growth for U.S. corporations
in 1997 and another good year for U.S. equities, though not likely as strong as
last year. As always, equity performance can be affected by changes in the
economic environment, such as higher than expected inflation, which could lead
to a Fed tightening by midyear, or an unforeseen faltering of economic growth.
After the outstanding performance of the past two years, it is
important to maintain realistic expectations from your equity investments. As
increased volatility during 1996 demonstrated, equities can go down as well as
up. Over the long run, however, stocks have historically outperformed other
asset classes, rewarding investors committed to a long-term investment horizon.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
A Major Addition to Our Active Equity Management Team
We are pleased to announce that we have recently acquired Liberty
Investment Management, a Tampa, Florida-based investment advisory firm with an
impressive 16-year track record. Liberty's Chief Investment Officer, Herbert
Ehlers, and his portfolio management team have assumed primary responsibility
for the Goldman Sachs Capital Growth Fund, which they will manage using a
"growth at a reasonable price" investment style. The Liberty group adds both
breadth and depth to the Goldman Sachs U.S. Active Equity team, and we look
forward to working with them.
In conclusion, thank you for making the Goldman Sachs equity funds part of
your long-term financial plan.
Sincerely,
/s/ David B. Ford /s/ John P. McNulty
David B. Ford John P. McNulty
Co-Head, Co-Head,
Goldman Sachs Goldman Sachs
Asset Management Asset Management
March 3, 1997
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3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Balanced Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Balanced Fund seeks to provide investors with a
combination of long-term growth of capital and current income by investing in a
diversified portfolio that includes both equity and fixed income securities.
Under normal market conditions, the fund is expected to maintain an asset mix of
45% to 65% in equity securities, with the remainder (at a minimum 25%) in fixed
income securities. The fund's portfolio management team will review the fund's
asset mix on a regular basis and adjust it to reflect changes in the economic
environment.
Stocks are selected using a value style, identifying those judged to
be inexpensive relative to their expected long-term earnings and ability to pay
dividends. We also consider the degree to which a company's management is
committed to increasing value for shareholders.
In the fixed income portion of the portfolio, we actively manage the
portfolio within a risk-controlled framework. We seek to minimize interest rate
risk relative to the portfolio's benchmark, and focus on seeking to add value
through sector selection, security selection and yield curve strategies.
Performance Review: Equity, Fixed Income and Asset Allocation Contributed to
Strong Results
<TABLE>
<CAPTION>
Fund Total Return
(based on net Benchmark
asset value) Total Return+
------------ -------------
<S> <C> <C>
Class A (1/31/96 - 1/31/97)* 18.59% 15.51%
Class B (5/1/96 - 1/31/97)* 16.22% 14.99%
</TABLE>
* Class A and B share performance assumes reinvestment of all dividends and
distributions, a complete redemption at the net asset value at the end of the
period and no initial sales charge or contingent deferred sales charge.
Performance for Class B shares is a cumulative total return (not annualized)
from their inception through the end of the period.
+ The benchmark is a combination of the S&P 500 stock index (weighted at 55%)
and the Lehman Brothers Aggregate Bond Index (weighted at 45%).
We are pleased to report that during the period under review, the
fund's Class A and Class B shares outperformed the benchmark. In addition, the
fund's Class A shares ranked within the top 15% of the Lipper balanced fund
category (35th of 281) for the 12-month period ended January 31, 1997, according
to Lipper Analytical Services, Inc. (Please note that Lipper rankings do not
take sales charges into account and that past performance is not a guarantee of
future results. Class B shares were not ranked because they did not exist during
the full year.)
The equity and fixed income portions of the fund both performed
favorably, with equity investments contributing most to fund results. In
addition, our asset allocation decisions also benefited performance. During the
spring of 1996, we reduced the fund's equity weightings in favor of fixed income
investments, which worked in its favor when equities fell sharply in July. In
October, we increased the fund's equity weighting, just prior to a significant
rally in the stock market. As of January 31, 1997, the fund's asset mix based on
net assets was 54% in equities, 42% in fixed income and the remainder in cash
equivalents.
Best Performing Equity Investments Included Technology, Finance and Energy
Stocks
The fund's best performing stocks came from a wide range of
industries, particularly technology, finance and energy. Technology holdings
that performed well included Intel Corp., the dominant microprocessor
manufacturer, which we sold after it climbed sharply due to stronger than
expected personal computer sales and reached our target price, and Avnet, Inc.,
the second largest distributor of semiconductors and other electronic
components. In the financial sector, BankAmerica Corp. increased its focus on
aggressive capital management, and NationsBank Corp. began to realize the
benefits of cost cuts. Top-performing energy-related investments were Tosco
Corp., an oil refiner and distributor, which continued its ambitious acquisition
strategy, and Texaco Inc., which benefited from higher petroleum prices and a
successful restructuring program. Disappointing performers included three
companies that suffered from
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
overcapacity in their respective industries: Georgia-Pacific Corp. and Stone
Container Corp., both manufacturers of paper products, and Geon Corp., a
manufacturer of polyvinyl chloride.
One of the fund's new investments was Unicom Corp., an electric
utility that operates 12 nuclear units at six sites. Unicom generates excess
capital and, unlike many other electric utilities, has no utility power purchase
problems. We established a position after its stock price declined due to a
mandated increase in spending on operations and maintenance, an issue that
management believes will not impair the company's long-term prospects. During
the period, we sold several stocks after they appreciated and reached our price
targets, including Anheuser-Busch Co., Inc., the world's largest brewer, and
Greenpoint Financial Corp., a New York-based thrift.
<TABLE>
<CAPTION>
Top 10 Equity Holdings as of January 31, 1997
Percentage of
Total
Company Line of Business Net Assets
<S> <C> <C>
Aetna Inc. Healthcare 1.9%
Management
Tenet Healthcare Corp. Hospitals 1.9%
Cigna Corp. Insurance 1.7%
Lear Corp. Autoparts/Original 1.7%
Equipment
Brunswick Corp. Pleasure 1.7%
Boats/Marine
Engines
Goodyear Tire & Rubber Co. Tire and Rubber 1.6%
Products
Dean Witter Discover & Co. Financial Services 1.6%
Avnet, Inc. Electronic 1.5%
Components
Distributor
Philip Morris Companies, Tobacco and Food 1.5%
Inc. Products
Owens-Illinois, Inc. Packaging 1.5%
</TABLE>
Corporate and Emerging Market Debt Sectors Led the Fund's Fixed Income
Performance
The fixed income sectors that contributed most to the fund's
performance were its corporate bond holdings and emerging market debt
securities. Corporate bonds benefited when many companies reported positive
earnings growth throughout the period. Emerging market debt was one of the
fund's smaller allocations during the year but performed extremely well due to
positive emerging country credit trends and supportive cash flows resulting from
global investors' persistent search for incremental yield. In addition, the
fund's investments in the mortgage and asset-backed sectors also performed well,
reflecting healthy investor demand.
The fund's largest fixed income allocation was mortgage-backed
securities (MBS), which accounted for a 12.9% position in terms of total net
assets, up from 10.0% a year ago. The MBS sector fared particularly well during
the first half of the period, when interest rates rose and prepayment fears
abated. We gradually trimmed the fund's exposure in the corporate bond sector to
9.8%, down from 13.2% a year ago, as it became more fully valued. The fund's
asset-backed securities (ABS) weighting was 4.8%, and they continued to offer
incremental yield over similar duration Treasuries. U.S. Treasuries, with an
8.5% allocation, were used together with futures to manage the fund's interest
rate risk. Finally, 3.3% of the fund was invested in emerging market debt, where
we stressed higher credit, short-duration bonds, and 0.7% was invested in
government agency securities.
Outlook
We believe that, overall, the stock market is moderately overvalued
and is therefore unlikely to match the strong return it achieved in 1996.
However, it is important to note that even after last year's rally, the fund's
equity holdings continue to be attractively valued. We expect that our emphasis
on using extensive fundamental research to identify stocks selling below their
- --------------------------------------------------------------------------------
5
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Balanced Fund (continued)
- --------------------------------------------------------------------------------
intrinsic value will continue to serve us well in 1997's potentially more
challenging stock market environment.
We have a relatively cautious view of the fixed income markets in the
coming months due to a possible tightening by the Federal Reserve later in the
year, which would impact the prices of fixed income securities. In the MBS
market, the pace of mortgage prepayments remains stable, and we continue to
identify specific securities that present attractive investment opportunities.
We have a moderately optimistic view for the corporate sector, where we will
continue to emphasize short-duration bonds that offer attractive incremental
yield over Treasuries. Finally, we believe ABS still offer attractive value
relative to other similarly rated securities, and we expect new supply to
continue to be met with enthusiastic demand.
Going forward, we will continue to actively allocate the portfolio's
asset mix between the equity and fixed income sectors to take advantage of
changing market conditions throughout the coming year.
/s/ Ronald E. Gutfleish /s/ Jonathan A. Beinner
Ronald E. Gutfleish Jonathan A. Beinner
Senior Portfolio Manager, Co-Head,
U.S. Active Equity Value U.S. Fixed Income
/s/ G. Lee Anderson /s/ c. Richard Lucy
G. Lee Anderson C. Richard Lucy
Portfolio Manager, Co-Head,
U.S. Active Equity Value U.S. Fixed Income
/s/ Eileen A. Aptman /s/ Richard H. Buckholz
Eileen A. Aptman Richard H. Buckholz
Portfolio Manager, Portfolio Manager,
U.S. Active Equity Value U.S. Fixed Income
March 3, 1997
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Balanced Fund
January 31, 1997
- --------------------------------------------------------------------------------
The following graphs show the value as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's
benchmarks (the Standard and Poor's 500 index ("S&P 500") and the Lehman
Brothers Aggregate Bond Index (LBABI)) are shown for the appropriate time
periods. All performance data shown represents past performance and should not
be considered indicative of future performance which will fluctuate with changes
in market conditions. These performance fluctuations will cause an investor's
shares, when redeemed, to be worth more or less than their original cost.
<TABLE>
<CAPTION>
Class A
[LINE GRAPH APPEARS HERE]
GS Balanced GS Balanced
Class A Class A
(w/sales charge) (no sales charge) LBABI S&P 500
---------------- ----------------- ----- -------
<S> <C> <C> <C> <C>
10/12/94 9,450 10,000 10,000 10,000
1/31/95 9,532 10,087 10,233 10,184
1/31/96 12,211 12,922 11,966 14,123
1/31/97 14,488 15,331 12,357 17,842
<CAPTION>
Class B
[LINE GRAPH APPEARS HERE]
GS Balanced GS Balanced
Class B Class B
(no redemp. charge) (w/redemp. charge) LBABI S&P 500
------------------- ------------------ ----- -------
<S> <C> <C> <C> <C>
5/1/96 10,000 10,000 10,000 10,000
1/31/97 11,622 11,122 10,642 12,218
</TABLE>
---------------------------------------
Average Annual Total Return
---------------------------------------
One Year Since Inception/(a)/
------------------------------- ------------------ -------------------
Class A, no sales charge 18.59% 20.32%
------------------------------- ------------------ -------------------
Class A, w/sales charge 12.07% 17.41%
------------------------------- ------------------ -------------------
Class B, no redemption charge N/A 16.22%/(b)/
------------------------------- ------------------ -------------------
Class B, w/redemption charge N/A 11.22%/(b)/
------------------------------- ------------------ -------------------
/(a)/ Class A and B shares commenced operations October 12, 1994 and May 1,
1996, respectively.
/(b)/ An aggregate total return (not annualized) is shown instead of an average
annual total return since this class has not completed a full twelve
months of operations.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Balanced Fund
January 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks--53.0%
Airlines--1.8%
7,700 AMR Corp.* $ 619,850
32,600 Continental Airlines, Inc.* 908,725
- --------------------------------------------------------------------
1,528,575
- --------------------------------------------------------------------
Appliance Manufacturer--0.9%
28,600 Sunbeam Corp. 793,650
- --------------------------------------------------------------------
Auto/Original Equipment Manufacturer--1.7%
38,200 Lear Corp.* 1,427,725
- --------------------------------------------------------------------
Auto/Vehicle--1.0%
25,600 Ford Motor Co. 824,400
- --------------------------------------------------------------------
Banks--4.5%
10,300 BankAmerica Corp. 1,149,738
5,300 Chase Manhattan Corp. 490,250
9,400 Fleet Financial Group, Inc. 507,600
9,300 NationsBank Corp. 1,004,400
7,400 Republic Bank of New York Corp. 655,825
- --------------------------------------------------------------------
3,807,813
- --------------------------------------------------------------------
Chemicals-Commodity--1.1%
31,400 Geon Co. 588,750
7,600 Union Carbide Corp. 344,850
- --------------------------------------------------------------------
933,600
- --------------------------------------------------------------------
Defense--2.1%
17,900 McDonnell Douglas Corp. 1,203,775
6,200 Northrop Grumman Corp. 484,375
1,900 Thiokol Corp. 106,400
- --------------------------------------------------------------------
1,794,550
- --------------------------------------------------------------------
Department Stores--0.8%
13,900 Sears Roebuck & Co. 667,200
- --------------------------------------------------------------------
Electric Utilities--2.8%
5,500 CMS Energy Corp. 184,250
43,000 Long Island Lighting Co. 978,250
49,600 Unicom Corp. 1,171,800
- --------------------------------------------------------------------
2,334,300
- --------------------------------------------------------------------
Food--1.5%
40,200 Chiquita Brands International, Inc. 587,925
4,000 Unilever Inc. 658,000
- --------------------------------------------------------------------
1,245,925
- --------------------------------------------------------------------
Forest Products--1.1%
12,400 Georgia Pacific Corp. 912,950
- --------------------------------------------------------------------
Health Suppliers/Services--1.3%
23,300 Baxter International, Inc. 1,074,713
- --------------------------------------------------------------------
Healthcare Management--3.8%
20,400 Aetna Inc. 1,611,600
57,800 Tenet Healthcare Corp.* 1,560,600
- --------------------------------------------------------------------
3,172,200
- --------------------------------------------------------------------
Home Builders--1.8%
18,200 Centex Corp. 709,800
28,200 Lennar Corp. 750,825
- --------------------------------------------------------------------
1,460,625
- --------------------------------------------------------------------
Insurance-Life--2.5%
9,500 Cigna Corp. 1,440,438
11,700 Lincoln National Corp. 627,413
- --------------------------------------------------------------------
2,067,851
- --------------------------------------------------------------------
Insurance-Property and Casualty--1.6%
9,200 Allmerica Financial Corp. 336,950
16,100 Partner Re Holding Ltd. 571,550
12,700 Tig Holdings, Inc. 439,738
- --------------------------------------------------------------------
1,348,238
- --------------------------------------------------------------------
Integrated Oil--2.6%
8,100 Atlantic Richfield Co. 1,071,225
10,300 Texaco, Inc. 1,090,513
- --------------------------------------------------------------------
2,161,738
- --------------------------------------------------------------------
Logistics/Rail--1.0%
30,400 Canadian Pacific Ltd. 824,600
- --------------------------------------------------------------------
Logistics/Trucking--1.2%
39,600 Consolidated Freightways, Inc. 1,004,850
- --------------------------------------------------------------------
Oil Refining & Marketing--1.9%
12,800 Ashland Inc. 552,000
11,300 Tosco Corp. 1,000,050
- --------------------------------------------------------------------
1,552,050
- --------------------------------------------------------------------
Packaging--1.5%
52,500 Owens-Illinois Inc.* 1,246,875
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
8
<PAGE>
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Recreational Products--1.7%
55,500 Brunswick Corp. $ 1,394,438
- --------------------------------------------------------------------
Security and Commodity Brokers, Dealers and Services--0.5%
13,100 Lehman Brothers Holdings, Inc. 414,288
- --------------------------------------------------------------------
Semiconductors & Electronics--1.5%
20,700 Avnet Inc. 1,280,813
- --------------------------------------------------------------------
Software--0.5%
13,800 Autodesk Inc. 436,425
- --------------------------------------------------------------------
Specialty Finance--1.6%
34,200 Dean Witter Discover & Co. 1,303,875
- --------------------------------------------------------------------
Steel--1.0%
20,200 AK Steel Holding Corp. 813,050
- --------------------------------------------------------------------
Supermarkets--2.0%
56,300 Fleming Companies, Inc. 907,838
24,600 Supervalu, Inc. 759,525
- --------------------------------------------------------------------
1,667,363
- --------------------------------------------------------------------
Textiles--1.3%
27,500 Fruit of The Loom, Inc.* 1,103,438
- --------------------------------------------------------------------
Tire & Other Related Rubber Products--1.6%
24,000 Goodyear Tire & Rubber Co. 1,308,000
- --------------------------------------------------------------------
Tobacco--2.8%
4,200 Loews Corp. 415,275
10,700 Philip Morris Companies, Inc. 1,271,963
12,100 RJR Nabisco, Inc. 396,275
8,500 Universal Corp. 263,500
- --------------------------------------------------------------------
2,347,013
- --------------------------------------------------------------------
Total Common Stocks
(Cost $35,773,086) $44,253,131
====================================================================
Preferred Stocks--0.1%
Media Content--0.1%
63 Time Warner, Inc. 10.25% $ 69,064
- --------------------------------------------------------------------
Tobacco--0.0%
3,400 RJR Nabisco, Inc., class C 9.25% 22,525
- --------------------------------------------------------------------
Total Preferred Stocks
(Cost $84,320) $ 91,589
====================================================================
Rights--1.1%
Forest Products--0.7%
42,000 Stone Container Corp. * exp. 08/08/98 $ 567,000
Technology Capital Goods--0.4%
10,800 Teradyne, Inc.* exp. 03/26/00 333,450
- --------------------------------------------------------------------
Total Rights
(Cost $923,718) $ 900,450
====================================================================
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
====================================================================
<S> <C> <C> <C>
Fixed Income--41.5%
Asset-Backed Securities--4.8%
Airplanes Pass Through Trust Series 1, Class C
$ 100,000 8.15% 03/15/19 $ 102,655
Asset Securitization Corp., Series 1996, Class A1
250,000 6.88 11/13/26 249,609
Case Equipment Loan Trust, Series 1995-A, Class A
74,286 7.30 03/15/02 75,124
Chemical Bank Master Credit Card Trust, Series 1995-2, Class A
140,000 6.23 06/15/03 139,343
Chevy Chase Auto Receivables Trust Series 1995-2, Class A
74,323 5.80 06/15/02 74,137
Discover Card Master Trust 1994-2, Class A
70,000 5.83 10/16/04 70,613
Discover Card Master Trust 1996-2, Class A
110,000 5.70 07/18/05 110,550
Discover Card Master Trust 1996-4, Class A
740,000 5.86 10/16/13 751,329
Discover Card Master Trust 1996-4, Class B
420,000 6.03 10/16/13 424,460
Fasco Auto Trust, Series 1996-1
266,114 6.65 11/15/01 267,223
Fingerhut Master Trust, Series 1996-1, Class A
200,000 6.45 02/20/02 200,936
Navistar Financial Trust, Series 1995-A, Class A2
134,590 6.55 11/20/01 135,347
Navistar Financial Trust, Series 1995-b, Class A3
120,000 6.05 04/15/02 120,000
Sears Credit Account Master Trust, Series 1995-2, Class A
700,000 8.10 06/15/04 733,026
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
9
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Balanced Fund (continued)
January 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
====================================================================
<S> <C> <C> <C>
Asset-Backed Securities (continued)
Sears Credit Card Master Trust, Series 1995-3, Class A
$ 70,000 7.00% 10/15/04 $ 71,268
Standard Credit Card Master Trust, Series 1994-4, Class A
110,000 8.25 11/07/03 117,322
Standard Credit Card Master Trust, Series 1995-1, Class A
360,000 8.25 01/07/07 389,135
- --------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $4,019,726) $ 4,032,077
====================================================================
Corporate Bonds--9.8%
Finance Bonds--3.6%
BankAmerica Corp.
$ 500,000 7.75% 07/15/02 $ 520,600
Capital One Bank
200,000 8.33 02/10/97 200,056
250,000 8.13 02/27/98 254,825
Conseco Finance
120,000 8.70 11/15/26 122,912
Continental Bank
100,000 12.50 04/01/01 120,501
Countrywide Funding Corp.
100,000 6.08 07/14/99 99,368
150,000 8.00 12/15/26 147,029
Edison Mission Energy Funding Corp.
100,000 6.77 09/15/03 99,852
Fleet Mortgage Group, Inc.
250,000 6.50 06/15/00 248,888
Golden West Financial Corp.
200,000 10.25 12/01/00 223,894
Meditrust, Inc.
120,000 7.82 09/10/26 128,021
Mic Finance Trust
80,000 8.38 02/01/27 80,442
Olympic Financial Ltd.
95,000 13.00 05/01/00 107,350
PXRE Cap Trust
65,000 8.85 02/01/27 65,847
Signet Banking Corp.
$ 500,000 9.63% 06/01/99 $ 531,870
Washington Real Estate
55,000 7.13 08/13/03 54,745
- --------------------------------------------------------------------
Total Finance Bonds
(Cost $3,035,271) $ 3,006,200
====================================================================
Industrial Bonds--5.6%
360 Communications Co.
$ 195,000 7.13% 03/01/03 $ 193,518
Auburn Hills Trust
90,000 12.00 05/01/20 134,352
Blockbuster Entertainment
50,000 6.63 02/15/98 49,995
Chelsea GCA Realty
226,000 7.75 01/26/01 228,362
DVI Equipment Lease Trust
434,745 6.55 07/10/04 434,605
Ford Motor Credit Co.
40,000 8.38 01/15/00 42,038
General Motors Acceptance Corp.
170,000 7.13 05/10/00 173,087
210,000 5.63 02/05/01 202,810
H + T Master Trust, Class A2
220,000 8.18 08/15/02 220,000
K Mart Corp.
40,000 9.55 06/30/98 40,290
40,000 9.60 09/15/98 40,845
Loewen Group International
50,000 7.75 10/15/01 50,000
News America Holdings, Inc.
160,000 7.50 03/01/00 163,784
Northwest Airlines
217,076 8.97 01/02/15 226,558
NWA
68,025 8.26 03/10/06 71,149
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
10
<PAGE>
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
====================================================================
<S> <C> <C> <C>
Corporate Bonds (continued)
Industrial Bonds (continued)
Oryx Energy Co.
$ 245,000 9.50% 11/01/99 $ 259,252
RJR Nabisco Inc.
135,000 8.00 07/15/01 136,184
160,000 8.63 12/01/02 164,654
Rogers Cablesystems, Inc.
115,000 9.63 08/01/02 119,600
Tele-Communications, Inc.
295,000 6.19 09/15/03 292,956
125,000 9.65 10/01/03 133,951
20,000 6.82 09/15/10 19,899
Tenet Healthcare Corp.
60,000 9.63 09/01/02 65,100
Time Warner, Inc.
375,000 7.45 02/01/98 378,776
125,000 9.63 05/01/02 139,444
250,000 7.98 08/15/04 256,243
Tosco Corp.
110,000 7.00 07/15/00 110,793
U.S. Home Corp.
70,000 7.95 03/01/01 68,250
USI American Holdings Corp.
60,000 7.25 12/01/06 58,540
Viacom International
80,000 9.13 08/15/99 81,800
95,000 10.25 09/15/01 103,550
- --------------------------------------------------------------------
Total Industrial Bonds
(Cost $4,650,412) $ 4,660,385
====================================================================
Utility Bonds--0.6%
Arkla Inc.
$ 250,000 9.20% 12/18/97 $ 255,665
Central Maine Power Co.
100,000 7.38 01/01/99 100,138
160,000 7.45 08/30/99 159,134
- --------------------------------------------------------------------
Total Utility Bonds
(Cost $521,661) $ 514,937
====================================================================
- --------------------------------------------------------------------
====================================================================
Total Corporate Bonds
(Cost $8,207,344) $ 8,181,522
====================================================================
Government Bonds--1.2%
Australia Commonwealth
AUD1,000,000 7.50% 07/15/05 $ 769,138
Province of Quebec
$ 200,000 13.25 09/15/14 238,976
- --------------------------------------------------------------------
Total Government Bonds
(Cost $1,033,387) $ 1,008,114
====================================================================
Emerging Market Debt--3.3%
Argentina Bocan
$ 144,111 5.69% 04/01/01 $ 138,490
Asia Pulp and Paper International Finance Co.
100,000 7.26(a) 04/03/97 98,614
200,000 8.30 06/28/99 198,118
90,000 10.25 10/01/00 90,754
Banco De Commercio Exterior
30,000 8.63 06/02/00 30,979
BCO De Colombia
110,000 8.63 06/02/00 113,590
Bridas Corp.
170,000 12.50 11/15/99 181,433
Bridas Corp. Gtd Euro Medium
60,000 9.50 06/17/99 60,147
Corp. Andina de Fomento
160,000 7.25 04/30/98 161,774
Emp Ica Soc Contro
110,000 9.75 02/11/98 111,440
Empresa Col Petroleos
80,000 7.25 07/08/98 80,566
Financiera Energy Nacional
230,000 5.88 02/17/98 226,062
60,000 8.13 04/09/98 60,347
200,000 8.46 06/19/98 201,876
80,000 9.38 06/15/06 82,847
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
11
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Balanced Fund (continued)
January 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
====================================================================
<S> <C> <C> <C>
Emerging Market Debt (continued)
Grupo Industrial Durango
$ 120,000 12.00% 07/15/01 $ 127,978
Grupo Televisa
20,000 11.38 05/15/03 21,425
Imexsa Export Trust
100,000 10.13 05/31/03 104,190
Inst Fomento Industrial
290,000 8.38 07/29/01 295,707
PT Indah Kiat
50,000 8.88 11/01/00 49,518
Republic of Argentina
89,600 8.63 04/06/98 90,730
150,000 5.63 04/01/00 75,600
Sampoerna International
50,000 8.38 06/15/06 51,208
YPF Sociedad Anonima
111,483 7.50 10/26/02 113,132
- --------------------------------------------------------------------
Total Emerging Market Debt
(Cost $2,710,872) $ 2,766,525
====================================================================
Government Agency Obligations--0.7%
Federal National Mortgage Association
$ 520,000 8.50% 02/01/05 $ 545,917
- --------------------------------------------------------------------
Total Government Agency Obligations
(Cost $566,963) $ 545,917
====================================================================
Mortgage Backed Obligations--12.9%
Federal Home Loan Mortgage Corp.
$ 2,000,000 7.50% TBA-30yr/(b)/ $ 2,003,740
Federal National Mortgage Association
2,000,000 8.00 TBA-30yr/(b)/ 2,042,500
1,000,000 6.50 TBA-15yr/(b)(d)/ 990,930
95,702 8.50 09/01/06/(d)/ 100,068
119,291 8.50 03/01/07/(d)/ 124,733
677,419 8.50 03/01/10/(d)/ 707,985
1,000,000 3.50 05/25/19 869,370
====================================================================
Government National Mortgage Association
$ 1,000,000 7.50% TBA-30yr/(b)/ $ 1,002,180
963,086 7.50 05/15/23 969,404
1,005,709 7.00 07/15/23 990,311
1,000,000 7.00 08/15/23 984,690
- --------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $10,687,107) $10,785,911
====================================================================
Sovereign Credit--0.2%
State of Israel
$ 150,000 6.38% 12/15/05 $ 141,983
- --------------------------------------------------------------------
Total Sovereign Credit
(Cost $139,082) $ 141,983
====================================================================
U.S. Treasury Obligations--8.5%
United States Treasury Bonds
$ 470,000 12.00% 08/15/13/(d)/ $ 666,592
120,000 8.75 05/15/17/(d)/ 144,619
30,000 8.88 08/15/17 36,595
580,000 8.75 05/15/20 704,068
160,000 8.75 08/15/20/(d)/ 194,400
680,000 7.63 02/15/25 743,430
United States Treasury Notes
1,200,000 6.88 08/31/99 1,223,628
1,000,000 6.13 07/31/00 999,220
900,000 7.88 11/15/04 977,202
United States Treasury Principal Only Stripped Securities/(a)/
80,000 6.03/(a)/ 08/15/99 68,774
740,000 6.55/(a)/ 11/15/04/(d)/ 447,552
320,000 6.59/(a)/ 05/15/05 186,781
2,200,000 7.09/(a)/ 02/15/19 473,968
890,000 7.10/(a)/ 05/15/20 175,205
- --------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $7,102,563) $ 7,042,034
====================================================================
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
12
<PAGE>
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
====================================================================
<S> <C> <C> <C>
Yankee Bonds--0.1%
Korea Electric Power
$ 93,927 7.40% 04/01/16 $ 93,712
- --------------------------------------------------------------------
Total Yankee Bonds
(Cost $90,825) $ 93,712
====================================================================
Total Fixed Income
(Cost $34,557,869) $34,597,795
- --------------------------------------------------------------------
Short-Term Obligations--0.2%
Argentina Treasury Bill
$ 40,000 6.00%/(a)/ 02/14/97 $ 39,896
Banco Nacional de Com
50,000 10.63 06/23/97 51,291
Republic of Argentina
90,000 6.29(a) 05/16/97 88,166
- --------------------------------------------------------------------
Total Short-Term Obligations
(Cost $179,353) $ 179,353
====================================================================
Repurchase Agreement--11.0%
Joint Repurchase Agreement Account
$ 9,200,000 5.63% 02/03/97/(d)/ $ 9,200,000
- --------------------------------------------------------------------
Total Repurchase Agreement
(Cost $9,200,000) $ 9,200,000
====================================================================
Total Investments
(Cost $80,718,346)/(c)/ $89,222,318
====================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 9,461,225
Gross unrealized loss for investments in which
cost exceeds value (981,857)
- --------------------------------------------------------------------
Net unrealized gain $ 8,479,368
====================================================================
<CAPTION>
- --------------------------------------------------------------------
====================================================================
Futures contracts open at January 31, 1997 are as follows:
Number of
Contracts Settlement Unrealized
Type Long(e) Month Gain(Loss)
- ------------------------- ------------ --------------- -----------
<S> <C> <C> <C>
2-Year U.S. Treasury Note 5 March 1997 $(3,438)
10-Year U.S. Treasury Bond 15 March 1997 (25,500)
30-Year U.S. Treasury Bond 2 March 1997 (3,969)
S&P 500 Stock Index 4 March 1997 123,100
- -------------------------------------------------------------------
$90,193
- -------------------------------------------------------------------
</TABLE>
* Non-income producing security.
/(a)/ The interest rate disclosed for these securitites represents effective
yields to maturity.
/(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 aggregate cost for federal income tax purposes is $80,742,950.
/(d)/ Portions of these securities are being segregated as collateral for
futures contracts, TBA (To Be Assigned) securities, covered short sales
and/or mortgage dollar rolls.
/(e)/ Each 2-Year U.S. Treasury Note contract represents $200,000 in notional
par value. Each 10-Year and 30-Year U.S. Treasury Bond contract represents
$100,000 in notional par value. Each S&P 500 Stock Index represents
$50,000 in notional par value. The total net notional amount and market
value at risk are $2,900,000 and $4,463,969, 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 percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Select Equity Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Select Equity Fund is designed to provide investors with
a broadly diversified portfolio that can be used as a core holding on which to
build an investment program. The fund's investment objective is to provide
investors with long-term growth of capital and dividend income through
investment in a broadly diversified portfolio of predominantly large-cap and
blue-chip equity securities representing all major sectors of the U.S. economy.
The fund's mandate is to remain fully invested with industry diversification,
capitalization and risk characteristics similar to the aggregate U.S. stock
market as represented by the S&P 500 stock index. Therefore, the fund's relative
performance compared with the market comes almost exclusively from stock
selection within sectors. We believe the fund offers investors an attractive
combination of value and growth, without assuming more risk than the broad
market.
The fund employs a disciplined approach that combines fundamental
investment research provided by the Goldman Sachs Global Investment Research
Department with quantitative analysis generated by the Asset Management
Division's proprietary model. Our quantitative system evaluates each stock using
many different criteria including valuation measures, growth expectations,
earnings momentum and risk. It also objectively analyzes the impact of current
economic conditions on different types of stocks. Those stocks ranked highly by
both our quantitative model and by Goldman Sachs research are selected for the
fund's portfolio.
Performance Review: Quantitative Model Contributed to the Fund's Performance
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fund Total
Return S&P 500
(based on net Total
asset value) Return
----------- ------
<S> <C> <C>
Class A (1/31/96 -1/31/97)* 23.75% 26.25%
Class B (5/1/96 -1/31/97)* 18.59% 22.18%
Institutional (1/31/96 -1/31/97)* 24.63% 26.25%
Service (6/7/96 - 1/31/97)* 15.92% 18.36%
</TABLE>
- --------------------------------------------------------------------------------
* Class A, B, Institutional and Service share performance assumes reinvestment
of all dividends and distributions, a complete redemption at the net asset value
at the end of the period and no initial sales charge or contingent deferred
sales charge. Performance for Class B and Service shares is a cumulative total
return (not annualized) from their inception through the end of the period.
During the period, the fund achieved strong absolute returns, with most of
its gains occurring in the second half of the year. When the period began, the
fund performed well primarily due to successful stock selection. The Research
Department's qualitative ratings were particularly helpful early in the period,
when its analysis helped the fund steer clear of underperforming stocks. During
the latter half of the year, most of the fund's positive performance came from
the Asset Management Division's quantitative model.
Of the three themes considered by our quantitative model -- value, growth
and low-risk -- stocks with value-oriented features, such as low price/earnings
ratios, received the highest weighting during most of the period. This emphasis
did not work in the fund's favor during the second and third quarters of 1996,
when stocks with growth characteristics (strong near-term growth expectations
and high price/earnings multiples) outperformed value-oriented stocks. In the
fourth quarter, however, our emphasis on value proved to be extremely
successful, as stocks with value characteristics soared to record highs and
outperformed the other themes by a substantial margin. As a result of this
dramatic rebound, value emerged as the dominant investment style for the year.
Despite the positive results from our quantitative model, the fund
underperformed the index because it was
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
unable to keep pace with the dramatic outperformance of the largest 50 stocks,
which accounted for a significant portion of the market's gains. In addition,
the fund held a slightly higher cash position than usual as the volume of new
assets invested in the fund rapidly increased, particularly during the fourth
quarter, when the top 50 stocks surged. To address this issue, at the end of
1996 the fund instituted new procedures to ensure that cash balances will be
invested more rapidly. Furthermore, we expect that any future market advance
will broaden to include stocks beyond the top 50.
The fund's best performers were large-capitalization stocks from a wide
range of sectors, including banks (BankAmerica Corp. and NationsBank Corp.),
technology companies (Intel Corp., Microsoft Corp. and IBM Corp.), consumer
staples (Procter & Gamble Co.), electrical equipment (General Electric Co.) and
tobacco (Philip Morris Companies, Inc.).
Stocks that fell short of our expectations included some of the fund's
utility, telecommunication and oil investments such as Unicom Corp., Airtouch
Communications, Inc. and Tenneco, Inc.
Portfolio Composition: Model Increasingly Favored Stocks With Defensive
Characteristics
As of January 31, 1997, the fund held 141 stocks. While its sector
exposures were generally in line with the S&P 500 index, the fund was
overweighted in electric/gas (5.8% for the fund versus 3.3% for the S&P 500) and
energy (10.1% versus 8.0%) and underweighted in consumer nondurables (10.2%
versus 12.9%) and telecommunications (3.9% versus 6.3%). These over- and
underweightings, as shown in Table II, were the result of the fund's stock
selection process and were not a reflection of our economic forecast for
specific sectors.
During the first quarter of 1996, the Fund's quantitative model favored
growth characteristics (such as earnings momentum and price momentum) and put a
smaller, but still positive, weight on stocks with value or low-risk
characteristics (e.g., low beta and low "disappointment" risk). As the year
progressed, the fund's strategy became somewhat more defensive as our
quantitative model increased its weighting in value and low-risk themes. This
shift was triggered by a number of indicators that pointed toward emerging
excesses in the equity market: Low cash cushions held by equity mutual funds,
the increasing volatility of equity prices, the record-low dividend yields and
the divergence in returns between stocks and bonds.
As a result of our more defensive posture, over the past year we gradually
increased the fund's weighting in energy-related companies such as Texaco Inc.
and Atlantic Richfield Co., both newcomers to the fund's 10 largest holdings. We
also decreased the fund's exposure to consumer noncyclicals, which includes
food/agriculture companies (e.g., IBP, Inc. and Kellogg Co.).
As of the end of the period, the fund's major valuation characteristics
were more attractive than the benchmark. These included a lower price/earnings
ratio based on 1997 estimated earnings (15.9x versus 17.3x for the S&P 500) as
well as a lower price/book ratio (3.0x versus 3.4x). The fund achieved these
favorable valuation levels while maintaining growth and risk characteristics in
line with those of the S&P 500.
Table I: Top 10 Portfolio Holdings as of 1/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percentage of
Total Net
Company Line of Business Assets
<S> <C> <C>
General Electric Co. Electronics 2.9%
Intel Corp. Semiconductors 2.8%
and Electronics
Exxon Corp. Petroleum and 2.2%
Natural Gas
Microsoft Corp. Computer Software 2.1%
Texaco Inc. Petroleum and 2.0%
Natural Gas
Merck & Co., Inc. Pharmaceuticals 1.9%
Atlantic Richfield Co. Petroleum and 1.7%
Natural Gas
Bristol-Myers Squibb Co. Pharmaceuticals 1.7%
Philip Morris Companies, Tobacco and Food 1.7%
Inc. Products
Travelers Group, Inc. Financial Services 1.6%
</TABLE>
- --------------------------------------------------------------------------------
15
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Select Equity Fund (continued)
- --------------------------------------------------------------------------------
Table II: Sector Breakout as of 1/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percentage of
Percentage S&P 500
Industry Sectors of Portfolio Index Difference
<S> <C> <C> <C>
Finance 17.8% 16.2% 1.6%
Consumer Nondurables 10.2% 12.9% -2.7%
Energy 10.1% 8.0% 2.1%
Health 9.6% 10.4% -0.8%
Technology 9.3% 10.9% -1.6%
Basic Industry 7.9% 7.1% 0.8%
Capital Spending 6.5% 5.6% 0.9%
Electric/Gas 5.8% 3.3% 2.5%
Miscellaneous 4.4% 5.0% -0.6%
Retail 4.3% 3.6% 0.7%
Telecommunications 3.9% 6.3% -2.4%
Consumer Services 3.8% 4.8% -1.0%
Consumer Durables 2.6% 2.5% 0.1%
Aerospace 1.8% 2.0% -0.2%
Transportation 1.1% 1.4% -0.3%
Cash 1.0% 0.0% 1.0%
</TABLE>
- --------------------------------------------------------------------------------
Outlook
Goldman Sachs expects the U.S. equity market to continue to advance in
1997, although returns will likely be more modest than the unusually strong
results of 1995 and 1996. In addition, we expect equity gains to broaden beyond
the top 50 stocks. In 1997, we will continue to maintain a balanced approach by
considering risk, value and growth simultaneously.
However, the relative importance of avoiding riskier stocks has increased in the
current market environment, which is likely to result in greater emphasis on
defensive stocks with below-average price volatility, attractive valuations and
lower possibility of near-term earnings disappointments.
/s/ Robert C. Jones
Robert C. Jones
Senior Portfolio Manager,
Quantitative Equity
/s/ Kent A. Clark
Kent A. Clark
Portfolio Manager,
Quantitative Equity
/s/ Victor H. Pinter
Victor H. Pinter
Portfolio Manager,
Quantitative Equity
March 3, 1997
- --------------------------------------------------------------------------------
16
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Select Equity Fund
January 31, 1997
- --------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's benchmark
(the Standard and Poor's 500 Index ("S&P 500")) is shown for the appropriate
time periods. All performance data shown represents past performance and should
not be considered indicative of future performance which will fluctuate with
changes in market conditions. These performance fluctuations will cause an
investor's shares, when redeemed, to be worth more or less than their original
cost.
<TABLE>
<CAPTION>
Class A
[LINE GRAPH APPEARS HERE]
GS Select Eq GS Select Eq
Class A Class A
(w/sales charge) (no/sales charge) S&P 500
---------------- ---------------- -------
<S> <C> <C> <C>
5/24/91 9,450 10,000 10,000
1/31/92 10,112 10,701 11,092
1/31/93 10,548 11,162 12,266
1/31/94 12,144 12,851 13,846
1/31/95 12,009 12,708 13,919
1/31/96 16,654 17,617 19,306
1/31/97 20,613 21,813 24,390
<CAPTION>
Class B
[LINE GRAPH APPEARS HERE]
GS Select Eq GS Select Eq
Class B Class B
(no redemption charge) (w/redemption charge) S&P 500
---------------------- --------------------- -------
<S> <C> <C> <C>
5/1/96 10,000 10,000 10,000
1/31/97 11,859 11,359 12,218
<CAPTION>
Institutional
[LINE GRAPH APPEARS HERE]
GS Select Eq
Institutional Class S&P 500
------------------- -------
<S> <C> <C>
6/15/95 10,000 10,000
1/31/96 12,014 12,029
1/31/97 14,983 15,197
<CAPTION>
Service
[LINE GRAPH APPEARS HERE]
GS Select Eq
Serv. Class S&P 500
------------ -------
<S> <C> <C>
6/7/96 10,000 10,000
1/31/97 11,592 11,836
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------
Average Annual Total Return
------------------------------------------------
One Year Since Inception/(a)/
- --------------------------------------------------------------------------------
<S> <C> <C>
Class A, no sales charge 23.75% 14.67%
- --------------------------------------------------------------------------------
Class A, w/sales charge 16.98% 13.54%
- --------------------------------------------------------------------------------
Class B, no redemption charge N/A 18.59% /(b)/
- --------------------------------------------------------------------------------
Class B, w/redemption charge N/A 13.59% /(b)/
- --------------------------------------------------------------------------------
Institutional Class 24.63% 28.04%
- --------------------------------------------------------------------------------
Service Class N/A 15.92% /(b)/
- --------------------------------------------------------------------------------
</TABLE>
/(a)/ Class A, Class B, Institutional and Service shares commenced operations on
May 24, 1991, May 1, 1996, June 15, 1995 and June 7, 1996, respectively.
/(b)/ An aggregate total return (not annualized) is shown instead of an average
annual total return since these classes have not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
17
<PAGE>
Statement of Investments
Goldman Sachs Select Equity Fund
- --------------------------------------------------------------------
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
- --------------------------------------------------------------------
<S> <C> <C>
Common Stocks--97.3%
Aerospace--0.8%
43,600 United Technologies Corp. $ 3,041,100
- --------------------------------------------------------------------
Agency/Government--0.9%
93,800 Federal National Mortgage Assn. 3,705,100
- --------------------------------------------------------------------
Agriculture/Heavy Equipment--2.5%
25,100 Case Corp. 1,330,300
55,500 Caterpillar, Inc. 4,308,188
44,100 Conagra, Inc. 2,227,050
48,900 Tenneco, Inc. 1,956,000
- --------------------------------------------------------------------
9,821,538
- --------------------------------------------------------------------
Airlines--1.2%
19,700 AMR Corp.* 1,585,850
38,500 Delta Air Lines, Inc. 3,041,500
- --------------------------------------------------------------------
4,627,350
- --------------------------------------------------------------------
Alcohol--0.2%
21,600 Anheuser Busch Companies, Inc. 918,000
- --------------------------------------------------------------------
Appliance Manufacturer--1.0%
38,300 Emerson Electric Co. 3,782,125
- --------------------------------------------------------------------
Auto/Original Equipment Manufacturer--0.3%
23,100 Cummins Engine, Inc. 1,215,638
- --------------------------------------------------------------------
Auto/Vehicle--1.5%
25,200 Chrysler Corp. 878,850
32,200 Ford Motor Co. 1,034,425
70,700 General Motors Corp. 4,171,300
- --------------------------------------------------------------------
6,084,575
- --------------------------------------------------------------------
Bank Holding Companies--0.4%
26,000 Comerica, Inc. 1,485,250
- --------------------------------------------------------------------
Banks--6.0%
33,550 Banc One Corp. 1,522,331
48,000 Bank of New York, Inc. 1,758,000
46,400 BankAmerica Corp. 5,179,400
12,900 Chase Manhattan Corp. 1,193,250
25,800 Citicorp 3,002,475
28,500 First Bank System, Inc. 2,166,000
34,400 First Chicago Corp. 1,965,100
6,400 First Union Corp. 535,200
48,400 NationsBank Corp. 5,227,200
4,500 Wells Fargo & Company $ 1,371,375
- --------------------------------------------------------------------
23,920,331
- --------------------------------------------------------------------
Beverages--1.6%
41,900 Coca Cola Co. 2,424,963
115,300 Pepsico, Inc. 4,021,088
- --------------------------------------------------------------------
6,446,051
- --------------------------------------------------------------------
Business Services--0.2%
19,100 Automatic Data Processing, Inc. 790,263
- --------------------------------------------------------------------
Chemicals-Commodity--2.1%
46,000 Dow Chemicals Co. 3,547,750
20,600 Du Pont EI de Nemours 2,258,275
68,900 Monsanto Co. 2,609,588
- --------------------------------------------------------------------
8,415,613
- --------------------------------------------------------------------
Chemicals-Specialty--1.0%
37,800 Allied Signal, Inc. 2,655,450
27,700 Morton International, Inc. 1,125,313
- --------------------------------------------------------------------
3,780,763
- --------------------------------------------------------------------
Commercial Services--0.3%
32,500 Interim Services, Inc.* 1,178,125
- --------------------------------------------------------------------
Communications Services Companies--1.5%
75,500 Airtouch Communications, Inc.* 1,953,563
96,100 Sprint Corp. 3,916,075
- --------------------------------------------------------------------
5,869,638
- --------------------------------------------------------------------
Communications Technology--0.8%
37,403 Lucent Technologies, Inc. 2,029,113
15,200 Motorola Inc. 1,037,400
- --------------------------------------------------------------------
3,066,513
- --------------------------------------------------------------------
Computers--0.9%
65,200 Hewlett Packard Co. 3,431,150
- --------------------------------------------------------------------
Computers & Peripherals--3.7%
45,400 Cisco Systems, Inc.* 3,166,650
35,000 Compaq Computer Corp.* 3,040,625
20,300 Eastman Kodak Co. 1,761,025
33,400 International Business Machines 5,252,150
51,100 Sun Microsystems, Inc.* 1,622,425
- --------------------------------------------------------------------
14,842,875
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
- --------------------------------------------------------------------
<S> <C> <C>
Common Stocks (continued)
Construction/Environmental Services--0.2%
13,300 Armstrong World Industries, Inc. $ 944,300
- --------------------------------------------------------------------
Consumer Staples--3.4%
51,700 American Home Products Corp. 3,276,488
13,300 Clorox Co. 1,577,713
60,200 Gillette Co. 4,906,300
33,400 Procter & Gamble Co. 3,857,700
- --------------------------------------------------------------------
13,618,201
- --------------------------------------------------------------------
Defense--1.4%
5,400 Boeing Co. 578,475
17,700 McDonnell Douglas Corp. 1,190,325
18,500 Textron, Inc. 1,801,438
36,800 TRW, Inc. 1,867,600
- --------------------------------------------------------------------
5,437,838
- --------------------------------------------------------------------
Department Stores--3.2%
147,400 Dayton Hudson Corp. 5,545,925
38,000 Federated Dept. Stores, Inc.* 1,249,250
18,900 Mercantile Stores Co. 926,100
65,700 Sears Roebuck & Co. 3,153,600
72,100 Walmart Stores, Inc. 1,712,375
- --------------------------------------------------------------------
12,587,250
- --------------------------------------------------------------------
Electric Utilities--4.7%
76,300 Duke Power Co. 3,576,563
128,700 Edison International, Inc. 2,750,963
31,500 Empresa Nacional de Electric ADR 2,071,125
139,600 Niagara Mohawk Power* 1,413,450
57,700 Public Service Company of New Mexico 1,154,000
92,800 Texas Utilities Co. 3,758,400
156,300 Unicom Corp. 3,692,588
- --------------------------------------------------------------------
18,417,089
- --------------------------------------------------------------------
Electrical Equipment Manufacturer--2.9%
112,200 General Electric Co. 11,556,600
- --------------------------------------------------------------------
Financial Services--0.7%
53,300 Providian Corp. 2,871,538
- --------------------------------------------------------------------
Food Producers--0.5%
10,600 CPC International, Inc. 814,875
16,400 Ralston Purina Co. 1,289,450
- --------------------------------------------------------------------
2,104,325
- --------------------------------------------------------------------
Forest Products--2.6%
78,600 Avery Dennison Corp. 2,878,725
32,000 Champion International Corp. 1,340,000
32,600 Georgia Pacific Corp. 2,400,175
26,000 International Paper Co. 1,062,750
19,700 Mead Corp. 1,108,125
30,700 Weyerhaeuser Co. 1,396,850
- --------------------------------------------------------------------
10,186,625
- --------------------------------------------------------------------
Funeral Services--0.2%
29,600 Service Corp. International 858,400
- --------------------------------------------------------------------
Gas Distribution & Pipeline--1.2%
55,600 Columbia Gas Systems, Inc. 3,620,950
22,900 Panenergy Corp. 1,056,263
- --------------------------------------------------------------------
4,677,213
- --------------------------------------------------------------------
Health Suppliers/Services--1.3%
73,200 Johnson & Johnson 4,218,150
15,800 Medtronic Inc. 1,082,300
- --------------------------------------------------------------------
5,300,450
- --------------------------------------------------------------------
Healthcare Management--0.8%
55,800 Columbia HCA Healthcare 2,204,100
38,300 Manor Care, Inc. 976,650
- --------------------------------------------------------------------
3,180,750
- --------------------------------------------------------------------
Information Management--0.7%
114,100 Dun & Bradstreet Corp. 2,738,400
- --------------------------------------------------------------------
Insurance Brokers & Other Insurance--0.3%
24,600 Exel Insurance Ltd. 1,042,425
- --------------------------------------------------------------------
Insurance-Life--2.6%
29,100 American General Corp. 1,160,363
18,700 Cigna Corp. 2,835,388
122,933 Travelers Group, Inc. 6,438,616
- --------------------------------------------------------------------
10,434,367
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Select Equity Fund (continued)
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Insurance-Property and Casualty--2.2%
25,956 Allstate Corp. $ 1,706,607
36,850 American International Group, Inc. 4,463,456
68,500 Safeco Corp. 2,603,000
- --------------------------------------------------------------------
8,773,063
- --------------------------------------------------------------------
Integrated Oil--11.1%
22,100 Amoco Corp. 1,922,700
51,800 Atlantic Richfield Co. 6,850,550
84,300 Exxon Corp. 8,735,574
46,800 Kerr McGee Corp. 3,217,500
17,200 Mobil Corp. 2,257,500
52,000 Norsk Hydro ADR 2,925,000
32,000 Phillips Petroleum Co. 1,412,000
26,600 Royal Dutch Petroleum ADR 4,615,100
75,700 Texaco, Inc. 8,014,738
97,300 Unocal Corp. 4,098,763
- --------------------------------------------------------------------
44,049,425
- --------------------------------------------------------------------
Investment Brokers & Managers--2.7%
52,500 Merrill Lynch Co. 4,423,125
38,300 Morgan Stanley Group, Inc. 2,187,888
76,900 Salomon, Inc. 4,248,725
- --------------------------------------------------------------------
10,859,738
- --------------------------------------------------------------------
Local Phone Companies--2.3%
53,600 Ameritech Corp. 3,202,600
67,100 GTE Corp. 3,153,700
104,900 Worldcom, Inc.* 2,635,613
- --------------------------------------------------------------------
8,991,913
- --------------------------------------------------------------------
Machinery and Equipment--0.6%
20,100 Dover Corp. 994,950
29,300 Ingersoll-Rand Co. 1,336,813
- --------------------------------------------------------------------
2,331,763
- --------------------------------------------------------------------
Media/Entertainment--1.4%
41,400 King World Productions, Inc.* 1,619,775
54,942 Walt Disney Co. 4,024,502
- --------------------------------------------------------------------
5,644,277
- --------------------------------------------------------------------
Nonferrous Metals--1.3%
15,900 Phelps Dodge Corp. 1,111,013
72,800 Tyco International Ltd. 4,158,700
- --------------------------------------------------------------------
5,269,713
- --------------------------------------------------------------------
Office & Business Equipment--0.5%
36,400 Xerox Corp. 2,133,950
- --------------------------------------------------------------------
Oil & Gas Exploration--0.4%
31,100 Burlington Resources, Inc. 1,547,225
- --------------------------------------------------------------------
Pharmaceuticals--6.7%
51,100 Abbott Labs 2,778,563
53,100 Bristol Myers Squibb 6,743,700
18,600 Eli Lilly & Co. 1,620,525
82,100 Merck & Co. 7,450,575
23,600 Pfizer, Inc. 2,191,850
31,700 Pharmacia & Upjohn, Inc. 1,180,825
47,600 Schering Plough Corp. 3,599,750
13,800 Warner Lambert Co. 1,110,900
- --------------------------------------------------------------------
26,676,688
- --------------------------------------------------------------------
Recreational Products--0.2%
29,407 Mattel, Inc. 827,072
- --------------------------------------------------------------------
Restaurants & Hotels--1.0%
14,000 HFS, Inc.* 980,000
23,000 ITT Corp.* 1,313,875
40,200 McDonalds Corp. 1,829,100
- --------------------------------------------------------------------
4,122,975
- --------------------------------------------------------------------
Retail--0.7%
34,100 Home Depot, Inc. 1,687,950
29,900 TJX Companies, Inc. 1,188,525
- --------------------------------------------------------------------
2,876,475
- --------------------------------------------------------------------
Retail-Specialty--1.2%
48,200 Gap, Inc. 1,385,750
49,600 Nike, Inc. 3,366,600
- --------------------------------------------------------------------
4,752,350
- --------------------------------------------------------------------
Semiconductors & Electronics--2.8%
67,800 Intel Corp. 11,000,550
- --------------------------------------------------------------------
Software--2.7%
33,350 Computer Associates International,
Inc. 1,513,256
79,900 Microsoft Corp.* 8,149,800
24,600 Oracle Corp.* 956,325
- --------------------------------------------------------------------
10,619,381
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Supermarkets--0.9%
63,300 Great A&P Tea Co., Inc. $ 1,978,125
31,200 Safeway, Inc.* 1,489,800
- --------------------------------------------------------------------
3,467,925
- --------------------------------------------------------------------
Technical Services--0.4%
22,800 3Com Corp.* 1,530,450
- --------------------------------------------------------------------
Technology Capital Goods--0.7%
18,800 Applied Materials, Inc.* 928,250
22,000 Harris Corp. 1,674,750
- --------------------------------------------------------------------
2,603,000
- --------------------------------------------------------------------
Telecommunications--0.2%
17,000 Tellabs, Inc.* 700,188
- --------------------------------------------------------------------
Textiles--1.1%
22,500 Liz Claiborne, Inc. 947,813
33,200 Sara Lee Corp. 1,311,400
30,800 VF Corp. 2,048,200
- --------------------------------------------------------------------
4,307,413
- --------------------------------------------------------------------
Tire & Other Related Rubber Products--0.8%
36,800 BF Goodrich Co. 1,508,800
29,800 Goodyear Tire & Rubber Co. 1,624,100
- --------------------------------------------------------------------
3,132,900
- --------------------------------------------------------------------
Tobacco--1.7%
55,600 Philip Morris Companies, Inc. 6,609,450
- --------------------------------------------------------------------
Total Common Stocks
(Cost $294,916,122) $ 385,205,653
====================================================================
Rights--0.9%
Insurance--0.2%
9,400 MBIA, Inc.,* exp. 12/12/01 $ 903,575
- --------------------------------------------------------------------
Insurance-Life--0.4%
36,400 Protective Life Corp.*, exp. 07/13/97 1,442,350
- --------------------------------------------------------------------
Specialty Finance--0.3%
19,100 Beneficial Corp.,* exp. 11/23/97 1,284,475
- --------------------------------------------------------------------
Total Rights
(Cost $2,826,759) $ 3,630,400
- --------------------------------------------------------------------
<CAPTION>
Principal
Amount Description Value
====================================================================
<S> <C> <C>
U.S. Treasury Obligations--0.2%
$ 841,000 U.S. Treasury Bill
5.08%, 05/29/97/(b)/ $ 827,118
- --------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $827,118) $ 827,118
- --------------------------------------------------------------------
Repurchase Agreement--0.9%
$ 3,600,000 Joint Repurchase Agreement Account
5.63%, 02/03/97 $ 3,600,000
- --------------------------------------------------------------------
Total Repurchase Agreements
(Cost $3,600,000) $ 3,600,000
- --------------------------------------------------------------------
Total Investments
(Cost $302,169,999)/(a)/ $ 393,263,171
====================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 94,373,749
Gross unrealized loss for investments in
which cost exceeds value (3,489,045)
- --------------------------------------------------------------------
Net unrealized gain $ 90,884,704
====================================================================
</TABLE>
<TABLE>
<CAPTION>
Futures Contracts open at January 31, 1997 are as follows:
Number of
Contracts Settlement Unrealized
Type Long/(c)/ Month Gain
- ------------------------- ------------- ------------ ----------------
<S> <C> <C> <C>
S&P 500 Stock Index 7 March 1997 $91,800
</TABLE>
* Non-income producing security.
/(a)/The aggregate cost for federal income tax purposes is $302,378,467.
/(b)/Portion of this security is being segregated as collateral for futures
contracts.
/(c)/Each S&P 500 Stock Index represents $50,000 in notional par value. The
total net notional amount and net market value at risk are $350,000 and
$2,756,250, 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 percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Growth and Income Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Growth and Income Fund seeks long-term growth of
capital and growth of income primarily through investments in a diversified
portfolio of common stocks and other equity securities. The fund is managed with
a value style, which means we focus on companies whose stocks we believe are
inexpensive relative to their expected long-term earnings growth and their
ability to pay dividends. Investments may include well-known companies that are
temporarily out of favor due to cyclical economic conditions or are experiencing
near-term difficulties the portfolio managers judge to be temporary in nature.
In-depth fundamental research of a company's financial structure, its
competitive position in the market and its management's commitment to increasing
shareholder value are all critical parts of the fund's investment approach.
Though we are not sector investors, we closely monitor the fund's sector and
industry exposures compared with the benchmark in an effort to avoid
unintentional over- or underweightings.
Performance Review: The Fund Outperformed the Index...
<TABLE>
<CAPTION>
- ------------------------------------- ----------------- -----------
Fund Total
Return S&P 500
(based on net Total
asset value) Return
----------- ------
<S> <C> <C>
Class A (1/31/96 - 1/31/97)* 28.42% 26.25%
Class B (5/1/96 - 1/31/97)* 22.23% 22.18%
Institutional (6/3/96 - 1/31/97)* 20.77% 19.11%
Service (3/6/96 - 1/31/97)* 23.87% 22.20%
- ------------------------------------- ----------------- -----------
</TABLE>
* Class A, B, Institutional and Service share performance assumes reinvestment
of all dividends and distributions, a complete redemption at the net asset value
at the end of the period and no initial sales charge or contingent deferred
sales charge. Performance for Class B, Institutional and Service shares is a
cumulative total return (not annualized) from their inceptions through the end
of the period.
The U.S. stock market continued to soar during the period under
review, adding to the impressive performance recorded during the prior year.
Most of the market's gains occurred during the latter half of the period, when
equities rebounded strongly following a sharp correction in July.
We are pleased to report that all of the fund's share classes
outperformed the S&P 500 stock index during the past fiscal year. Most notably,
its Class A shares returned 28.42% (at net asset value) versus 26.25% for the
index. During the period, the fund increased its regular quarterly dividend.
....And Fared Very Well Relative to Its Peers
We are proud to announce that for the three-year period ended January
31, 1997, the fund's Class A shares were rated "five stars" (out of 1,858
domestic equity funds) by Morningstar, Inc., an independent mutual fund rating
agency. The "five star" designation is Morningstar's highest rating for
historical risk-adjusted performance, and is given to mutual funds that
Morningstar determines to be in the top 10% of their category.1
In addition, the fund's Class A shares ranked within the top 10% of
the Lipper growth and income category (53rd of 533) for the 12-month period
ended January 31, 1997, according to Lipper Analytical Services, Inc. (Please
note that Lipper rankings do not take sales charges into account and that past
performance is not a guarantee of future results. Class B, Institutional and
Service shares
- -------------------------
1 Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 1/31/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five- and ten-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. For the one-year period, the Class A shares
received four stars and was rated among 2,990 domestic equity funds. The
Morningstar rating applies only to the fund's Class A shares; the fund's Class
B, Institutional and Service shares have not been rated. Class B, Institutional
and Service shares are subject to additional fees and expenses that may have the
effect of lowering performance and may affect any future Morningstar rating.
Morningstar rates funds against peers in the same category. In all, there are
five Morningstar categories (domestic equity, international equity, fixed
income, municipal and hybrid). Morningstar ratings range from five stars
(highest) to one star (lowest). Funds with five-star ratings are in the top 10%
of their category, four-star ratings in the next 22.5%, three stars the next
35%, two stars the next 22.5% and one star the lowest 10% of their categories.
22
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
were not ranked because they did not exist during the full year.)
Financial, Technology and Energy Stocks Were Among the Fund's Best Performers
The fund's outperformance came from successful stock selection in a
wide range of industries, led by finance, its largest sector weighting at 18.0%.
Technology and energy investments also did well. In addition, the fund benefited
significantly from our decision to limit its exposure in the media and
communication sector. Our concerns regarding increased competition between the
local exchange and long-distance companies and high valuations in the sector
proved to be on target.
In the financial sector, top performers were BankAmerica Corp. and
NationsBank Corp., the country's third and fourth largest banks, respectively.
BankAmerica Corp. increased its focus on aggressive capital management, which
resulted in its exiting unprofitable businesses and buying back some of its
stock. NationsBank Corp. acquired Bank South Corp. and Boatmen's Bancshares,
Inc., and investors began to realize the benefits of its cost structure due to
its acquisitions over the past few years.
Technology holdings that performed well included Intel Corp., the
dominant microprocessor manufacturer, which was purchased when the sector was
depressed due to concerns that the personal computer upgrade cycle had slowed.
Intel quickly rebounded when investors recognized the advantages of its dominant
market position, and we subsequently sold the stock when it reached our target
price. We saw solid gains from Avnet, Inc., the second largest distributor of
semiconductors and other electronic components, which we viewed as an
inexpensive opportunity to participate in the growth of the technology sector.
The fund was also well served by a number of its energy-related
investments. Tosco Corp., an oil refiner and distributor, more than doubled in
price as it continued to consolidate its market position through an ambitious
acquisition strategy, and Texaco Inc. benefited from higher petroleum prices and
a restructuring program that meaningfully improved profits.
In addition, several holdings appreciated due to special situations.
Our confidence in Long Island Lighting Co., a New York-based utility, which had
been shunned by many other investors, was handsomely rewarded when the stock
soared after Brooklyn Union Gas Co. made an attractive bid for the company in
January. The fund also benefited when McDonnell Douglas Corp., one of our
long-term positions, was acquired by Boeing Co. at a very favorable price.
Sunbeam Corp., a leading consumer products company, met with an enthusiastic
investor response to the aggressive restructuring program initiated by its new
CEO.
Paper and Chemical Stocks Were Weak
Disappointing performers included three companies impacted by
overcapacity in their respective industries: Georgia-Pacific Corp. and Stone
Container Corp., both manufacturers of paper products, and Geon Corp., a
manufacturer of polyvinyl chloride. We continue to have confidence in these
companies and expect their prospects to improve over time.
Additional Investments in a Variety of Sectors
During the period, we added a number of new holdings. These included
Dean Witter, Discover & Co., which we viewed as undervalued based on the
potential of its broker-dealer/asset management business and its large Discover
credit card business. In February 1997, Dean Witter, Discover & Co. announced
its intention to merge with investment bank Morgan Stanley. We also invested in
Unicom Corp., an electric utility that operates 12 nuclear units at six sites.
Unicom generates excess capital and, unlike many other electric utilities, has
no utility power purchase problems. We established a position after its stock
price declined due to a mandated increase in spending on operations and
maintenance, an issue that management believes will not impair the company's
long-
23
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Growth and Income Fund (continued)
- --------------------------------------------------------------------------------
term prospects. Also notable was our decision to increase the fund's
position in Tenet Healthcare Corp., a long-term holding, based on its prospects
for improved efficiencies resulting from the integration of its acquisition of
OrNda Healthcorp., a for-profit hospital chain.
Sales Included Several Financial and Technology Positions
We sold several stocks after they appreciated and reached our price
targets. These included Anheuser-Busch Co., Inc., the world's largest brewer,
which reported strong earnings; Greenpoint Financial Corp., which benefited from
increased investor appreciation of the value of its
"no-documentation--low-documentation" mortgage franchise; and technology
holdings Compaq Computer Corp. and Intel Corp.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Top 10 Portfolio Holdings as of January 31, 1997
Percentage
of Total Net
<S> <C> <C>
Company Line of Business Assets
Aetna Inc. Healthcare Service 3.3%
Provider
Tenet Healthcare Corp. Hospitals 3.3%
Lear Corp. Autoparts/Original 3.0%
Equipment
Cigna Corp. Insurance 2.9%
Brunswick Corp. Pleasure 2.9%
Boats/Marine
Engines
Dean Witter, Discover & Co. Financial Services 2.8%
Goodyear Tire & Rubber Co. Tire and Rubber 2.8%
Products
Philip Morris Companies, Tobacco and Food 2.7%
Inc. Products
Avnet, Inc. Electronic 2.7%
Components
Distributor
BankAmerica Corp. Commercial Bank 2.6%
- --------------------------------------------------------------------
</TABLE>
Outlook
As we enter the seventh year of a bull market for U.S. equities, we
view the market as moderately overvalued and therefore unlikely to match the
strong return it achieved in 1996. In this environment, it is particularly
noteworthy that the fund's holdings continue to be attractively valued even
after last year's rally. Our focus on undervalued stocks and extensive
fundamental research will continue to be extremely important in the more
challenging market we anticipate ahead.
/s/ Ronald E. Gutfleish /s/ G. Lee Anderson
- ------------------------ -------------------------
Ronald E. Gutfleish G. Lee Anderson
Senior Portfolio Manager, Portfolio Manager,
U.S. Active Equity Value U.S. Active Equity Value
/s/ Eileen A. Aptman
--------------------
Eileen A. Aptman
Portfolio Manager,
U.S. Active Equity Value
March 3, 1997
24
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Growth and Income Fund
January 31, 1997
- -------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's benchmark
(the Standard and Poor's 500 Index ("S&P 500")) is shown for the appropriate
time periods. All performance data shown represents past performance and should
not be considered indicative of future performance which will fluctuate with
changes in market conditions. These performance fluctuations will cause an
investor's shares, when redeemed, to be worth more or less than their original
cost.
<TABLE>
<CAPTION>
Class A
[LINE GRAPH APPEARS HERE]
GS Growth & Inc GS Growth & Inc
Class A Class A
(w/sales charge) (no sales charge) S&P 500
---------------- ----------------- -------
<S> <C> <C> <C>
2/5/93 $ 9,450 $10,000 $10,000
1/31/94 10,686 11,308 11,073
1/31/95 11,110 11,757 11,132
1/31/96 14,716 15,573 15,436
1/31/97 18,911 20,012 19,501
<CAPTION>
Class B
[LINE GRAPH APPEARS HERE]
GS Growth & Inc GS Growth & Inc
Class B Class B
(no redemp charge) (w/redemp charge) S&P 500
------------------ ----------------- -------
<S> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000
1/31/97 12,223 11,723 12,218
<CAPTION>
Institutional
[LINE GRAPH APPEARS HERE]
GS Growth & Inc
Institutional Class S&P 500
------------------- -------
<S> <C> <C>
6/3/96 $10,000 $10,000
1/31/97 12,077 11,911
<CAPTION>
Service
[LINE GRAPH APPEARS HERE]
GS Growth & Inc
Service Class S&P 500
--------------- -------
<S> <C> <C>
3/6/96 $10,000 $10,000
1/31/97 12,387 12,220
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------
Average Annual Total Return
--------------------------------------------
One Year Since Inception /(a)/
- --------------------------------------------------------------------------------
<S> <C> <C>
Class A, no sales charge 28.42% 18.98%
- --------------------------------------------------------------------------------
Class A, w/sales charge 21.39% 17.31%
- --------------------------------------------------------------------------------
Class B, no redemption charge N/A 22.23% /(b)/
- --------------------------------------------------------------------------------
Class B, w/redemption charge N/A 17.23% /(b)/
- --------------------------------------------------------------------------------
Institutional Class N/A 20.77% /(b)/
- --------------------------------------------------------------------------------
Service Class N/A 23.87% /(b)/
- --------------------------------------------------------------------------------
</TABLE>
/(a)/ Class A, Class B, Institutional and Service shares commenced operations on
February 5, 1993, May 1, 1996, June 3, 1996 and March 6, 1996,
respectively.
/(b)/ An aggregate total return (not annualized) is shown instead of an average
annual total return since these classes have not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
25
<PAGE>
Statement of Investments
- -------------------------------------------------------------------
Goldman Sachs Growth and Income Fund
January 31, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Shares Description Value
===================================================================
<S> <C> <C>
Common Stocks--93.2%
Airlines--3.2%
96,100 AMR Corp.* $ 7,736,050
463,600 Continental Airlines, Inc.* 12,980,800
- -------------------------------------------------------------------
20,716,850
- -------------------------------------------------------------------
Appliance Manufacturer--1.9%
440,900 Sunbeam Corp. 12,234,975
- -------------------------------------------------------------------
Auto/Original Equipment Manufacturer--3.0%
512,800 Lear Corp.* 19,165,900
- -------------------------------------------------------------------
Auto/Vehicle--2.0%
394,800 Ford Motor Co. 12,682,950
- -------------------------------------------------------------------
Banks--8.3%
146,600 BankAmerica Corp. 16,364,225
64,900 Chase Manhattan Corp. 6,003,250
117,800 Fleet Financial Group Inc. 6,361,200
146,900 NationsBank Corp. 15,865,200
96,500 Republic of New York Corp. 8,552,313
- -------------------------------------------------------------------
53,146,188
- -------------------------------------------------------------------
Chemicals-Commodity--2.0%
439,800 Geon Co. 8,246,250
97,400 Union Carbide Corp. 4,419,525
- -------------------------------------------------------------------
12,665,775
- -------------------------------------------------------------------
Defense--3.4%
225,100 McDonnell Douglas Corp. 15,137,975
79,800 Northrop Grumman Corp. 6,234,375
6,300 Thiokol Corp. 352,800
- -------------------------------------------------------------------
21,725,150
- -------------------------------------------------------------------
Department Stores--1.6%
207,700 Sears Roebuck & Co. 9,969,600
- -------------------------------------------------------------------
Electric Utilities--5.1%
95,100 CMS Energy Corp. 3,185,850
641,400 Long Island Lighting Co. 14,591,850
632,300 Unicom Corp. 14,938,088
- -------------------------------------------------------------------
32,715,788
- -------------------------------------------------------------------
Food--2.8%
582,200 Chiquita Brands International, Inc. 8,514,675
58,400 Unilever Inc. 9,606,800
- -------------------------------------------------------------------
18,121,475
- -------------------------------------------------------------------
Forest Products--1.9%
161,500 Georgia Pacific Corp. 11,890,438
- -------------------------------------------------------------------
Health Suppliers/Services--2.0%
280,800 Baxter International, Inc. 12,951,900
- -------------------------------------------------------------------
Healthcare Management--6.6%
266,400 Aetna Inc. 21,045,600
768,500 Tenet Healthcare Corp.* 20,749,500
- -------------------------------------------------------------------
41,795,100
- -------------------------------------------------------------------
Home Builders--3.1%
232,800 Centex Corp. 9,079,200
388,500 Lennar Corp. 10,343,813
- -------------------------------------------------------------------
19,423,013
- -------------------------------------------------------------------
Insurance-Life--4.3%
123,600 Cigna Corp. 18,740,850
166,200 Lincoln National Corp. 8,912,475
- -------------------------------------------------------------------
27,653,325
- -------------------------------------------------------------------
Insurance-Property & Casualty--1.4%
16,100 Integon Corp. 223,388
237,600 Partner Re Holding Ltd. 8,434,800
- -------------------------------------------------------------------
8,658,188
- -------------------------------------------------------------------
Integrated Oil--4.8%
121,400 Atlantic Richfield Co. 16,055,150
138,900 Texaco, Inc. 14,706,038
- -------------------------------------------------------------------
30,761,188
- -------------------------------------------------------------------
Logistics/Rails--1.8%
415,700 Canadian Pacific Ltd. 11,275,863
- -------------------------------------------------------------------
Logistics/Trucking--2.0%
512,100 Consolidated Freightways, Inc. 12,994,538
- -------------------------------------------------------------------
Oil Refining & Marketing--3.6%
187,700 Ashland Inc. 8,094,563
166,800 Tosco Corp. 14,761,800
- -------------------------------------------------------------------
22,856,363
- -------------------------------------------------------------------
Packaging--2.5%
661,600 Owens Illinois Corp.* 15,713,000
- -------------------------------------------------------------------
Recreational Products--2.9%
724,800 Brunswick Corp. 18,210,600
- -------------------------------------------------------------------
- -------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
- -------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Shares Description Value
- -------------------------------------------------------------------
<C> <S> <C>
Common Stocks (continued)
Security and Commodity Brokers, Dealers and Services--1.0%
195,900 Lehman Brothers Holdings, Inc. $ 6,195,338
- -------------------------------------------------------------------
Semiconductors & Electronics--2.7%
275,100 Avnet, Inc. 17,021,813
- -------------------------------------------------------------------
Software--1.1%
214,300 Autodesk, Inc. 6,777,238
- -------------------------------------------------------------------
Specialty Finance--2.8%
470,200 Dean Witter Discover & Co. 17,926,375
- -------------------------------------------------------------------
Steel--1.6%
251,600 AK Steel Holding Corp. 10,126,900
- -------------------------------------------------------------------
Supermarkets--3.4%
726,500 Fleming Companies, Inc. 11,714,813
316,700 Supervalu, Inc. 9,778,113
- -------------------------------------------------------------------
21,492,926
- -------------------------------------------------------------------
Textiles--2.4%
374,400 Fruit of The Loom, Inc.* 15,022,800
- -------------------------------------------------------------------
Tire & Other Related Rubber Products--2.8%
320,900 Goodyear Tire & Rubber Co. 17,489,050
- -------------------------------------------------------------------
Tobacco--5.2%
63,700 Loews Corp. 6,298,338
144,700 Philip Morris Companies, Inc. 17,201,204
187,480 RJR Nabisco, Inc. 6,139,970
115,600 Universal Corp. 3,583,600
- -------------------------------------------------------------------
33,223,112
- -------------------------------------------------------------------
Total Common Stocks
(Cost $465,569,279) $ 592,603,719
===================================================================
Preferred Stocks--0.6%
Food--0.3%
44,600 Chiquita Brands International, Inc.
Convertible, 5.75% $ 2,073,900
- -------------------------------------------------------------------
Tobacco--0.3%
287,100 RJR Nabisco, Inc., Class C 9.25% 1,902,038
- -------------------------------------------------------------------
Total Preferred Stocks
(Cost $3,843,410) $ 3,975,938
===================================================================
Rights--2.0%
Forest Products--1.2%
579,100 Stone Container Corp.,* exp.
08/08/98 $ 7,817,850
- -------------------------------------------------------------------
Technology Capital Goods--0.8%
166,300 Teradyne, Inc.,* exp. 03/26/00 5,134,513
- -------------------------------------------------------------------
Total Rights
(Cost $13,294,493) $ 12,952,363
===================================================================
Repurchase Agreements--4.2%
- -------------------------------------------------------------------
$ 26,800,000 Joint Repurchase Agreement Account
5.63%, 02/03/97 $ 26,800,000
- -------------------------------------------------------------------
Total Repurchase Agreements
(Cost $26,800,000) $ 26,800,000
===================================================================
<CAPTION>
Contracts Description Value
===================================================================
<C> <S> <C>
Options*--0.4%
1,340 S & P 500 Index Put, Strike 750
exp. 06/97 $ 2,244,500
1,439 S & P 500 Index Put, Strike 700
exp. 03/97 377,738
- -------------------------------------------------------------------
Total Options
(Cost $4,105,525) $ 2,622,238
===================================================================
Total Investments
(Cost $513,612,707)/(a)/ $ 638,954,258
===================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $136,933,045
Gross unrealized loss for investments in which
cost exceeds value (11,607,531)
- -------------------------------------------------------------------
Net unrealized gain $125,325,514
===================================================================
</TABLE>
* Non-income producing security.
/(a)/The aggregate cost for federal income tax purposes is $513,628,744. The
percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- -------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Capital Growth Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Capital Growth Fund seeks long-term growth of capital
primarily through investments in a portfolio of large-capitalization stocks. We
use extensive fundamental research to identify companies in a diversified range
of industries that we believe offer attractive growth potential at a reasonable
price.
The fund's investment management team believes that wealth is created
through the long-term ownership of growing businesses. As such, we view each
stock purchase as if we were buying the entire business. To implement this
investment strategy, we focus on growing companies with characteristics such as
strong brand franchises, dominant market share, recurring revenue, product
pricing flexibility, long product life cycles, high returns on invested capital,
high profit margins, strong free cash flow, excellent management and favorable
long-term prospects. Finally, we will buy a stock meeting our rigorous criteria
only if it trades at a reasonable discount to the company's intrinsic value.
Performance Review: Fund Achieved Strong Results
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Fund Total Return S&P 500
(based on net Total
asset value) Return
----------- ------
<S> <C> <C>
Class A (1/31/96 - 1/31/97)* 25.97% 26.25%
Class B (5/1/96 - 1/31/97)* 19.39% 22.18%
- --------------------------------------------------------------------
</TABLE>
* Class A and B share performance assumes reinvestment of all dividends and
distributions, a complete redemption at the net asset value at the end of the
period and no initial sales charge or contingent deferred sales charge.
Performance for Class B shares is a cumulative total return (not annualized)
from their inception through the end of the period.
During the 12-month period ended January 31, 1997, the fund's Class A shares
achieved a total return of approximately 26%, in line with the S&P 500 stock
index, reflecting the robust equity market, particularly during the second half
of the period. The fund's Class B shares also achieved strong absolute results;
however, a partial year of only nine months is obviously too short a time frame
to meaningfully measure long-term performance.
We are pleased to report that for the five-year period ended January
31, 1997, the fund's Class A shares were rated "four stars" (out of 1,072
domestic equity funds) by Morningstar, Inc., an independent mutual fund rating
agency./1/ In addition, the fund's Class A shares fared well versus its peers in
the Lipper growth fund category, placing in the top third (187th out of 685) for
the 12-month period and in the top quartile (56th out of 263) for the five-year
period, as of January 31, 1997, according to Lipper Analytical Services, Inc.
(Please note that Lipper rankings do not take sales charges into account and
that past performance is not a guarantee of future results. Lipper did not rank
the fund's Class B shares.)
Top Performers Included Financial, Technology and Defense Stocks
The fund's best performers during the period came from a variety of sectors,
particularly financial services (20.4% of the portfolio), technology (9.1%) and
defense/aerospace (3.2%).
.. Top performers in the financial sector included MBNA Corp. and First USA
Inc., the nation's third and fourth largest credit card issuers, respectively,
which both reported better than expected earnings and loan growth. In
- --------
/1/ Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 1/31/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five- and ten-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Class A shares received three stars
for both the three- and one-year periods. The Class A shares were rated among
1,858 and 2,990 domestic equity funds for the three- and one-year periods,
respectively. The Morningstar rating applies only to the fund's Class A shares;
the fund's Class B shares have not been rated. Class B shares are subject to
additional fees and expenses that may have the effect of lowering performance
and may affect any future Morningstar rating. Morningstar rates funds against
peers in the same category. In all, there are five Morningstar categories
(domestic equity, international equity, fixed income, municipal and hybrid).
Morningstar ratings range from five stars (highest) to one star (lowest). Funds
with five-star ratings are in the top 10% of their category, four-star ratings
in the next 22.5%, three stars the next 35%, two stars the next 22.5% and one
star the lowest 10% of their categories.
- --------------------------------------------------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
addition, these companies benefited from continuing industry consolidation,
with First USA performing particularly well after Banc One announced that it was
acquiring the company. Two of the fund's commercial bank holdings, BankAmerica
Corp. and NationsBank Corp., appreciated due to successful cost cutting, strong
earnings growth and aggressive capital management, and PartnerRe Holding Ltd., a
worldwide provider of catastrophe reinsurance, rose on strong earnings.
.. Several of our technology holdings also performed well. During the first
half of the period, we increased the fund's positions in Intel Corp., the
dominant microprocessor manufacturer, and Compaq Computer Corp., the world's
largest manufacturer of personal computers, when their prices slumped because of
concerns regarding slowing computer sales. This strategy significantly
contributed to the fund's performance when computer sales were stronger than
expected. We subsequently sold Compaq Computer when it reached our target price
but continue to hold Intel, which more than tripled in price during the period.
.. Consolidation in the defense industry helped two of the fund's long-
standing investments in that sector. McDonnell Douglas Corp. climbed over 50%
after the announcement of its proposed merger with Boeing Co., and Northrop
Grumman Corp. was buoyed by its purchase of Westinghouse Electric Corp.'s
defense electronics businesses.
Specific Paper, Airline and Insurance Stocks Lagged
Not all of the fund's holdings fulfilled our expectations. For example,
Georgia-Pacific Corp., a manufacturer of paper products, suffered from an
industry oversupply and a consequent decline in paper and pulp prices; AMR
Corp., the holding company of American Airlines, was impacted by concerns
regarding competition from discount carriers; and Integon Corp., a provider of
automobile insurance, experienced a higher than expected increase in claims and
lower earnings.
New Additions in Consumer Product Companies and Pharmaceuticals
During the period, we initiated several positions that reflect our new
emphasis on large-capitalization stocks with world-class franchises and/or
strong brand names. For example, we added Procter & Gamble Co., one of the
strongest marketers in the U.S. with a stable of brand name products, many of
which hold number one or number two positions in their respective markets. Over
the past decade, the company has achieved steady growth in revenues and
earnings, exactly the type of consistent operating history that we favor.
Another recent investment was Coca-Cola Co., a world-class company with four of
the five leading carbonated soft drinks -- Coca-Cola, Diet Coke, Sprite and
Fanta. With 80% of its business coming from abroad, we expect Coca-Cola's long-
term earnings growth to continue as it further penetrates the emerging markets
of China, India, Latin America, Southeast Asia, Eastern Europe and Russia.
Other new positions included pharmaceutical companies Bristol-Myers
Squibb Co., Johnson & Johnson Co. and Pfizer, Inc., which are attractive because
of their strong new product flow, huge free cash flow, earnings growth and
essentially net debt-free balance sheets. We believe these companies are
positioned to be major beneficiaries as the baby boomers age and require more
health-related products and services over the coming decades.
Sales Included Several Investments in Cyclical Industries
During the period, we sold Kirby Corp. and Trinity Industries after we lost
confidence in their managements' attempts to improve their competitive
positions, and cyclical stocks such as Quanex Corp. and Harnischfeger
Industries, Inc. after they were unable to improve their profitability in
difficult industry conditions. In contrast, we sold the fund's long-held
position in Millipore Corp., an industrial filter producer, after it reached our
target price.
- --------------------------------------------------------------------------------
29
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Capital Growth Fund (continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Top 10 Portfolio Holdings as of January 31, 1997
<TABLE>
<CAPTION>
Percentage
of Total
Company Line of Business Net Assets
<S> <C> <C>
First USA, Inc. Financial Services 4.5%
Intel Corp. Semiconductors and 4.3%
Electronics
NationsBank Corp. Commercial Bank 3.4%
Aetna Inc. Healthcare 3.4%
Management
Texaco Inc. International 3.3%
Integrated Oil
Company
BankAmerica Corp. Commercial Bank 3.2%
Tenet Healthcare Corp. Hospitals 3.0%
Philip Morris Companies, Tobacco and Food 3.0%
Inc. Products
Baxter International, Inc. Medical Supplies 2.9%
PartnerRe Ltd. Insurance 2.7%
- --------------------------------------------------------------------
</TABLE>
Outlook
We believe that the global political and economic environments will
continue to remain favorable for the financial markets. In our opinion, the
outlook for the U.S. stock market is attractive, as we expect it to continue to
benefit from low inflation, moderate growth and high levels of consumer
confidence. In addition, we anticipate that the equity market will continue to
be buoyed as baby boomers increase their savings and 401(k) investment plans
grow. To enhance the fund's ability to benefit from the positive investing
climate, we expect to continue to diversify the portfolio among industry sectors
and increase its holdings of large-cap stocks, with the intention of both
providing favorable long-term returns and reducing portfolio risk.
We want to emphasize that investing is a marathon, not a sprint.
Notwithstanding the excellent performance the fund has recently experienced, we
have a long-term investment horizon. In a nutshell, we hope to be able to
purchase great companies with attractive business characteristics and favorable
long-term outlooks, and then patiently hold them for an extended period of time
so that their growth compounds.
/s/ Herbert E. Ehlers
Herbert E. Ehlers
Senior Portfolio Manager,
U.S. Active Equity Growth
/s/ Robert G. Collins
Robert G. Collins
Portfolio Manager,
U.S. Active Equity Growth
/s/ Gregory H. Ekizian
Gregory H. Ekizian
Portfolio Manager,
U.S. Active Equity Growth
March 3, 1997
- --------------------------------------------------------------------------------
30
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Capital Growth Fund
January 31, 1997
- -------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's benchmark
(the Standard and Poor's 500 Index ("S&P 500")) is shown for the appropriate
time periods. All performance data shown represents past performance and should
not be considered indicative of future performance which will fluctuate with
changes in market conditions. These performance fluctuations will cause an
investor's shares, when redeemed, to be worth more or less than their original
cost.
Class A
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Capital Growth GS Capital Growth
Class A Class A
(w/sales charge) (no sales charge) S&P 500
----------------- ----------------- -------
<S> <C> <C> <C>
4/20/90 9,450 10,000 10,000
1/31/91 9,529 10,084 10,552
1/31/92 12,322 13,040 12,946
1/31/93 14,542 15,388 14,316
1/31/94 16,998 17,987 16,160
1/31/95 16,254 17,200 16,246
1/31/96 21,203 22,437 22,528
1/31/97 26,726 28,282 28,460
</TABLE>
Class B
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Capital Growth GS Capital Growth
Class B Class B
(no redemp. charge) (w/redemp. charge) S&P 500
------------------- ------------------ -------
<S> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000
1/31/97 11,939 11,439 12,218
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------
Average Annual Total Return
----------------------------------------------
One Year Five Year Since Inception/(a)/
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A, no sales charge 25.97% 16.73% 16.54%
- ------------------------------------------------------------------------------
Class A, w/sales charge 19.04% 15.42% 15.57%
- ------------------------------------------------------------------------------
Class B, no redemption charge N/A N/A 19.39%/(b)/
- ------------------------------------------------------------------------------
Class B, w/redemption charge N/A N/A 14.39%/(b)/
- ------------------------------------------------------------------------------
</TABLE>
/(a)/Class A and Class B shares commenced operations on April 20, 1990 and
May 1, 1996, respectively.
/(b)/An aggregate total return (not annualized) is shown instead of an average
annual total return since this class has not completed a full twelve months
of operations.
- --------------------------------------------------------------------------------
31
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Capital Growth Fund
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks--98.9%
Advertising & Marketing--1.8%
888,900 Valassis Communications, Inc.* $ 16,333,538
- --------------------------------------------------------------------
Airlines--1.5%
176,500 AMR Corp.* 14,208,250
- --------------------------------------------------------------------
Auto/Original Equipment Manufacturer--1.6%
391,900 Lear Corp.* 14,647,262
- --------------------------------------------------------------------
Banks--6.6%
263,700 BankAmerica Corp. 29,435,512
291,500 NationsBank Corp. 31,482,000
- --------------------------------------------------------------------
60,917,512
- --------------------------------------------------------------------
Beverages--2.1%
155,100 Coca Cola Co. 8,976,413
293,800 Pepsico, Inc. 10,246,275
- --------------------------------------------------------------------
19,222,688
- --------------------------------------------------------------------
Commercial Services--0.9%
226,500 Ecolab Inc. 8,380,500
- --------------------------------------------------------------------
Communications Technology--1.7%
290,860 Lucent Technologies, Inc. 15,779,155
- --------------------------------------------------------------------
Construction/Environmental Services--2.0%
497,500 WMX Technologies, Inc. 18,220,938
- --------------------------------------------------------------------
Consumer Staples--4.0%
150,800 Avon Products Inc. 9,462,700
109,000 Gillette Co. 8,883,500
160,940 Procter & Gamble Co. 18,588,570
- --------------------------------------------------------------------
36,934,770
- --------------------------------------------------------------------
Defense--3.2%
226,800 McDonnell Douglas Corp. 15,252,300
187,500 Northrop Grumman Corp. 14,648,438
- --------------------------------------------------------------------
29,900,738
- --------------------------------------------------------------------
Electric Utilities--1.6%
669,400 Long Island Lighting Co. 15,228,850
- --------------------------------------------------------------------
Electrical Equipment Manufacturer--1.0%
89,400 General Electric Co. 9,208,200
- --------------------------------------------------------------------
Electronics & Semiconductors--1.5%
219,700 Avnet Inc. 13,593,937
- --------------------------------------------------------------------
Food--1.8%
186,500 Nabisco Holdings Corp. 7,133,625
160,480 William Wrigley Jr. Co. 9,327,900
- --------------------------------------------------------------------
16,461,525
- --------------------------------------------------------------------
Forest Products--2.2%
273,500 Georgia Pacific Corp. 20,136,437
- --------------------------------------------------------------------
Health Suppliers/Services--8.4%
589,600 Baxter International, Inc. 27,195,300
477,500 Fisher Scientific International, Inc. 20,950,312
176,400 Johnson & Johnson 10,165,050
277,600 Perkin-Elmer Corp. 19,397,300
- --------------------------------------------------------------------
77,707,962
- --------------------------------------------------------------------
Healthcare Management--8.5%
395,760 Aetna Inc. 31,265,040
487,650 Columbia HCA Healthcare 19,262,175
1,021,400 Tenet Healthcare Corp.* 27,577,800
- --------------------------------------------------------------------
78,105,015
- --------------------------------------------------------------------
Hotels & Restaurants--1.0%
169,720 Marriott International, Inc. 9,016,375
- --------------------------------------------------------------------
Information Management--1.9%
241,000 First Data Corp. 8,676,000
135,670 Reuters Holdings Corp. ADR 8,665,921
- --------------------------------------------------------------------
17,341,921
- --------------------------------------------------------------------
Insurance-Property and Casualty--3.2%
356,650 Integon Corp. 4,948,519
703,800 PartnerRe Holding Ltd. 24,984,900
- --------------------------------------------------------------------
29,933,419
- --------------------------------------------------------------------
Integrated Oil--6.7%
68,700 Amoco Corp. 5,976,900
52,700 Atlantic Richfield Co. 6,969,575
90,900 Mobil Corp. 11,930,625
41,200 Royal Dutch Petroleum ADR 7,148,200
284,800 Texaco, Inc. 30,153,200
- --------------------------------------------------------------------
62,178,500
- --------------------------------------------------------------------
Logistics/Rails--1.6%
556,900 Canadian Pacific Ltd. 15,105,912
- --------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
- --------------------------------------------------------------------
<S> <C> <C>
Common Stocks (continued)
Media Content--4.6%
166,200 Gaylord Entertainment Co. $ 4,258,875
261,800 Knight Ridder, Inc. 10,046,575
530,700 Telecommunication Liberty
Media Group* 10,083,300
237,610 Time Warner Inc. 9,147,985
130,400 Walt Disney Co. 9,551,800
- --------------------------------------------------------------------
43,088,535
- --------------------------------------------------------------------
Packaging--1.6%
614,000 Owens Illinois Corp.* 14,582,500
- --------------------------------------------------------------------
Pharmaceuticals--2.3%
90,500 Bristol Myers Squibb 11,493,500
104,300 Pfizer, Inc. 9,686,863
- --------------------------------------------------------------------
21,180,363
- --------------------------------------------------------------------
Retail Trade--1.0%
222,600 Walgreen Co. 9,154,425
- --------------------------------------------------------------------
Retail-Department Stores--2.1%
658,400 Dillard Department Stores, Inc. 19,669,700
- --------------------------------------------------------------------
Security and Commodity Brokers, Dealers and Services--2.0%
571,000 Lehman Brothers Holdings, Inc. 18,057,875
- --------------------------------------------------------------------
Semiconductors & Electronics--4.3%
247,000 Intel Corp. 40,075,750
- --------------------------------------------------------------------
Specialty Finance & Agency--8.6%
345,300 Federal National Mortgage Assn. 13,639,350
828,200 First USA, Inc. 41,927,625
683,925 MBNA Corp. 23,595,413
- --------------------------------------------------------------------
79,162,388
- --------------------------------------------------------------------
Specialty Retail--1.0%
311,900 Service Corp. International 9,045,100
- --------------------------------------------------------------------
Technology Capital Goods--1.5%
286,400 Applied Materials Inc.* 14,141,000
- --------------------------------------------------------------------
Tire & Other Related Rubber Products--2.1%
362,400 Goodyear Tire & Rubber Co. 19,750,800
- --------------------------------------------------------------------
Tobacco--3.0%
229,400 Philip Morris Companies, Inc. 27,269,925
- --------------------------------------------------------------------
Total Common Stocks
(Cost $661,066,240) $ 913,741,765
- --------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------
Principal
Amount Description Value
====================================================================
<S> <C> <C>
Repurchase Agreement--2.0%
$18,300,000 Joint Repurchase Agreement Account
5.63%, 02/03/97 $ 18,300,000
- --------------------------------------------------------------------
Total Repurchase Agreement
(Cost $18,300,000) $ 18,300,000
- --------------------------------------------------------------------
Total Investments
(Cost $679,366,240)(a) $ 932,041,765
- --------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 255,377,138
Gross unrealized loss for investments in
which cost exceeds value (3,163,091)
- --------------------------------------------------------------------
Net unrealized gain $ 252,214,047
====================================================================
</TABLE>
* Non-income producing security.
(a) The aggregate cost for federal income tax purposes is $679,827,718.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
Letter to Shareholders
- ----------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund
- ----------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Small Cap Equity Fund's objective is long-term
capital appreciation, primarily through investments in equity securities of U.S.
companies with market capitalizations of $1 billion or less. The fund is managed
using a "business value" approach to investing, which means we look for
attractive companies with high or improving returns on capital that we believe
can achieve solid, sustainable growth, as well as generate free cash after
investing for future growth. This approach differs markedly from many emerging
growth small-cap funds that invest in companies with high price-to-earnings
multiples solely on the basis of rapid, but frequently unsustainable, growth
rates. Using our own rigorous fundamental research, which includes meeting with
a company's management and examining a company's competitors, customers and
suppliers, we build the fund's portfolio one stock at a time.
Performance Review: Class A Shares Outperformed the Benchmark and the S&P 500
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
<S> <C> <C>
Fund Total Return Russell
(based on net 2000 Total
asset value) Return
----------- ------
Class A (1/31/96 - 1/31/97)* 27.28% 18.95%
Class B (5/1/96 - 1/31/97)* 5.39% 7.32%
- --------------------------------------------------------------------
</TABLE>
* Class A and B share performance assumes reinvestment of all dividends and
distributions, a complete redemption at the net asset value at the end of the
period and no initial sales charge or contingent deferred sales charge.
Performance for Class B shares is a cumulative total return (not annualized)
from their inception through the end of the period.
During the period under review, small-cap stocks achieved strong
returns but still underperformed large-cap stocks. Small-caps began the period
on a strong note, outpacing large-caps from February through May, then gave up
their early lead during June and July when the market experienced a sharp
correction. While both large-cap and small-cap stocks sold off, small-caps were
particularly hard hit. During the latter half of the period, the market surged
to record highs, but small-caps trailed their larger peers as investors rushed
to participate in the rising market, but hedged their bets by sticking with the
largest, most liquid stocks.
Despite the small-cap sector's waning momentum, we are pleased to
report that the fund's Class A shares returned 27.28% (at net asset value),
outperforming both its benchmark, the Russell 2000 index (18.95%), and the
large-cap S&P 500 stock index (26.25%). In addition, the fund's Class A shares
placed in the top third of the Lipper small-company growth fund category
(ranking 129th out of 394) for the 12-month period ended January 31, 1997,
according to Lipper Analytical Services, Inc. (Please note that Lipper rankings
do not take sales charges into account and that past performance is not a
guarantee of future results. Lipper did not rank the fund's Class B shares.) The
fund's Class B shares also achieved positive returns, but did not fare as well
because their inception coincided with the start of a more difficult market
environment for small-cap stocks.
The fund's performance was especially strong during the first half of
the period, when a number of its long-held investments performed well. These
positions included some companies that had experienced temporary difficulties
and rebounded on improving fundamentals, as well as companies that had been
relatively undiscovered and garnered increased investor awareness due to
continued strong earnings gains. The fund also performed better than the broader
market during the summer correction, when expensive, momentum-type stocks were
hit harder than those with inexpensive valuations, which the fund typically
emphasizes. In contrast, during the second half of the period, stocks with
momentum characteristics rebounded, while the types of stocks that the fund
stresses did not perform as strongly. In addition, the fund experienced price
corrections in several holdings due to earnings volatility.
The fund's top performers during the period came from a wide variety
of industries, with Black Box Corp. and Morningstar Group, Inc. contributing
significantly to overall results. Black Box Corp., a catalog marketer of
34
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
communications and networking products, was the fund's largest holding in the
beginning of the period and climbed substantially as it continued to achieve
record revenues and profits due to successful direct marketing efforts and new
product introductions. The position in Black Box was then sold after it reached
our target price. Morningstar Group, Inc., a manufacturer of specialty foods,
was the fund's eighth largest holding at the start of the period and nearly
tripled in price when it consolidated its market position through internal
growth, new product introductions and several attractive acquisitions. The fund
has held Morningstar Group for over four years; it is a good example of our
willingness to hold strong businesses until the market recognizes their true
value.
Other strong performers included American Safety Razor Co., the
leading U.S. manufacturer of private-brand and value-priced shaving blades,
which benefited from internal profit enhancement efforts and particularly strong
sales of its branded and private-label shaving and personal care products;
Movado Group, Inc., the owner of the Movado, Concord and Esquire watch brands,
which rebounded due to significant sales growth, new licensing agreements and
increased analyst coverage; J. Baker, Inc., a diversified retailer of footwear
and apparel, which announced its intention to sell its shoe division in order to
focus its resources on its successful "Casual Male Big & Tall" stores; and
Nimbus CD International, Inc., a CD and CD-ROM manufacturer that we sold after
it rose sharply due to high investor expectations of future DVD (digital video
disk) demand. Finally, several financial holdings performed well, such as Horace
Mann Educators Co., a provider of property, casualty and life insurance for the
educator market, and Terra Nova Bermuda Holdings, a worldwide provider of
property casualty insurance and reinsurance.
Not all of the fund's holdings fulfilled our expectations. Several
stocks were hurt by disappointing earnings, although we continue to believe in
their long-term prospects. For example, Landstar System, Inc. experienced
weakness when the restructuring of its trucking operations from a fixed cost to
a variable cost business took longer than expected. In addition, Central Maine
Power Co. was impacted by uncertainty in the regulatory environment, and Alpine
Lace Brands, Inc., a developer and marketer of cheese products, declined due to
an increase in commodity cheese prices. We took advantage of lower prices and
increased the fund's positions in all three stocks. In contrast, we liquidated
two other underperformers, Musicland Stores Corp. and Levitz Furniture Inc.,
because their fundamental businesses continued to deteriorate.
Recent Additions
During the period, we initiated a number of positions that have
already contributed to performance. These included Linens 'N Things, Inc., a
retailer of home accessories, which was attractively valued versus its key
competitor, Bed, Bath and Beyond, and has significant store expansion and margin
improvement potential, and Sun Healthcare Group, Inc., a well-managed
owner/operator of nursing homes with attractive long-term growth potential.
Though Sun Healthcare Group has been temporarily impacted by a government
investigation of one of its subsidiaries, we believe this issue is fully
reflected in the current stock price. In the technology sector, we added
DecisionOne Holdings Corp., the leading independent provider of computer
hardware and maintenance support services to U.S. companies. We intend to
continue to focus on technology-related service providers and distributors that
we believe are positioned to benefit from the expected long-term growth of the
sector but are not dependent on the success of any single product or service.
Other new investments were APS Holding Corp., a distributor of
automotive parts, which was depressed by industry- and company-specific issues
that we believe to be temporary, and Friedman's, Inc., a retailer of inexpensive
jewelry with significant expansion potential and a very low-cost operating
strategy. We also added two specialty insurance companies, SCPIE Holdings, Inc.
and Symon's International Group, Inc.
35
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund (continued)
- --------------------------------------------------------------------------------
Sales Included Several Financial Holdings
The fund sold several stocks after they appreciated and reached our
target prices. These included a number of financial holdings, such as Greenpoint
Financial Corp., the leading national lender of "no-documentation--low-
documentation" mortgages; Dime Bancorp, Inc., the fifth largest thrift in the
U.S.; and Western National Corporation, a marketer of annuity products.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Top 10 Portfolio Holdings as of January 31, 1997
Percentage of
Total Net
Company Line of Business Assets
<S> <C> <C>
Movado Group, Inc. Luxury and 5.6%
Affordable Watch
Distributor
DecisionOne Holdings Corp. Computer Support 4.9%
Provider
Sun Healthcare Group, Inc. Healthcare Services 3.9%
APS Holding Corp. Automotive Parts 3.6%
Distributor
Mariner Health Group, Inc. Healthcare Services 3.6%
Groupe AB Television 3.5%
Programming
Distributor
Friedman's, Inc. Jewelry Retailer 3.5%
J. Baker, Inc. Specialty Apparel 3.5%
Heritage Media Corp. Marketing Services 3.4%
Provider
Linens 'N Things, Inc. Home Products 3.1%
Retailer
- --------------------------------------------------------------------
</TABLE>
Outlook
One of the key factors that will affect equity performance during
1997 will be the continuation of the favorable economic environment of moderate
growth and low inflation, which would ensure that both the corporate earnings
outlook and the interest rate climate remain hospitable. Small-capitalization
stocks as a group currently appear undervalued relative to large-cap stocks and
to their own expected earnings potential. We believe that corporate earnings
growth will slow somewhat in 1997, and to the extent that smaller companies can
achieve better earnings growth than larger companies, they should perform
relatively well. The performance of small-caps will particularly depend on
investors broadening their focus from the largest, most liquid stocks to
smaller, less widely followed issues. We are optimistic regarding the fund's
future performance based on the strong earnings growth and the free cash flow we
expect from many of our top holdings, as well as from new investments.
/s/ Paul D. Farrell
Paul D. Farrell
Senior Portfolio Manager,
U.S. Active Equity Value
/s/ Matthew B. McLennan
Matthew B. McLennan
Assistant Portfolio Manager,
U.S. Active Equity Value
/s/ Timothy G. Ebright
Timothy G. Ebright
Portfolio Manager,
U.S. Active Equity Growth
March 3, 1997
36
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund
January 31, 1997
- -------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's
benchmarks (the Standard and Poor's 500 Index ("S&P 500") and the Russell 2000)
are shown for the appropriate time periods. All performance data shown
represents past performance and should not be considered indicative of future
performance which will fluctuate with changes in market conditions. These
performance fluctuations will cause an investor's shares, when redeemed, to be
worth more or less than their original cost.
Class A
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Small Cap Class A GS Small Cap Class A Russell
(w/sales charge) (no sales charge) S&P 500 2000
-------------------- --------------------- ------- -------
<S> <C> <C> <C> <C>
10/22/92 $ 9,450 10,000 $10,000 $10,000
1/31/93 11,138 11,786 10,655 11,733
1/31/94 14,494 15,337 12,027 13,914
1/31/95 11,953 12,649 12,091 13,078
1/31/96 12,813 13,559 16,768 17,010
1/31/97 16,320 17,270 21,183 20,242
</TABLE>
Class B
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Small Cap Class B GS Small Cap Class B Russell
(no redemp. charge) (w/redemp. charge) S&P 500 2000
-------------------- -------------------- ------- -------
<S> <C> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000 $10,000
1/31/97 10,539 10,039 12,218 10,732
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------
Average Annual Total Return
-----------------------------------------
One Year Since Inception/(a)/
-------------------------------------------------------------------------
<S> <C> <C>
Class A, no sales charge 27.28% 13.61%
-------------------------------------------------------------------------
Class A, w/sales charge 20.27% 12.12%
-------------------------------------------------------------------------
Class B, no redemption charge N/A 5.39%/(b)/
-------------------------------------------------------------------------
Class B, w/redemption charge N/A 0.39%/(b)/
-------------------------------------------------------------------------
</TABLE>
/(a)/ Class A and Class B shares commenced operations on October 22, 1992
and May 1, 1996, respectively.
/(b)/ An aggregate total return (not annualized) is shown instead of an
average annual total return since this class has not completed a full
twelve months of operations.
- --------------------------------------------------------------------------------
37
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks--92.5%
- --------------------------------------------------------------------
Auto/Original Equipment Manufacturer--3.6%
777,200 APS Holding Corp.* $ 7,869,150
- --------------------------------------------------------------------
Commercial Products--2.4%
211,000 Figgie International, Inc. Class A* 2,611,125
231,400 Figgie International, Inc. Class B* 2,487,550
- --------------------------------------------------------------------
5,098,675
- --------------------------------------------------------------------
Commercial Services--1.0%
539,200 Opinion Research Corp.* 2,022,000
- --------------------------------------------------------------------
Computers & Peripherals--7.5%
598,700 DecisionOne Holdings Corp.* 10,477,250
467,100 Multiple Zones International, Inc.* 5,605,200
- --------------------------------------------------------------------
16,082,450
- --------------------------------------------------------------------
Consumer Staples--3.8%
270,700 American Safety Razor Co.* 3,958,987
389,400 Spartech Corp. 4,234,725
- --------------------------------------------------------------------
8,193,712
- --------------------------------------------------------------------
Electric Utilities--2.2%
433,900 Central Maine Power Co. 4,827,137
- --------------------------------------------------------------------
Electrical Equipment--2.3%
240,100 Carbide/Graphite Group* 5,012,087
- --------------------------------------------------------------------
Food--2.3%
374,600 Alpine Lace Brands, Inc.* 2,341,250
109,000 Morningstar Group, Inc.* 2,588,750
- --------------------------------------------------------------------
4,930,000
- --------------------------------------------------------------------
Healthcare Management--9.0%
20,100 Health Systems International, Inc.* 520,088
798,000 Mariner Health Group, Inc.* 7,780,500
517,100 Sun Healthcare Group, Inc.* 8,402,875
146,200 Trigon Healthcare, Inc.* 2,595,050
- --------------------------------------------------------------------
19,298,513
- --------------------------------------------------------------------
Home Furnishing & Services--2.9%
221,500 Congoleum Corp.* 3,156,375
160,900 Synthetic Industries, Inc.* 3,036,988
- --------------------------------------------------------------------
6,193,363
- --------------------------------------------------------------------
Insurance Specialty--1.6%
63,100 Old Republic International Corp. 1,695,812
83,900 Scpie Holdings, Inc.* 1,761,900
- --------------------------------------------------------------------
3,457,712
- --------------------------------------------------------------------
Insurance-Life--0.3%
36,000 AmerUs Life Holdings, Inc.* 711,000
- --------------------------------------------------------------------
Insurance-Property and Casualty--6.0%
50,500 Horace Mann Educators Co. 2,158,875
206,500 IPC Holdings Ltd. 4,943,094
92,200 Symons International Group* 1,475,200
215,800 Terra Nova Bermuda Holdings 4,262,050
- --------------------------------------------------------------------
12,839,219
- --------------------------------------------------------------------
Leisure--1.0%
210,700 Trump Hotels & Casino Resorts,
Inc.* 2,212,350
- --------------------------------------------------------------------
Media Content--9.0%
596,300 Groupe AB SA ADR* 7,602,825
609,800 Heritage Media Corp.* 7,393,825
432,300 International Post Ltd.* 1,729,200
324,200 Platinum Entertainment, Inc.* 2,674,650
- --------------------------------------------------------------------
19,400,500
- --------------------------------------------------------------------
Metal Products--0.5%
57,200 Doncasters Plc ADR* 1,122,550
- --------------------------------------------------------------------
Packaging--0.7%
88,100 Shorewood Packaging Corp.* 1,596,813
- --------------------------------------------------------------------
Real Estate--0.7%
73,700 Insignia Financial Group, Inc.* 1,538,487
- --------------------------------------------------------------------
Recreation Products--5.6%
539,200 Movado Group, Inc. 12,064,600
- --------------------------------------------------------------------
Restaurants & Hotels--6.4%
262,400 IHOP Corp.* 6,461,600
399,300 Mortons Restaurant Group, Inc.* 6,438,713
40,000 Sonic Corp.* 815,000
- --------------------------------------------------------------------
13,715,313
- --------------------------------------------------------------------
Retail Hardgoods--4.7%
731,000 Brookstone Inc.* 5,939,375
290,700 Finlay Enterprises, Inc.* 4,287,825
- --------------------------------------------------------------------
10,227,200
- --------------------------------------------------------------------
</TABLE>
38
<PAGE>
- --------------------------------------------------------------------
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Specialty Retail--12.7%
506,200 Friedmans, Inc.* $ 7,593,000
242,000 General Nutrition Companies, Inc.* 4,386,250
1,500 Hibbett Sporting Goods, Inc.* 24,375
1,100,400 J. Baker, Inc. 7,565,250
87,000 Leslies Poolmart, Inc.* 1,141,875
307,200 Linens N'Things, Inc.* 6,758,400
- --------------------------------------------------------------------
27,469,150
- --------------------------------------------------------------------
Telephone Communications--0.3%
15,400 Telephone & Data Systems, Inc. 587,125
- --------------------------------------------------------------------
Textiles--1.6%
87,800 Samsonite Corp.* 3,468,100
- --------------------------------------------------------------------
Trucking--2.3%
207,100 Landstar Systems, Inc.* 4,918,625
- --------------------------------------------------------------------
Voice, Video and Data--2.1%
263,200 Pegasus Communications, Inc.* 3,224,200
142,700 Rural Cellular Corp.* 1,391,325
- --------------------------------------------------------------------
4,615,525
- --------------------------------------------------------------------
Total Common Stocks
(Cost $194,261,908) $199,471,356
====================================================================
<CAPTION>
Principal
Amount Description Value
====================================================================
<S> <C> <C>
Corporate Bond--0.2%
- --------------------------------------------------------------------
$ 500,000 J. Baker, Inc.
7.0%, 06/01/02 $ 412,500
- --------------------------------------------------------------------
Total Corporate Bond
(Cost $498,387) $ 412,500
====================================================================
Repurchase Agreement--7.7%
- --------------------------------------------------------------------
$16,600,000 Joint Repurchase Agreement Account
5.63%, 02/03/97 $ 16,600,000
- --------------------------------------------------------------------
Total Repurchase Agreement
(Cost $16,600,000) $ 16,600,000
====================================================================
<CAPTION>
Contracts Description Value
====================================================================
<S> <C> <C>
Options*--0.5%
200 S&P 500 Index Put Strike 725
exp. 03/97 $ 95,000
351 S&P 500 Index Put Strike 700
exp. 03/97 92,138
560 S&P 500 Index Put Strike 750
exp. 06/97 938,000
- --------------------------------------------------------------------
Total Options
(Cost $1,643,182) $ 1,125,138
====================================================================
Total Investments
(Cost $213,003,477)/(a)/ $217,608,994
====================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 31,335,604
Gross unrealized loss for investments in
which cost exceeds value (26,835,810)
- --------------------------------------------------------------------
Net unrealized gain $ 4,499,794
====================================================================
</TABLE>
* Non-income producing security.
/(a)/The aggregate cost for federal income tax purposes is $213,109,200.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs International Equity Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs International Equity Fund seeks long-term capital
appreciation by investing in equity securities of companies organized or traded
outside the U.S. that we believe have the potential to appreciate over the long
term. The fund focuses on growing companies that are attractively valued and
have strong, competitive positions in their respective industries. The fund's
portfolio managers are based in London, Tokyo and Singapore and their knowledge
of local markets plays an important role in uncovering investment opportunities.
While the fund does not allocate assets across specific countries based on
top-down economic or market forecasts, the portfolio managers strive to manage
risk by remaining diversified by country and industry sector and by closely
monitoring economic and political events in countries in which the fund does
invest.
Economic and Market Overview: European Markets Were Strong Despite Weak
Economies; Asia Faltered
Economic growth was slower than expected in many countries during the
period, prompting further monetary easing in much of Europe and continued very
low short-term interest rates in Japan. European equity markets performed very
well despite the growth shortfall, benefiting from an increased focus on
improving shareholder value. The Japanese market declined significantly, while
results in other Asian markets were mixed.
.. Europe. The economies of several European markets, such as the U.K., Norway
and Ireland, strengthened during the period, but overall growth remained weak
throughout most of Europe. A number of European countries attempted to stimulate
their economies through monetary easing, but maintained tight fiscal policies in
an effort to reduce their budget deficits enough to qualify for European
Monetary Union. This strategy proved to be only modestly successful, as
unemployment remained at record highs, particularly in Germany. Though the
recovery was somewhat disappointing, European equity markets rose 26.6% during
the period (as measured by the FT/S&P Actuaries Europe Index in terms of local
currencies), fueled by low inflation, low interest rates and relatively strong
bond markets. In addition, corporate profits improved, reflecting increased
emphasis on cost cutting and restructuring. The equity markets of Finland, Spain
and Sweden were among the strongest performers, while British stocks lagged much
of Europe due to a strengthening currency (which made U.K. exports more
expensive) and expectations of increases in short-term interest rates.
.. Japan. The Japanese economy strengthened during the period, but earnings
growth fell short of expectations. For the 12-month period ended January 31,
Japanese stocks (as measured by the TOPIX index in yen) declined 14.9%, with
approximately half of the loss occurring in January 1997 alone. During the first
half of the period, the Japanese market was bolstered by heavy demand from
Europe and the U.S., but foreign investors subsequently became net sellers when
the economic recovery softened and raised uncertainty surrounding the
sustainability of corporate profits. The weaker corporate earnings outlook
resulted in a conspicuous divergence between the performance of the largest
international blue-chip stocks and the rest of the market, particularly in the
third quarter. Lackluster investor sentiment was further exacerbated at the end
of the year due to increased pessimism that the Liberal Democratic Party (LDP)
government's higher taxes and scant spending on public works would dampen the
economy.
.. Asia (ex-Japan). Asian stock markets rose 2.4% during the period, as measured
by the MSCI All Country Asia Free (Ex Japan) Index (in terms of local
currencies). Asian markets began the period on a strong note, but several
markets faltered during the spring and summer due to a host of issues. These
included political uncertainty arising from national elections in several Asian
countries as well as slowing economic growth throughout the region, principally
due to weak electronics exports. From
- --------------------------------------------------------------------------------
40
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
September 1996 through January 1997, the region generally improved due to
stronger corporate earnings and stabilizing exports. The performance of the
individual markets varied widely. Malaysia was one of the region's best
performing markets during the period under review, rising 18.4%; Hong Kong, the
largest market in the region, performed well with a 12.0% return; and Thailand
was by far the weakest market, declining 45.3% (all in local currency terms).
Performance Review: Security Selection, Country Allocations and Industry
Weightings All Contributed to Strong Performance
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Fund Total FT/S&P
Return Actuaries
(based on Europe &
net asset Pacific Index
value) Total Return
------ ------------
<S> <C> <C>
Class A (1/31/96 - 1/31/97)* 13.48% 1.27%
Class B (5/1/96 - 1/31/97)* 2.83% -4.22%
Institutional (2/7/96 - 1/31/97)* 12.53% 0.53%
Service (3/6/96 - 1/31/97)* 10.42% 0.86%
- ------------------------------------------------------------------------------
</TABLE>
* Class A, B, Institutional and Service share performance assumes reinvestment
of all dividends and distributions, a complete redemption at the net asset value
at the end of the period and no initial sales charge or contingent deferred
sales charge. Performance for Class B, Institutional and Service shares is a
cumulative total return (not annualized) from their inception through the end of
the period.
The fund performed extremely well during the period under review,
with all of its share classes outperforming the benchmark, the Financial
Times/S&P Actuaries Europe & Pacific Index ("Europac") unhedged. Europac is a
capitalization-weighted composite of approximately 1,500 stocks from 23
countries in Europe and the Asia-Pacific region and is calculated on a monthly
basis. We are also pleased to note that the fund's Class A shares placed in the
top third of the Lipper international fund category (ranking 93rd out of 342)
for the 12-month period ended January 31, 1997, according to Lipper Analytical
Services, Inc. (Please note that Lipper rankings do not take sales charges into
account and that past performance is not a guarantee of future results. Lipper
did not rank the fund's Class B, Institutional or Service shares.)
The primary driver of the fund's superior performance was successful
stock selection, as we continued to focus on growing companies that actively
increased shareholder value through actions such as cost cutting, share buybacks
or restructuring. In addition, country allocations that worked in the fund's
favor were its overweighting in Sweden, one of the strongest performing markets
during the period, and its underweighting in Japan, one of the weakest, each the
result of our bottom-up approach to stock selection. The fund's industry
allocations also added value. The fund was overweighted in business services and
diversified consumer goods/services, which were among the best performing
sectors, and underweighted in financial services and basic industries, which
performed relatively poorly.
In terms of currency exposure, though the fund's neutral exposure is
unhedged, it was substantially hedged against the yen, which benefited
performance significantly when the yen continued to fall against the dollar. In
addition, the fund was partially hedged against some European currencies, such
as the Deutsche mark and the Swiss franc, which worked in its favor when the
dollar rose against those currencies.
The fund's Class B shares outperformed the benchmark by a wide
margin, but their performance was not as strong as the other share classes
because they began operations in May, after equity prices had already risen
significantly.
Portfolio Composition: A Widely Diversified Portfolio
As of January 31, 1997, the fund held positions in 56 companies based
in 16 countries. In terms of total portfolio assets, the five largest country
exposures were Japan (27.3%), the U.K. (12.6%), Germany (7.1%), Sweden (7.0%)
and Switzerland (6.8%).
Europe. At the end of the period, the portfolio's 53.0% allocation in European
stocks was in line with that of the benchmark (54.1%). In general, growth stocks
led the
- --------------------------------------------------------------------------------
41
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs International Equity Fund (continued)
- --------------------------------------------------------------------------------
market during the period. Many of the fund's European holdings were
growth-oriented stocks that benefited from positive earnings surprises and
successful efforts by senior management to enhance equity returns and
shareholder value. Several of the portfolio's longer term European holdings
were, once again, among its strongest performers. Securitas (Sweden), the
largest security services company in Europe, more than doubled during the
period, boosted by earnings from companies it acquired in Germany, France and
Portugal. Fresenius (Germany), a major producer of medical supplies, rose over
140% as it merged its global kidney dialysis division with W. R. Grace's
National Medical Center healthcare subsidiary and spun off the resulting
business, Fresenius Medical Care. Ericsson (Sweden), one of the world's leading
suppliers of mobile telephones and infrastructure, rebounded from weakness early
in the period when it achieved very good earnings, which reassured investors
that it was not suffering from margin pressure or weak mobile telephone orders.
Other strong performers were Randstad Holdings (Netherlands), the leading
temporary help organization in its market, which reported healthy sales and
earnings as its business continued to expand, and Comptoirs Modernes (France), a
supermarket chain operator, which gained market share in France and made
important acquisitions in Spain.
Several of the fund's newer additions also contributed to its
positive results. These included two pharmaceutical companies: Hoechst
(Germany), whose acquisition and restructuring plans indicate a commitment to
improving shareholder value, and Novartis (Switzerland), which was formed
through the merger of Ciba-Geigy and Sandoz and is expected to benefit from
significant cost reductions as well as new product development. Other
significant new positions that performed well were SGS Thomson (France), one of
the 10 largest semiconductor manufacturers in the world, which operates in the
high-value-added, application-specific sector of the market, and Telecom Italia
Mobile (Italy), the leading mobile telephone operator in Italy, which generates
strong cash flow and is extremely profitable.
Japan. Approximately 27% of the fund was invested in Japan, which was
underweighted relative to the benchmark (32.1%). The fund's Japanese stocks
fared better than the market, as we avoided banks and brokerages, two of the
weakest industries. We invested in companies with relatively robust earnings
visibility and good valuations, particularly favoring management that improved
cost competitiveness and strengthened their core business. The fund's best
performing Japanese stocks were TDK Corp., an electronic components manufacturer
that reported better than expected earnings due to strong sales of personal
computer-related components; Hoya Corp., an optical glass manufacturer that
aggressively restructured its operations and successfully diversified its
business so that it now dominates the glass magnetic disc market; and Mirai
Industry, a market leader in electric cables, pipes and other electric wiring
that introduced new products and cut costs. In contrast, Kyocera Corp., an
electronics components manufacturer, reported disappointing results due to
increased competition in the semiconductor and communication equipment
businesses. A new addition was Takeda Chemical Industry, the largest
pharmaceutical company in Japan, where aggressive new management initiatives
rapidly expanded overseas sales and improved the profitability of its
prescription drug business.
Asia-Pacific. Asia, a 13.5% allocation (excluding Japan), was slightly
overweighted compared with the benchmark's 10.7%, with Hong Kong representing
the largest country position at 6.7% of the portfolio. For most of the period,
the fund was overweighted in Malaysia, Hong Kong and Australia, which were three
of the better performing Asian markets. Though the performance of some of the
other markets fell short of expectations, our stock selection within the region
worked in the fund's favor. Several of the fund's top performers were financial
stocks, including Commerce Asset-Holdings, the fifth largest financial group in
Malaysia, which benefited from its merchant banking operations and strong loan
growth, and HSBC Holdings, a Hong Kong-based banking and financial services
organization, which reported strong results due to its dominant market position.
New holdings include Australia & New Zealand Bank Group, a bank that is
positioned to benefit from the potential deregulation in Australia's financial
services sector, and Asia Satellite Telecommunications Holdings Ltd., a
- --------------------------------------------------------------------------------
42
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
leading satellite owner and operator in the Asia-Pacific region that owns prime
orbital slots that are expected to result in high utilization rates and fees.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Top 10 Portfolio Holdings as of January 31, 1997
Percentage
of Total
Company Country Line of Business Net Assets
<S> <C> <C> <C>
HSBC Holdings Hong Kong Banking and 3.0%
Finance
Novartis Switzerland Pharmaceuticals 3.0%
Fresenius Germany Kidney Dialysis 2.4%
Equipment
TDK Corp. Japan Tape and Disc 2.4%
Manufacturer
Telecom Italia Italy Mobile Tele- 2.4%
Mobile communications
Operator
Canon, Inc. Japan Office Equipment 2.4%
Manufacturer
Adecco Switzerland Temporary Help 2.4%
Services
Adidas Germany Sporting Goods 2.4%
Manufacturer
Hoechst Germany Chemical and 2.3%
Drug
Manufacturer
Hoya Corp. Japan Optical Glass 2.3%
Manufacturer
- --------------------------------------------------------------------
</TABLE>
Outlook
In the near term, we expect most international economies to continue
to experience moderate growth and subdued inflation. We are particularly
positive on the prospects for the European markets in 1997, where we expect a
modest acceleration in economic growth and a continuation of healthy corporate
earnings growth helped by cost cutting as well as restructuring initiatives.
We are currently most concerned about Japan. Despite the sharp
correction, we expect to remain underweighted in the Japanese market because of
our negative view of the banking sector and only modest earnings recoveries in
nonmanufacturing sectors. Lack of investor confidence in the government's
commitment to deregulation, as well as simultaneous weakness in the bond and
currency markets, have all impacted market sentiment. In this state of
uncertainty, superior stock selection will be essential, and we intend to
emphasize companies with clear earnings visibility, strong management and
attractive valuations. Despite the generally poor conditions, the earnings for
the fund's Japanese holdings are above expectations and are being upgraded. In
non-Japan Asia, corporate earnings reports have been mixed, but we believe
improved political stability and export growth should help stocks in 1997.
Finally, we are pleased to report that we have expanded our
international equity team in all geographic regions to support our effort to
seek out the most promising companies around the world.
/s/ Roderick D. Jack
Roderick D. Jack
Senior Portfolio Manager, London
/s/ Marcel Jongen
Marcel Jongen
Senior Portfolio Manager, London
/s/ Shogo Maeda
Shogo Maeda
Senior Portfolio Manager, Tokyo
/s/ Warwick M. Negus
Warwick M. Negus
Senior Portfolio Manager, Singapore
March 3, 1997
- --------------------------------------------------------------------------------
43
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs International Equity Fund
January 31, 1997
- --------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and Class B, respectively) on the
inception date of each class. For comparative purposes, the performance of the
Fund's benchmark (the Financial Times-Actuaries World Euro-Pacific Index
Unhedged ("FT Euro-Pac (Unhedged)/(b)/) is shown for the appropriate time
periods. All performance data shown represents past performance and should not
be considered indicative of future performance which will fluctuate with changes
in market conditions. These performance fluctuations will cause an investor's
shares, when redeemed, to be worth more or less than their original cost.
<TABLE>
<CAPTION>
Class A
[LINE GRAPH APPEARS HERE]
GS Intl Eq GS Intl Eq
Class A Class A FT Euro-Pac Ft Euro-Pac
(w/sales charge) (no sales charge) (Comb )(b) (Unhedged)
---------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C>
12/1/92 9,450 10,000 10,000 10,000
1/31/93 9,566 10,123 10,063 10,055
1/31/94 12,066 12,768 13,498 14,399
1/31/95 10,058 10,643 12,119 13,902
1/31/96 12,942 13,695 13,983 16,039
1/31/97 14,961 15,546 14,160 16,243
<CAPTION>
Class B
[LINE GRAPH APPEARS HERE]
GS Intl Eq GS Intl Eq
Class B Class B FT Euro-Pac
(w/sales charge) (no sales charge) (Unhedged)
---------------- ----------------- -----------
<S> <C> <C> <C>
5/1/96 10,000 10,000 10,000
1/31/97 10,283 9,783 9,578
<CAPTION>
Institutional
[LINE GRAPH APPEARS HERE]
GS Intl Equity FT Euro-Pac
Institutional Class (Unhedged)
------------------- -----------
<S> <C> <C>
2/7/96 10,000 10,000
1/31/97 11,253 10,053
<CAPTION>
Service
[LINE GRAPH APPEARS HERE]
GS Intl Equity FT Euro-Pac
Service Class (Unhedged)
-------------- -----------
<S> <C> <C>
3/6/97 10,000 10,000
1/31/97 11,042 10,086
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------
Average Annual Total Return
----------------------------------------
One Year Since Inception/(a)/
- -------------------------------------- ------------------- --------------------
<S> <C> <C>
Class A, no sales charge 13.48% 11.15%
- -------------------------------------- ------------------- --------------------
Class A, w/sales charge 7.26% 9.66%
- -------------------------------------- ------------------- --------------------
Class B, no redemption charge N/A 2.83% /(c)/
- -------------------------------------- ------------------- --------------------
Class B, w/redemption charge N/A (2.17)%/(c)/
- -------------------------------------- ------------------- --------------------
Institutional Class N/A 12.53% /(c)/
- -------------------------------------- ------------------- --------------------
Service Class N/A 10.42% /(c)/
- -------------------------------------- ------------------- --------------------
</TABLE>
/(a)/ Class A, Class B, Institutional and Service shares commenced operations
on December 1, 1992, May 1, 1996, February 7, 1996 and March 6, 1996,
respectively.
/(b)/ Beginning on September 1, 1994, the Class A shares began using the
unhedged FT Euro-Pac as its benchmark (prior thereto, Class A used the
hedged FT Euro-Pac). The combined FT Euro-Pac represents the hedged FT
Euro-Pac performance up to August 31, 1994 and the unhedged FT Euro-Pac
performance from September 1, 1994 through January 31, 1997.
/(c)/ An aggregate total return (not annualized) is shown instead of an average
annual total return since these classes have not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
44
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs International Equity Fund
January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks--91.5%
Australian Dollar--3.6%
1,851,658 Australia & New Zealand Bank Group
(Commercial Banks) $ 11,355,706
1,564,955 Woodside Petroleum, Ltd. (Oil &
Gas) 11,053,763
- --------------------------------------------------------------------
22,409,469
- --------------------------------------------------------------------
Austrian Schilling--1.2%
105,400 Oesterreichische Elektrizitats
(Utilities) 7,698,241
- --------------------------------------------------------------------
Belgian Franc--0.2%
14,400 Dexia (Financial Services) 1,372,240
- --------------------------------------------------------------------
British Pound Sterling--12.6%
1,391,569 British Airport Authority
(Transportation) 11,661,442
1,788,649 Electrocomponents (Wholesale
Trade) 12,753,546
1,261,210 Premier Farnell PLC (Electronics) 10,670,067
706,368 Misys PLC (Business Services and
Computer Software) 12,393,414
1,708,700 Rentokil Group (Business Services) 12,553,100
473,916 Siebe (Machinery and Engineering
Services) 7,973,270
873,509 Standard Chartered (Banking) 10,497,224
- --------------------------------------------------------------------
78,502,063
- --------------------------------------------------------------------
Deutsche Mark--4.7%
155,760 Adidas AG (Textiles) 14,749,495
343,320 Hoechst AG (Healthcare) 14,439,672
- --------------------------------------------------------------------
29,189,167
- --------------------------------------------------------------------
French Franc--6.4%
22,531 Comptoirs Modernes (Retail) 11,749,983
40,720 CLF Dexia (Financial Services) 3,649,869
95,602 CLF Dexia - Registered Shares 8,569,124
(Financial Services)
63,189 Seita (Tobacco) 2,400,553
193,600 SGS Thomson Microelectronics
(Electronics) 13,882,408
- --------------------------------------------------------------------
40,251,937
- --------------------------------------------------------------------
Hong Kong Dollar--6.7%
4,148,000 Asia Satellite Tel.
(Telecommunications) 9,233,837
816,800 HSBC Holdings (Commercial Banks) 18,920,583
1,185,000 Sun Hung Kai Properties Co. (Real
Estate) 13,380,759
- --------------------------------------------------------------------
41,535,179
- --------------------------------------------------------------------
Irish Pound--2.3%
1,491,014 Bank of Ireland (Commercial Banks) 14,247,624
- --------------------------------------------------------------------
Italian Lira--2.4%
3,000,500 Telecom Italia Mobile (Utilities) 8,930,448
3,574,000 Telecom Italia Mobile (Di Risp
Shares) (Utilities) 6,095,944
- --------------------------------------------------------------------
15,026,392
- --------------------------------------------------------------------
Japanese Yen--27.3%
206,000 Aderans Company Ltd. (Retail) 4,808,281
702,000 Canon, Inc. (Office Equipment
Manufacturer) 14,880,119
363,000 Hoya Corp. (Electronics and
Instrumentation) 14,520,599
297,400 Inaba Denkisangyo (Industrial) 5,396,346
458,000 Kokuyo Co., Ltd. (Office Equipment
Manufacturer) 9,594,787
149,000 Kyocera Corp. (Electronics) 8,749,887
358,000 Max Co. (Electronics and
Instrumentation) 5,432,966
238,900 Mirai Industry Co. (Electrical
Equipment Manufacturer) 5,852,060
1,927,000 Mitsubishi Heavy Industries Ltd.
(Engineering) 13,874,972
1,530,000 Mitsui Marine & Fire (Insurance) 8,215,019
450,100 Santen Pharmaceutical Co.
(Healthcare) 8,352,716
92,800 Sanyo Shinpan Financial
(Financial) 5,204,668
</TABLE>
- --------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
45
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs International Equity Fund (continued)
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Japanese Yen (continued)
322,000 Shimachu (Retail-Furniture) $ 6,905,027
213,900 SMC Corp. (Machinery) 13,125,622
410,000 Taikisha Ltd. (Machinery) 5,038,558
570,000 Takeda Chemical Industry
(Healthcare) 11,235,927
235,000 TDK Corp. (Consumer Goods) 15,040,620
464,000 Tostem Corp. (Construction) 10,906,842
146,800 York Benimaru (Retail) 3,922,900
- --------------------------------------------------------------------
171,057,916
- --------------------------------------------------------------------
Malaysian Ringgit--1.9%
1,328,000 Commerce Asset Holdings
(Commercial Banks) 10,683,829
581,000 Leader Universal Holdings
(Metals-Diversified) 1,168,544
- --------------------------------------------------------------------
11,852,373
- --------------------------------------------------------------------
Netherlands Guilder--5.0%
146,070 Aegon (Insurance) 8,951,011
136,180 Randstad Holdings (Business
Services) 9,471,458
102,016 Wolters Kluwer (Media) 12,602,793
- --------------------------------------------------------------------
31,025,262
- --------------------------------------------------------------------
Singapore Dollar--1.5%
1,511,000 Singapore Land (Real Estate) 9,123,100
- --------------------------------------------------------------------
Spanish Peseta--1.9%
63,595 Banco Popular (Commercial Banks) 11,571,494
- --------------------------------------------------------------------
Swedish Krona--7.0%
335,300 Ericsson Telecommunications
(Computer - Office) 11,255,719
268,440 Hoganas AB (Metal Products) 8,455,037
405,970 Securitas AB (Business Services) 12,057,737
3,469,100 Swedish Match AB (Tobacco) 11,741,304
- --------------------------------------------------------------------
43,509,797
- --------------------------------------------------------------------
Swiss Franc--6.8%
52,468 Adecco SA (Business Services) 14,753,971
6,726 Cie Financier Richemont AG
(Consumer Goods) 9,231,858
16,335 Novartis AG (Healthcare) 18,730,002
- --------------------------------------------------------------------
42,715,831
- --------------------------------------------------------------------
Total Common Stocks
(Cost $503,926,410) $ 571,088,085
====================================================================
Preferred Stock--2.4%
- --------------------------------------------------------------------
Deutsche Mark--2.4%
74,790 Fresenius AG (Health Care),
Non-voting $ 15,042,126
- --------------------------------------------------------------------
Total Preferred Stock
(Cost $4,437,079) $ 15,042,126
====================================================================
<CAPTION>
Principal
Amount Description Value
====================================================================
<S> <C> <C>
Short-Term Obligations--6.6%
- --------------------------------------------------------------------
$ 41,394,109 State Street Bank & Trust
Euro-Time Deposit 5.5%, 02/03/97** $ 41,394,109
- --------------------------------------------------------------------
Total Short-Term Obligations
(Cost $41,394,109) $ 41,394,109
====================================================================
Total Investments
(Cost $549,757,598)/(a)/ $ 627,524,320
====================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $108,968,495
Gross unrealized loss for investments in
which cost exceeds value (31,533,818)
- --------------------------------------------------------------------
Net unrealized gain $ 77,434,677
====================================================================
</TABLE>
/(a)/ The aggregate cost for federal income tax purposes is $550,089,643.
* Non-income producing security.
** A portion of this security has been segregated for extended
settlement securities.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an intergral part of these financial statements.
46
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------
Common and Preferred Stock Industry Concentrations
====================================================================
<S> <C>
Business Services 7.8%
Commercial Banks 12.4%
Computer Software and Services 2.0%
Computer - Office 1.8%
Construction 1.7%
Consumer Goods 3.9%
Electrical Equipment Manufacturer 0.9%
Electronics 5.3%
Electronics and Instrumentation 3.2%
Engineering 2.2%
Financial 0.8%
Financial Services 2.2%
Health Care 10.9%
Industrial 0.9%
Insurance 2.7%
Machinery 2.9%
Machinery and Engineering Services 1.3%
Media 2.0%
Metal Products 1.4%
Metals-Diversified 0.2%
Office Equipment Manufacturer 3.9%
Oil & Gas 1.8%
Real Estate 3.6%
Retail 3.3%
Retail-Furniture 1.1%
Telecommunications 1.5%
Textiles 2.4%
Tobacco 2.3%
Transportation 1.9%
Utilities 3.6%
Wholesale Trade 2.0%
- --------------------------------------------------------------------
Total Common and Preferred Stock 93.9%
====================================================================
</TABLE>
The accompanying notes are an integral part of these financial
statements.
- --------------------------------------------------------------------
47
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Asia Growth Fund seeks long-term capital appreciation by
investing in a limited number of carefully selected companies located in 12
Asian markets, including China, Hong Kong, India, Indonesia, Malaysia, Pakistan,
the Philippines, Singapore, South Korea, Sri Lanka, Taiwan and Thailand.
We utilize extensive fundamental research in our search for well-managed
companies whose stock prices are, in our opinion, undervalued in the
marketplace. Because many companies in the Asian region are growing at
relatively rapid rates, we consider a company's return on capital, its
price-to-book value and the predictability of its earnings stream as among the
best measures of its intrinsic value. A strong market position and a skilled
management team dedicated to maximizing shareholder returns are also important
to us. Our investment process includes face-to-face meetings with senior
management as well as frequent contact with a company's customers, suppliers and
competitors.
While our primary focus is on stock selection, we seek to carefully manage
risk by diversifying the fund's portfolio in terms of countries, industry
sectors and size of capitalization. We are also mindful of making certain that
the market for a particular stock is relatively liquid, so we can easily sell a
position if our opinion changes. From time to time, we may choose to
significantly overweight or underweight our holdings in one country compared
with our benchmark, if we believe there is a compelling reason to do so.
Finally, we closely monitor the potential impact of political and economic
events in the region on particular companies and adjust the portfolio
accordingly.
Market Overview: Results Were Mixed in Asian Markets
As a group, the Asian stock markets rose 2.37% during the period, as
measured by the MSCI All Country Asia Free (Ex Japan) Index (without dividends
reinvested). The weak performance indicated by the Index masks the wide
divergence of performance among the individual Asian markets, as several
countries rose more than 10% while others fell more than 20%. The period under
review began on a strong note, but the region quickly sold off in mid-February
when investors became unnerved by rising political tension between China and
Taiwan. Though the Asian markets briefly rebounded, investor interest was
dampened again during the spring and summer due to uncertainty surrounding
national elections in several countries, a decline in exports and slowing
economic growth. From October 1996 through January 1997, most Asian markets
recovered due to improving corporate earnings and signs of stabilizing export
growth.
In terms of individual markets, Taiwan, Malaysia and Indonesia were the
strongest performers, rising 56.0%, 21.9% and 17.5%, respectively (in U.S.
dollar terms), with each overcoming brief setbacks such as negative short-term
economic data and political upheaval. Other positive markets were India, which
was the region's strongest performer during the first half of the year and
subsequently gave back some of its gains, and the Philippines, where healthy
economic growth and declining inflation renewed investor interest. Hong Kong,
the most heavily weighted country in the Index, posted lackluster results early
in the period, then rebounded to close the period with a 12.0% gain due to a
favorable interest rate environment and a soaring property market. The weakest
performer was Thailand, which dropped 46.5%. Thailand was impacted by a very
large budget deficit, exacerbated by the slowdown of computer-related exports as
well as a tear in the speculative bubble in the real estate market, as
nonperforming property loans caused problems in the banking sector. South Korea
and Singapore were weak as well, declining approximately 34% and 7%,
respectively. South Korean equities were affected by an ongoing investigation of
government corruption and a weakening economy, and Singapore's market fell due
to soft electronics exports.
- --------------------------------------------------------------------------------
48
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Review: Country Allocations Affected the Fund's Performance
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Fund Total MSCI AC
Return Asia Free
(based on net (Ex Japan)
asset value) Index +
------------ -----
<S> <C> <C>
Class A (1/31/96 - 1/31/97)* -1.01% 2.37%
Class B (5/1/96 - 1/31/97)* -6.02% -2.50%
Institutional (2/2/96 - 1/31/97)* -1.09% 2.06%
- -------------------------------------------------------------------
</TABLE>
* Class A, B and Institutional share performance assumes reinvestment of all
dividends and distributions, a complete redemption at the net asset value at
the end of the period and no initial sales charge or contingent deferred sales
charge. Performance for Class B and Institutional shares is a cumulative total
return (not annualized) from their inception through the end of the period.
+ Represents a price-only index that does not reflect reinvested dividends.
During the period under review, stock selection benefited the fund as a
number of holdings achieved strong returns. The fund's performance was
nonetheless affected by its country over- and underweightings relative to the
Index when individual markets performed better or worse than expected. For
example, Taiwan and Malaysia were two of the region's best performing markets,
but the fund was underweighted in those countries and therefore did not fully
participate in their rallies.
Financial, Property and Infrastructure Stocks Were the Strongest Performers
The fund's best performers during the period were its positions in the
financial, real estate and infrastructure sectors. Top financial stocks included
two of our Hong Kong investments, HSBC Holdings PLC, one of the world's largest
banking and financial services companies, and Wing Hang Bank Ltd., a provider of
banking, foreign exchange and treasury services, which both benefited from
strong growth in mortgage loans resulting from Hong Kong's robust property
market. Metropolitan Bank and Trust, the Philippines' largest bank in terms of
assets, rose substantially due to the growing Philippine economy and aggressive
branch expansion, and Commerce Asset-Holdings, the fifth largest financial group
in Malaysia, benefited from its merchant banking operations and strong loan
growth.
In the real estate sector, Hong Kong's booming property market buoyed
several of the fund's holdings. These included Sun Hung Kai Properties, one of
the largest and best managed property companies in Hong Kong; Henderson Land
Development, a large property development and investment holding company that
concentrates on mass residential developments; and HKR International Ltd., a
real estate developer that primarily focuses on residential development in
Discovery Bay on Lantau Island (a self-contained community that offers a
"quality lifestyle").
Other strong performers were two Malaysian companies that benefited from
the government's commitment to improve the country's infrastructure. Road
Builder Malaysia Holdings, a contractor specializing in civil engineering and
road construction, continued its strategic expansion and diversification, and
United Engineers Malaysia, Malaysia's largest builder and operator of toll
roads, rose due to the opening of several new roads.
Stocks that did not fulfill our expectations included Leader Universal
Holdings, Malaysia's leading manufacturer of power and telecommunication cable,
which reported lower than expected earnings due to very low export margins;
Industrial Finance Corp. of Thailand (IFCT), which declined in sympathy with
Thailand's financial sector; and Tata Engineering and Locomotive Company
(TELCO), India's largest vehicle manufacturer, which slumped on speculation
concerning rising inventories and general market uncertainty. We significantly
reduced the fund's position in Leader Universal Holdings and IFCT, but we
continue to have confidence in TELCO, which has strong fundamentals and fared
well relative to the broader Indian market.
Portfolio Composition
As of January 31, 1997, 97.1% of the fund's total market value was
invested in equities while 2.2% was in cash equivalents, with the remainder in
other securities. The fund's five largest country exposures were Hong Kong
(39.9%), Malaysia (13.5%), Singapore (10.1%), India (9.9%) and Indonesia (5.2%).
At the end of the period, the portfolio was overweighted relative to the Index
in Hong Kong, India and South Korea, slightly underweighted in
- --------------------------------------------------------------------------------
49
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund (continued)
- --------------------------------------------------------------------------------
the Philippines, and significantly underweighted in Thailand, Singapore,
Malaysia and Taiwan.
Additions in Real Estate and Security Services, Reductions in Several Existing
Positions
During the period, we added Hysan Development Company, a property
investment company that owns a number of commercial and residential properties
in Hong Kong and should be a beneficiary of rising rental prices, and
Taiwan-Sogo Shinkong, a security services company that controls approximately
38% of the market in Taiwan and is expected to experience growing demand from
residential clients. Other portfolio changes included the trimming of several
positions in Hong Kong after they appreciated significantly and became more
fully valued. These included Sun Hung Kai Properties, Henderson Land Development
and HKR International Ltd.
<TABLE>
<CAPTION>
Top 10 Portfolio Holdings as of January 31, 1997
Percentage
Line of of Total
Company Country Business Net Assets
<S> <C> <C> <C>
HKR International Hong Kong Property 4.4%
Ltd.
Road Builder Malaysia Infrastructure 4.1%
Malaysia Holdings
Swire Pacific Ltd. Hong Kong Conglomerate 4.1%
Metropolitan Bank Philippines Banking and 3.8%
and Trust Finance
Wing Hang Bank Hong Kong Banking and 3.9%
Ltd. Finance
Henderson Land Hong Kong Property 3.7%
Development
HSBC Holdings PLC Hong Kong Banking and 3.5%
Finance
Hutchison Hong Kong Conglomerate 3.5%
Whampoa
Sun Hung Kai Hong Kong Property 3.5%
Properties
Commerce Asset- Malaysia Conglomerate 3.5%
Holdings
</TABLE>
Outlook
In 1997, we expect export growth to strengthen, which should stimulate
economies throughout the region. With most of the region's elections now over,
the region should also benefit from greater political stability in 1997. Though
the recent death of Deng Xiaoping may increase near-term volatility, we remain
optimistic that the handover of Hong Kong to China will proceed smoothly, as it
is in China's best interests to maintain Hong Kong's current economic success.
We intend to increase the fund's weightings in Malaysia, the Philippines and
Indonesia, markets that we expect to benefit from stable currencies and good
economic fundamentals. In September 1996, the benchmark established a new
weighting in Taiwan and doubled its weighting in Korea, and we are actively
seeking investment opportunities in these countries. We continue to have a
favorable view of India but are still cautious regarding Thailand and Singapore,
where real estate overdevelopment may continue to hinder their respective
markets for the near term.
In general, we believe that Asian equities are attractively valued on a
historical basis. We expect that economic growth in the region may slow somewhat
to 5% to 7% annually, still approximately double versus the U.S., one of the
world's most mature economies. Over time, we intend to broaden our emphasis from
companies that tend to do well in the earliest stages of emerging economies to
companies that we believe are poised to benefit most from the region's internal
growth. These include new start-ups, consumer-related products and services, and
infrastructure companies.
On another front, we are pleased to announce that we have recently
expanded our portfolio management team. Our new team members will focus
primarily on real estate companies, conglomerates and cyclical industries, and
they will enhance our ability to seek out companies with above-average growth
potential.
50
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
We appreciate your continued support in what has been a challenging period
for the region and the fund. Going forward, we remain confident that the region
continues to offer many attractive investment opportunities for investors with a
long-term view.
/s/ Warwick M. Negus
Warwick M. Negus
Senior Portfolio Manager,
Asia Active Equity
/s/ Alice Lui
Alice Lui
Portfolio Manager,
Asia Active Equity
/s/ Ravi Shanker
Ravi Shanker
Portfolio Manager,
Asia Active Equity
/s/ Karma A. Wilson
Karma A. Wilson
Portfolio Manager,
Asia Active Equity
March 3, 1997
- --------------------------------------------------------------------------------
51
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund
January 31, 1997
- --------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's benchmark
(the Morgan Stanley Capital International Combined Asia (ex Japan) Index ("MSCI
Combined Asia-ex Japan")) is shown for the appropriate time periods. All
performance data shown represents past performance and should not be considered
indicative of future performance which will fluctuate with changes in market
conditions. These performance fluctuations will cause an investor's shares, when
redeemed, to be worth more or less than their original cost.
Class A
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Asia Growth GS Asia Growth
Class A Class A MSCI
(w/sales charge) (no sales charge) Combined
---------------- ----------------- --------
<S> <C> <C> <C>
7/8/94 $ 9,450 $10,000 $10,000
1/31/95 8,934 9,454 9,074
1/31/96 11,300 11,958 11,129
1/31/97 11,186 11,837 11,393
</TABLE>
Class B
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Asia Growth GS Asia Growth
Class B Class B MSCI
(w/redemp. charge) (no redemp. charge) Combined
------------------- ------------------ --------
<S> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000
1/31/97 9,398 8,928 9,750
</TABLE>
Institutional
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Asia Growth MSCI
Institutional Combined
-------------- --------
<S> <C> <C>
2/2/96 $10,000 $10,000
1/31/97 9,891 10,206
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------
Average Annual Total Return
----------------------------------------
One Year Since Inception/(a)/
- -------------------------------------------------------------------------
<S> <C> <C>
Class A, no sales charge (1.01)% 6.78%
- -------------------------------------------------------------------------
Class A, w/sales charge (6.44)% (4.46)%
- -------------------------------------------------------------------------
Class B, no redemption charge N/A (6.02)%/(b)/
- -------------------------------------------------------------------------
Class B, w/redemption charge N/A (10.72)%/(b)/
- -------------------------------------------------------------------------
Institutional Class N/A (1.09)%/(b)/
- -------------------------------------------------------------------------
</TABLE>
/(a)/ Class A, Class B and Institutional shares commenced operations July 8,
1994, May 1, 1996 and February 2, 1996, respectively.
/(b)/ An aggregate total return (not annualized) is shown instead of an average
annual total return since these classes have not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
52
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Asia Growth Fund
- --------------------------------------------------------------------
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
Common Stocks--96.0%
<S> <C> <C>
Hong Kong Dollar--39.9%
3,734,000 Asia Satellite Tel.*
(Telecommunications) $ 8,312,234
1,107,000 Henderson Land Development Co.
(Recreational Services) 10,250,000
7,947,440 HKR International Ltd.
(Real Estate) 12,358,582
2,731,000 Hong Kong Electric Holdings
(Utility) 9,709,517
426,000 HSBC Holdings
(Commercial Banks) 9,867,983
1,305,000 Hutchison Whampoa
(Conglomerates) 9,851,916
2,513,000 Hysan Development
(Utility) 9,145,257
9,735,666 JCG Holdings Ltd.
(Financial Services) 8,669,002
2,308,200 San Miguel Brewery Ltd.
(Breweries) 1,049,994
869,000 Sun Hung Kai Properties Co.
(Real Estate) 9,812,556
1,262,000 Swire Pacific Ltd. "A"
(Transportation) 11,603,755
2,316,500 Wing Hang Bank Ltd.
(Financial Services) 11,030,952
- --------------------------------------------------------------------
111,661,748
- --------------------------------------------------------------------
Indian Rupee--9.9%
235,000 Brook Bond Lipton India Ltd.
(Food) 2,438,494
372,900 Colgate Palmolive
(Conglomerates) 2,613,421
259,600 Hindustan Lever Ltd.
(Household Products) 6,423,018
10,000 Larsen & Toubro Ltd.
(Engineering) 65,272
143,500 Larsen & Toubro Ltd. GDR
(Engineering) 1,919,313
214,000 Larsen & Toubro LTD. GDS
(Engineering) 2,862,250
434,250 Mahindra & Mahindra Ltd.
(Autos and Trucks) 4,339,472
165,750 Mahindra & Mahindra GDR
(Autos and Trucks) 1,895,351
4,000 Niit Limited
(Computers) 32,022
80,000 Tata Engineering & Locomotive Ltd.
GDR (Engineering) 786,000
446,600 Tata Engineering & Locomotive Ltd.
GDS (Engineering) 4,387,845
- --------------------------------------------------------------------
27,762,458
- --------------------------------------------------------------------
Indonesian Rupiah--5.2%
2,374,750 Indofoods Sukses Makmur - Foreign
(Food) 5,245,031
2,346,000 PT Bank of Bali - Foreign
(Banking) 5,675,011
2,613,000 PT Jaya Real Property - Foreign
(Real Estate) 3,627,640
- --------------------------------------------------------------------
14,547,682
- --------------------------------------------------------------------
Malaysian Ringgit--13.2%
1,217,000 Commerce Asset Holdings
(Conglomerates) 9,790,829
623,000 Leader Universal Holdings
(Electronics) 1,253,017
1,936,000 Road Builder Malaysia Holdings
(Construction) 11,603,540
941,000 Tenaga National Berhad
(Utility) 4,504,385
1,081,000 United Engineers Malaysia Holdings
(Construction) 9,696,822
- --------------------------------------------------------------------
36,848,593
- --------------------------------------------------------------------
New Taiwan Dollar--2.5%
2,118,000 Taiwan Sogo Shinkong Securities
(Financial Services) 7,103,755
- --------------------------------------------------------------------
Philippine Peso--4.6%
18,189,000 Centennial City Inc.
(Real Estate) 2,208,911
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
53
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund (continued)
January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Philippine Peso (continued)
393,454 Metropolitan Bank and Trust
(Banking) $ 10,750,925
- --------------------------------------------------------------------
12,959,836
- --------------------------------------------------------------------
Singapore Dollar--9.9%
639,000 Overseas Union Bank - Foreign
(Banking) 5,174,457
1,149,000 Singapore Land
(Real Estate) 6,937,420
383,000 Singapore Press Holdings - Foreign
(Printing & Publishing) 7,671,970
2,195,000 Straits Steamship Land
(Conglomerates) 7,795,852
- --------------------------------------------------------------------
27,579,699
- --------------------------------------------------------------------
South Korean Won--3.8%
168,920 Korea Mobile Telecommunications
Corp. ADR* (Telecommunications) 2,512,685
4,759 Korea Mobile Telecommunications
Corp. (Telecommunications) 5,228,904
7,132 Samsung Fire & Marine Insurance
(Insurance) 2,982,743
- --------------------------------------------------------------------
10,724,332
- --------------------------------------------------------------------
Thai Baht--3.9%
723,800 Electricity Generating Public Co.
(Utility) 1,815,785
758,100 Electricity Generating Public Co.
Foreign(Utility) 1,843,315
1,989,000 Industrial Finance Corp - Foreign
(Financial Services) 5,220,069
425,000 Jasmine International Co. - Foreign
(Diversified) 602,808
1,617,500 Thai Telephone & Telecom Corp. -
Foreign (Telecommunications) 1,326,587
- --------------------------------------------------------------------
10,808,564
- --------------------------------------------------------------------
United States Dollar--3.1%
387,000 Korea Electric Power Corp. ADR*
(Utilities) 8,562,375
- --------------------------------------------------------------------
Total Common Stocks
(Cost $237,846,163) $268,559,042
====================================================================
Rights & Warrants*--0.3%
Singapore Dollar--0.2%
356,750 Straits Steamship Land, exp. 12/12/00
(Conglomerate)- warrants 494,149
Thai Baht--0.1%
808,750 Thai Telephone & Telecom Corp., exp.
03/07/97 (Telecommunications)-rights 351,155
- --------------------------------------------------------------------
Total Rights & Warrants
(Cost $287,980) $ 845,304
====================================================================
<CAPTION>
Principal
Amount Description Value
====================================================================
<S> <C> <C>
Corporate Bonds--0.3%
Malaysian Ringitt--0.3%
MYR United Engineers Malaysia
1,024,000 (Construction) 4.00%, 05/22/99 $ 848,528
- --------------------------------------------------------------------
Total Corporate Bonds
(Cost $521,580) $ 848,528
====================================================================
Short-Term Obligations--2.2%
$ 6,200,104 State Street Bank & Trust Euro-Time
Deposit, 5.50%, 02/03/97 $ 6,200,104
- --------------------------------------------------------------------
Total Short-Term Obligations
(Cost $6,200,104) $ 6,200,104
====================================================================
Total Investments
(Cost $244,855,827)/(a)/ $276,452,978
====================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 45,982,425
Gross unrealized loss for investments in
which cost exceeds value (14,998,273)
====================================================================
Net unrealized gain $ 30,984,152
====================================================================
</TABLE>
* Non-income producing security.
/(a)/The aggregate cost for federal income tax purposes is $244,890,862.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
54
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Common Stock, Rights, Warrants, and Corporate Bond Industry
Concentrations
====================================================================
<S> <C>
Autos and Trucks 2.2%
Banking 7.8%
Breweries 0.4%
Commercial Banks 3.5%
Conglomerates 10.9%
Construction 7.9%
Diversified 0.2%
Electronics 0.4%
Engineering 3.6%
Financial Services 11.5%
Food 2.7%
Household Products 2.3%
Insurance 1.1%
Printing & Publishing 2.7%
Real Estate 12.5%
Recreational Services 3.7%
Telecommunications 6.3%
Transportation 4.1%
Utilities 12.8%
- --------------------------------------------------------------------
Total Common Stock, Rights, Warrants, and
Corporate Bonds 96.6%
====================================================================
</TABLE>
- --------------------------------------------------------------------------------
55
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- -------------------------------------------------------------------------------
Statements of Assets and Liabilities
January 31, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Goldman Sachs Goldman Sachs
Balanced Select Equity
Fund Fund
===============================================
<S> <C> <C>
Assets:
Investments in securities, at value (identified cost $80,718,346, $302,169,999,
$513,612,707, $679,366,240, $213,003,477, $549,757,598 and $244,855,827,
respectively) $89,222,318 $393,263,171
Cash, at value 13,884 9,802
Receivables:
Investment securities sold 3,947,652 --
Forward foreign currency exchange contracts 6,692 --
Fund shares sold 565,860 3,095,601
Dividends and interest, at value 451,554 387,080
Variation margin 10,928 95,387
Deferred organization expenses, net 36,173 --
Other assets 97,786 8,495
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 94,352,847 396,859,536
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased 9,690,219 --
Forward foreign currency exchange contracts -- --
Fund shares repurchased 44,298 548,016
Amounts owed to affiliates 97,949 388,699
Covered securities sold short (cash received, $936,984) 938,808 --
Accrued expenses and other liabilities 61,446 89,126
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 10,832,720 1,025,841
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid-in capital 73,750,866 300,246,199
Accumulated undistributed (distributions in excess of) net investment income 180,204 --
(loss)
Accumulated undistributed (distributions in excess of) net realized gain (loss)
on investment, option and futures transactions 977,487 4,402,524
Accumulated net realized foreign currency gain (loss) 12,575 --
Net unrealized gain on investments, options and futures 8,611,563 91,184,972
Net unrealized loss on translation of assets and liabilities denominated in
foreign currencies (12,568) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets $83,520,127 $395,833,695
===================================================================================================================================
<CAPTION>
Class A Class B Class A Class B
------------ -------------- ------------- ------------
<S> <C> <C> <C> <C>
Total shares of beneficial interest outstanding, $.001 par
value (100,000,000 and 25,000,000 shares authorized for
each Class A and B, respectively) 4,336,101 112,660 9,688,806 744,222
Net asset and Class A redemption value per share (a) $18.78 $18.73 $23.32 $23.18
Maximum public offering price per share (Class A NAV x
1.0582) $19.87 $18.73 $24.68 $23.18
Institutional Service Institutional Service
------------ -------------- ------------- ------------
Total shares of beneficial interest outstanding, $.001 par
value (50,000,000 shares per each class authorized) -- -- 6,351,958 157,464
Net asset value, offering and redemption price per share -- -- $23.44 $23.27
===============================================================================================================================
(a) At redemption, Class B shares are subject to a contingent deferred sales charge assessed on the amount equal to the lesser
of the current net asset value or the original purchase price of the shares.
===============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
56
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs
Growth and Income Capital Growth Small Cap Equity International Equity Asia Growth
Fund Fund Fund Fund Fund
==================================================================================================================================
<S> <C> <C> <C> <C>
$638,954,258 $932,041,765 $217,608,994 $627,524,320 $276,452,978
59,158 94,994 30,728 1,735,366 1,060,177
1,632,491 1,390,277 4,392,159 959,642 3,093,623
-- -- -- 2,684,757 --
4,847,992 1,524,356 820,288 4,794,141 685,136
572,159 706,624 85,173 440,308 262,880
-- -- -- -- --
19,321 -- 13,467 14,573 77,113
14,043 16,281 2,597 10,188 770
- ----------------------------------------------------------------------------------------------------------------------------------
646,099,422 935,774,297 222,953,406 638,163,295 281,632,677
- ----------------------------------------------------------------------------------------------------------------------------------
9,130,091 9,797,231 6,585,828 8,912,558 --
-- -- -- 3,434,535 1,495
414,917 850,523 165,072 198,616 694,794
716,432 1,160,456 345,810 833,473 400,444
-- -- -- -- --
21,990 99,060 121,890 255,084 846,340
- ----------------------------------------------------------------------------------------------------------------------------------
10,283,430 11,907,270 7,218,600 13,634,266 1,943,073
- ----------------------------------------------------------------------------------------------------------------------------------
492,994,560 657,200,330 203,743,684 542,859,953 266,426,371
(193,256) (275,552) -- (25,666) (1,316,323)
17,673,137 14,266,724 7,385,605 2,530,732 (16,027,669)
-- -- -- (917,847) (411,919)
125,341,551 252,675,525 4,605,517 112,491,393 33,014,375
-- -- -- (32,409,536) (1,995,231)
- ----------------------------------------------------------------------------------------------------------------------------------
$635,815,992 $923,867,027 $215,734,806 $624,529,029 $279,689,604
==================================================================================================================================
<CAPTION>
Class A Class B Class A Class B Class A Class B Class A Class B Class A Class B
- ------------- ---------- ------------- ---------- ------------ ------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
26,534,286 751,089 55,021,724 193,240 10,140,493 176,544 27,765,580 997,807 16,122,122 206,387
$23.18 $23.10 $16.73 $16.67 $20.91 $20.80 $19.32 $19.24 $16.31 $16.24
$24.53 $23.10 $17.70 $16.67 $22.13 $20.80 $20.44 $19.24 $17.26 $16.24
<CAPTION>
Institutional Service Institutional Service Institutional Service Institutional Service Institutional Service
- ------------- ---------- ------------- ---------- ------------- ------------ ------------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
8,321 136,977 -- -- -- -- 3,524,169 34,830 815,499 --
$23.19 $23.17 -- -- -- -- $19.40 $19.34 $16.33 --
==================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
57
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Statements of Operations
For the Year Ended January 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Goldman Sachs
Balanced Select Equity
Fund Fund
===================================
<S> <C> <C>
Investment income:
Dividends /(a)/ $ 838,092 $ 5,629,026
Interest /(b)/ 2,107,288 541,011
- ----------------------------------------------------------------------------------------------------------------------------------
Total income 2,945,380 6,170,037
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses: /(c)/
Investment advisory fees 309,372 1,413,035
Administration fees 92,811 706,517
Distribution fees 157,253 468,965
Authorized dealer service fees 154,686 444,626
Custodian fees 93,352 95,947
Transfer agent fees 148,576 319,246
Professional Fees 71,598 74,319
Amortization of deferred organization expenses 13,468 9,549
Director fees 1,171 2,728
Other 53,077 96,414
- ----------------------------------------------------------------------------------------------------------------------------------
Total expenses 1,095,364 3,631,346
Less--expenses reimbursed and fees waived by Goldman Sachs (472,758) (626,188)
- ----------------------------------------------------------------------------------------------------------------------------------
Net expenses 622,606 3,005,158
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 2,322,774 3,164,879
- ----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions:
Net realized gain (loss) from:
Investment transactions 3,811,127 14,386,845
Options written (2,680) --
Futures transactions 148,013 645,873
Foreign currency related transactions 12,575 --
Net change in unrealized gain (loss) on:
Investments 5,008,557 49,393,370
Futures 14,475 67,175
Translation of assets and liabilities denominated in foreign currencies (12,568) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment, option, futures and foreign currency
transactions 8,979,499 64,493,263
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 11,302,273 $ 67,658,142
==================================================================================================================================
</TABLE>
/(a)/ For the Balanced, Select Equity, Growth and Income, Capital Growth, Small
Cap Equity, International Equity and Asia Growth Funds, taxes withheld on
dividends were $1,496, $42,274, $23,285, $53,869, $4,211, $900,877 and
$372,334, respectively.
/(b)/ For the Balanced Fund, taxes withheld on interest were $969.
/(c)/ Certain expenses reflected in the above statement of operations are
incurred on a class specific basis.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
58
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------
Goldman Sachs Goldman Sachs
Growth and Income Capital Growth
Fund Fund
<S> ========================================
Investment income: <C> <C>
Dividends /(a)/ $ 13,008,785 $ 14,748,431
Interest /(b)/ 1,235,823 2,802,840
- ---------------------------------------------------------------------------------------------------------------------------------
Total income 14,244,608 17,551,271
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses: /(c)/
Investment advisory fees 2,782,464 6,522,949
Administration fees 758,854 2,174,316
Distribution fees 1,280,332 2,179,405
Authorized dealer service fees 1,261,615 2,174,316
Custodian fees 102,394 129,556
Transfer agent fees 871,030 908,310
Professional Fees 75,891 74,529
Amortization of deferred organization expenses 19,164 --
Director fees 6,744 13,973
Other 144,279 208,397
- ----------------------------------------------------------------------------------------------------------------------------------
Total expenses 7,302,767 14,385,751
Less--expenses reimbursed and fees waived by Goldman Sachs (1,113,014) (2,171,272)
- ----------------------------------------------------------------------------------------------------------------------------------
Net expenses 6,189,753 12,213,979
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 8,054,855 5,337,292
- ----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions:
Net realized gain (loss) from:
Investment transactions 58,221,421 53,687,297
Options written (37,206) --
Futures transactions 45,994 --
Foreign currency related transactions -- --
Net change in unrealized gain (loss) on:
Investments 67,575,111 145,350,120
Futures -- --
Translation of assets and liabilities denominated in foreign currencies -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment, option, futures and foreign curren
transactions 125,805,320 199,037,417
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $133,860,175 $204,374,709
====================================================================================================================================
<CAPTION>
-------------------------------------------
Goldman Sachs Goldman Sachs
Small Cap Equity International Equity
Fund Fund
<S> ===========================================
Investment income: <C> <C>
Dividends /(a)/ $ 968,945 $ 5,944,299
Interest /(b)/ 896,528 1,533,039
- ------------------------------------------------------------------------------------------------------------------------------------
Total income 1,865,473 7,477,338
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses: /(c)/
Investment advisory fees 1,598,027 3,478,689
Administration fees 532,676 1,159,514
Distribution fees 538,657 1,115,919
Authorized dealer service fees 532,676 1,086,488
Custodian fees 63,636 786,004
Transfer agent fees 511,883 586,243
Professional Fees 72,844 84,162
Amortization of deferred organization expenses 18,742 17,603
Director fees 3,842 5,519
Other 73,764 229,722
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 3,946,747 8,549,863
Less--expenses reimbursed and fees waived by Goldman Sachs (529,684) (829,788)
- ------------------------------------------------------------------------------------------------------------------------------------
Net expenses 3,417,063 7,720,075
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (1,551,590) (242,737)
- ------------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions:
Net realized gain (loss) from:
Investment transactions 29,166,218 16,714,697
Options written (398,365) --
Futures transactions -- --
Foreign currency related transactions -- 146,694
Net change in unrealized gain (loss) on:
Investments 22,913,571 60,236,901
Futures -- --
Translation of assets and liabilities denominated in foreign currencies -- (28,245,657)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions 51,681,424 48,852,635
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $50,129,834 $48,609,898
====================================================================================================================================
<CAPTION>
-----------------
Goldman Sachs
Asia Growth
Fund
<S> ==================
Investment income: <C>
Dividends /(a)/ $ 4,216,521
Interest /(b)/ 716,243
- -----------------------------------------------------------------------------------------------------------
Total income 4,932,764
- -----------------------------------------------------------------------------------------------------------
Expenses: /(c)/
Investment advisory fees 1,937,658
Administration fees 645,897
Distribution fees 636,953
Authorized dealer service fees 630,134
Custodian fees 499,487
Transfer agent fees 385,114
Professional Fees 84,316
Amortization of deferred organization expenses 31,711
Director fees 3,496
Other 51,032
- -----------------------------------------------------------------------------------------------------------
Total expenses 4,905,798
Less--expenses reimbursed and fees waived by Goldman Sachs (511,880)
- -----------------------------------------------------------------------------------------------------------
Net expenses 4,393,918
- -----------------------------------------------------------------------------------------------------------
Net investment income (loss) 538,846
- -----------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions:
Net realized gain (loss) from:
Investment transactions (7,294,240)
Options written --
Futures transactions (141,910)
Foreign currency related transactions (1,099,538)
Net change in unrealized gain (loss) on:
Investments 5,823,115
Futures --
Translation of assets and liabilities denominated in foreign currencies (599,549)
- -----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions (3,312,122)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $(2,773,276)
===========================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
59
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- -------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Goldman Sachs Goldman Sachs
Balanced Select Equity
Fund Fund
===============================================
<S> <C> <C>
From operations:
Net investment income (loss) $ 2,322,774 $ 3,164,879
Net realized gain (loss) on investment, option and futures transactions 3,956,460 15,032,718
Net realized gain (loss) on foreign currency related transactions 12,575 --
Net change in unrealized gain (loss) on investments, options and futures 5,023,032 49,460,545
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies (12,568) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 11,302,273 67,658,142
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
Class A shares (2,259,972) (1,515,575)
Class B shares (13,466) (4,750)
Institutional shares -- (1,606,175)
Service shares -- (6,666)
In excess of net investment income
Class A shares (7,504) --
Class B shares -- (118,421)
Institutional shares -- (34,205)
Service shares -- (16,030)
From net realized gain on investment, option and futures transactions
Class A shares (3,654,841) (7,174,235)
Class B shares (77,400) (440,131)
Institutional shares -- (4,675,726)
Service shares -- (68,472)
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (6,013,183) (15,660,386)
-----------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 29,174,047 167,209,718
Reinvestment of dividends and distributions 5,694,651 14,904,237
Cost of shares repurchased (7,565,668) (32,152,494)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 27,303,030 149,961,461
- -----------------------------------------------------------------------------------------------------------------------------------
Total increase 32,592,120 201,959,217
Net assets:
Beginning of year 50,928,007 193,874,478
===================================================================================================================================
End of year $ 83,520,127 $ 395,833,695
===================================================================================================================================
Accumulated undistributed (distributions in excess of) net investment income $ 180,204 $ --
===================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
60
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Equity Portfolios, Inc.
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Goldman Sachs Goldman Sachs
Statements of Changes in Net Assets Growth and Income Capital Growth Small Cap
For the Year Ended January 31, 1997 Fund Fund Equity Fund
====================================================
<S> <C> <C> <C>
From operations:
Net investment income (loss) $ 8,054,855 $ 5,337,292 $ (1,551,590
Net realized gain (loss) on investment, option and futures transactions 58,230,209 53,687,297 28,767,853
Net realized gain (loss) on foreign currency related transactions -- -- --
Net change in unrealized gain (loss) on investments, options and futures 67,575,111 145,350,120 22,913,571
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 133,860,175 204,374,709 50,129,834
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
Class A shares (8,111,894) (5,948,617) --
Class B shares (5,818) -- --
Institutional shares (494) -- --
Service shares (11,500) -- --
In excess of net investment income
Class A shares (135,533) (258,749) --
Class B shares (48,273) (12,838) --
Institutional shares (380) --
Service shares (9,070) -- --
From net realized gain on investment, option and futures transactions
Class A shares (46,442,616) (91,862,169) (10,210,264)
Class B shares (754,312) (179,327) (149,626)
Institutional shares (9,971) -- --
Service shares (255,610) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (55,785,471) (98,261,700) (10,359,890)
- ----------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 140,362,846 76,008,897 56,119,213
Reinvestment of dividends and distributions 53,352,809 90,088,874 9,876,571
Cost of shares repurchased (72,730,939) (229,399,817) (95,024,895)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 120,984,716 (63,302,046) (29,029,111)
- ----------------------------------------------------------------------------------------------------------------------------------
Total increase 199,059,420 42,810,963 10,740,833
Net Asssets:
Beginning of Year 436,756,572 881,056,064 204,993,973
==================================================================================================================================
End of Year $635,815,992 $923,867,027 $ 215,734,806
==================================================================================================================================
Accumulated distributed (distributions in excess investment income) $ (193,256) $ (275,552) $ --
==================================================================================================================================
<CAPTION>
-----------------------------------------------------
Statements of Changes in Net Assets Goldman Sachs Goldman Sachs
For the Year Ended January 31, 1997 International Asia Growth
Equity Fund Fund
====================================================
<S> <C> <C>
From operations:
Net investment income (loss) $ (242,737) $ 538,846
Net realized gain (loss) on investment, option and futures transactions 16,714,697 (7,436,150)
Net realized gain (loss) on foreign currency related transactions 146,694 (1,099,538)
Net change in unrealized gain (loss) on investments, options and futures 60,236,901 5,823,115
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies (28,245,657) (599,549)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 48,609,898 (2,773,276)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
Class A shares -- (206,784)
Class B shares -- --
Institutional shares (106,712) --
Service shares -- --
In excess of net investment income
Class A shares -- --
Class B shares -- (5,064)
Institutional shares -- (83,075)
Service shares -- --
From net realized gain on investment, option and futures transactions
Class A shares (5,358,559) --
Class B shares (159,717) --
Institutional shares (689,171) --
Service shares (3,947) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (6,318,106) (294,923)
- ------------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 321,475,961 144,448,826
Reinvestment of dividends and distributions 5,481,492 221,279
Cost of shares repurchased (75,580,037) (67,451,011)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 251,377,416 77,219,094
- ----------------------------------------------------------------------------------------------------------------------------------
Total increase
Net assets: 293,669,208 74,150,895
Beginning of year 330,859,821 205,538,709
===================================================================================================================================
End of year $624,529,029 $279,689,604
====================================================================================================================================
Accumulated undistributed (distributions in excess of) net investment income $ (25,666) $ (1,316,323)
===================================================================================================================================
</TABLE>
61
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Goldman Sachs Goldman Sach
Balanced Select Equity
Fund Fund
==============================================
<S> <C> <C>
From operations:
Net investment income (loss) $ 1,083,645 $ 1,518,160
Net realized gain (loss) on investment, option and futures transactions 1,715,887 4,687,943
Net realized gain on foreign currency related transactions -- --
Net change in unrealized gain on investments, options and futures 3,518,420 37,068,509
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 6,317,952 43,274,612
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income (991,655) (1,610,216)
In excess of net investment income -- --
From net realized gain on investment, option and futures transactions (962,754) (3,527,188)
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,954,409) (5,137,404)
- ----------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 41,736,040 102,149,318
Reinvestment of dividends and distributions 1,802,563 4,880,575
Cost of shares repurchased (4,483,707) (46,260,132)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 39,054,896 60,769,761
- ----------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 43,418,439 98,906,969
Net assets:
Beginning of year 7,509,568 94,967,509
==================================================================================================================================
End of year $ 50,928,007 $ 193,874,478
==================================================================================================================================
Accumulated undistributed (distributions in excess of) net investment income $ 125,304 $ 86,854
==================================================================================================================================
Summary of share transactions:
===================================================================================================================================
<CAPTION>
Class A Class A Institutional
-------------- -------------- --------------
<S> <C> <C> <C>
Shares sold 2,578,356 2,479,285 3,220,915
Reinvestment of dividends and distributions 108,023 161,481 97,993
Shares repurchased (271,753) (2,578,247) (30,492)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 2,414,626 62,519 3,288,416
==================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
62
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs
Growth and Income Capital Growth Small Cap International Asia Growth
Fund Fund Equity Fund Equity Fund Fund
=================================================================================================================================
<S> <C> <C> <C> <C>
$ 5,307,925 $ 6,032,534 $ (1,717,759) $ 725,369 $ 1,643,482
18,815,320 188,790,639 (5,033,599) (8,757,936) (5,766,395)
-- -- -- 21,213,851 416,433
58,081,439 53,559,848 30,594,034 69,834,990 42,480,420
-- -- -- (12,612,130) (1,710,833)
- --------------------------------------------------------------------------------------------------------------------------------
82,204,684 248,383,021 23,842,676 70,404,144 37,063,107
- ---------------------------------------------------------------------------------------------------------------------------------
(5,300,032) (6,289,354) -- (9,491,864) (1,787,451)
-- -- -- -- (1,657,672)
(11,998,907) (139,713,660) (161,357) (14,089,155) --
- ---------------------------------------------------------------------------------------------------------------------------------
(17,298,939) (146,003,014) (161,357) (23,581,019) (3,445,123)
- ---------------------------------------------------------------------------------------------------------------------------------
199,623,973 144,529,476 56,891,181 85,900,104 88,560,430
16,219,024 131,979,456 149,801 21,651,092 2,951,847
(37,764,413) (359,937,680) (195,215,538) (98,600,969) (43,889,831)
- ---------------------------------------------------------------------------------------------------------------------------------
178,078,584 (83,428,748) (138,174,556) 8,950,227 47,622,446
- ---------------------------------------------------------------------------------------------------------------------------------
242,984,329 18,951,259 (114,493,237) 55,773,352 81,240,430
193,772,243 862,104,805 319,487,210 275,086,469 124,298,279
=================================================================================================================================
$436,756,572 $ 881,056,064 $ 204,993,973 $ 330,859,821 $ 205,538,709
=================================================================================================================================
$ 56,087 $ 607,360 $ -- $ 227,683 $ (1,630,536)
=================================================================================================================================
Class A Class A Class A Class A Class A
------------- --------------- --------------- -------------- --------------
10,766,604 9,130,715 3,285,739 5,082,572 5,830,049
848,870 9,145,811 8,585 1,286,112 197,978
(2,027,335) (22,215,374) (11,228,873) (6,067,690) (2,898,305)
- ---------------------------------------------------------------------------------------------------------------------------------
9,588,139 (3,938,848) (7,934,549) 300,994 3,129,722
=================================================================================================================================
- -------------------------------------------------------------------- ----------------------------------------------------------
</TABLE>
63
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements
January 31, 1997
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Equity Portfolios, Inc. (the "Company") is a Maryland corporation
registered under the Investment Company Act of 1940, as amended, as an open-end,
diversified management investment company. Included in this report are the
financial statements for the Goldman Sachs Balanced Fund ("Balanced Fund"),
Goldman Sachs Select Equity Fund ("Select Equity Fund"), Goldman Sachs Growth
and Income Fund ("Growth and Income Fund"), Goldman Sachs Capital Growth Fund
("Capital Growth Fund"), Goldman Sachs Small Cap Equity Fund ("Small Cap Equity
Fund"), Goldman Sachs International Equity Fund ("International Equity Fund")
and Goldman Sachs Asia Growth Fund ("Asia Growth Fund"), collectively, "the
Funds." The Select Equity, Growth and Income, International Equity and Asia
Growth Funds offer four classes of shares - Class A, Class B, Institutional and
Service. The Balanced, Capital Growth and Small Cap Equity Funds offer two
classes of shares - Class A and Class B.
2. Significant Accounting Policies
The following is a summary of the significant accounting policies consistently
followed by the Company. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts.
A. Investment Valuation
- ------------------------
Investments in securities traded on a U.S. or foreign securities exchange or the
NASDAQ system are valued daily at their last sale or closing price on the
principal exchange on which they are traded or NASDAQ. If no sale occurs,
securities traded on a U.S. exchange or NASDAQ are valued at the mean between
the closing bid and asked price, and securities traded on a foreign exchange
will be valued at the official bid price. Unlisted equity and debt securities
for which market quotations are available are valued at the mean between the
most recent bid and asked prices. Debt securities are valued at prices supplied
by an independent pricing service, which reflect broker/dealer-supplied
valuations and matrix pricing systems. Short-term debt obligations maturing in
sixty days or less are valued at amortized cost. Restricted securities, and
other securities for which quotations are not readily available, are valued at
fair value using methods approved by the Board of Directors of the Company.
B. Securities Transactions and Investment Income
- -------------------------------------------------
Securities transactions are recorded on the trade date. Realized gains and
losses on sales of investments are calculated on the identified-cost basis.
Dividend income is recorded on the ex-dividend date. Dividends for which the
Funds have the choice to receive either cash or stock are recognized as
investment income in an amount equal to the cash dividend. This amount is also
used as an estimate of the fair value of the stock received. Interest income is
determined on the basis of interest accrued, premium amortized and discount
earned with the exception of the Balanced Fund which does not amortize premiums.
In addition, it is the Funds' policy to accrue for estimated capital gains taxes
on foreign securities held by the Funds subject to such taxes.
C. Mortgage Dollar Rolls
- -------------------------
The Balanced 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. For financial reporting and
tax reporting purposes, the Fund treats mortgage dollar rolls as two separate
transactions; one involving the purchase of a security and a separate
transaction involving a sale.
D. Foreign Currency Translations
- ---------------------------------
The books and records of the Company are maintained in U.S. dollars. 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 on current exchange rates; (ii) purchases and sales of
foreign investments,
- --------------------------------------------------------------------------------
64
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
income and expenses are converted into U.S. dollars based on 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
dividends and interest recorded and the amounts actually received.
E. Forward Foreign Currency Exchange Contracts
- -----------------------------------------------
Certain of the Funds are authorized to enter into forward foreign currency
exchange contracts for the purchase 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 International Equity and Asia Growth
Funds may enter into such contracts to seek to increase total return. All
commitments are "marked-to-market" daily at the applicable translation rates and
any resulting unrealized gains or losses are recorded in the funds' financial
statements. The Funds record 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 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.
F. Short Securities Positions
- ------------------------------
The Funds (other than the Select Equity Fund) may enter into covered short
sales. Short securities positions are accounted for at cost and subsequently
marked to market to reflect the current market value of the position. The market
value of the short position is recorded as a liability on the fund's records and
any difference between this market value and cash received is reported as
unrealized gain or loss. Gains and losses are realized when a short
- --------------------------------------------------------------------------------
position is closed out by delivering securities back to the broker.
At January 31, 1997, the Balanced Fund had the following covered short positions
open:
- -------------------------------------------------------------------------------
Short Position
Issuer Par Value Market Value
- --------------------------- --------------- --------------------
FNMA TBA 15-Year $900,000 $938,808
- -------------------------------------------------------------------------------
G. Federal Taxes
- -----------------
It is the Funds' policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all of their investment company taxable income and capital gains
to their 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 the Funds' distributions may be shown in the accompanying financial
statements as either from or in excess of net investment income or net realized
gain on investment transactions, or from capital, depending on the type of
book/tax differences that may exist as well as timing differences associated
with having different book and tax year ends.
Asia Growth Fund had approximately $184,000, $5,487,000 and $9,825,000 at
January 31, 1997 of capital loss carryforward expiring in 2002, 2003 and 2004
for federal tax purposes. These amounts are available to be carried forward to
offset future capital gains to the extent permitted by applicable laws or
regulations.
H. Deferred Organization Expenses
- ----------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
I. Expenses
- ------------
Expenses incurred by the Company which do not specifically relate to an
individual fund of the Company are allocated to the Funds based on each Fund's
relative
- --------------------------------------------------------------------------------
65
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
January 31, 1997
- --------------------------------------------------------------------------------
average net assets for the period.
Class A and Class B 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. Each class of Shares separately bears
their respective class-specific transfer agency fees. Service Shares separately
bear a service fee.
J. Option Accounting Principles
- --------------------------------
When certain of the Funds write call or put options, 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 the funds enter into a closing purchase
transaction, the funds realize a gain or loss 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, the funds
realize a gain or loss 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 which the funds purchase upon exercise.
There is a risk of loss from a change in value of such options which may exceed
the related premiums received.
Upon the purchase of a call option or a protective put option by the Funds
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 the Funds
have purchased expires on the stipulated expiration date, the funds will realize
a loss in the amount of the cost of the option. If the funds enter into a
closing sale transaction, the funds will realize a gain or loss, depending on
whether the sale proceeds from the closing sale transaction are greater or less
than the cost of the option. If the Funds exercise a purchased put option, the
funds will realize a gain or loss from the sale of the underlying security, and
the proceeds from such sale will be decreased by the premium originally paid. If
the Funds exercise a purchased call option, the cost of the security which the
funds purchase upon exercise will be increased by the premium originally paid.
K. Futures Contracts
- ---------------------
The Funds may enter into futures transactions in order to hedge against changes
in interest rates, securities prices or currency exchange rates or to seek to
increase total return. The Select Equity Fund may enter into such transactions
only with respect to the S&P 500 Index. A Fund will engage in futures
transactions only for bona fide hedging purposes as defined in regulations of
the CFTC or to seek to increase total return (except with respect to
transactions by the Balanced, Growth and Income, Select Equity, Capital Growth
and Small Cap Equity Funds, in futures on foreign currencies) to the extent
permitted by such regulations. 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.
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 price,
unless such price does not reflect the fair market value of the contract, in
which case the position will be valued using methods approved by the Board of
Directors of the Company.
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'
- --------------------------------------------------------------------------------
66
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
hedging strategies and may also result in a loss to the Funds.
3. Agreements
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), acts as investment adviser to the
Balanced, Growth and Income, Small Cap Equity and International Equity Funds;
Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate of Goldman Sachs,
acts as investment adviser to the Select Equity and Capital Growth Funds; and
Goldman Sachs Asset Management International ("GSAM International") acts as
investment adviser to the Asia Growth Fund and subadviser to the International
Equity Fund. Under the Investment Advisory and Subadvisory Agreements, GSAM,
GSFM and GSAM International (the "Investment Advisors"), subject to the general
supervision of the Company's Board of Directors, manage the Company's
portfolios. As compensation for the services rendered under 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%, .55%, .75% and .25% of the average daily net assets of the Balanced,
Growth and Income, Small Cap Equity and International Equity Funds,
respectively. GSFM is entitled to a fee of .50% and .75% of the average daily
net assets of the Select Equity and Capital Growth Funds, respectively. GSAM
International is entitled to an advisory fee for the Asia Growth Fund and a
subadvisory fee for the International Equity Fund of .75% and .50% of the
average daily net assets for those funds, respectively.
GSAM also acts as the Funds' administrator pursuant to Administration
Agreements. Under these Administration Agreements, GSAM administers the Funds'
business affairs, including providing facilities. As compensation for the
services rendered pursuant to the Administration Agreements, GSAM is entitled to
a fee of .15% of the average daily net assets of the Balanced and Growth and
Income Funds, and .25% of the average daily net assets of the Select Equity,
Capital Growth, Small Cap Equity, International Equity and Asia Growth Funds.
Goldman Sachs has voluntarily agreed to reduce or limit certain "Other
Expenses" for the Balanced, Select Equity, Growth and Income, International
Equity and Asia Growth Funds (excluding advisory, administration, service,
distribution and authorized dealer service fees and litigation and
indemnification costs, taxes, interest, brokerage commissions and extraordinary
expenses and with the exception of the Balanced Fund, transfer agent fees) until
further notice to the extent such expenses exceed .10%, .06%, .11%, .20% and
..24% of the average daily net assets of the funds, respectively.
Goldman Sachs serves as the Distributor of shares of the Funds pursuant to
Distribution Agreements. Goldman Sachs may receive a portion of the Class A
salesload and Class B back-end salesload imposed and has advised the Company
that it retained approximately $94,000, $380,000, $555,000, $323,000, $219,000,
$1,563,000 and $1,397,000 during the year ended January 31, 1997 for the
Balanced, Select Equity, Growth and Income, Capital Growth, Small Cap Equity,
International Equity and Asia Growth Funds, respectively.
The Company, 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% and .75% of a Fund's average daily
net assets attributable to Class A and Class B shares, respectively.
The Company, on behalf of each Fund, has 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, on an annual basis, to .25%
of its average daily net assets attributable to Class A and Class B shares.
Goldman Sachs also serves as the Transfer Agent of the funds for a fee.
For the year ended January 31, 1997, the Advisors, Administrator and
Distributor have voluntarily agreed to waive certain fees and reimburse other
expenses as follows (in thousands):
- --------------------------------------------------------------------------------
67
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Waivers
------- Reimburse-
Admin- Class A Reimburse- ment
Fund Adviser istrator 12b-1 ment Outstanding
- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balanced $ -- $ -- $ 153 $ 320 $ 88
Select Equity 170 282 69 105 3
Growth and
Income -- -- 1,113 -- --
Capital
Growth -- -- 2,171 -- --
Small Cap
Equity -- -- 530 -- --
International
Equity 50 464 171 145 --
Asia Growth 103 259 100 50 --
</TABLE>
The Investment Advisors, Administrator and Distributor may discontinue or
modify such waivers and limitations in the future at their discretion.
At January 31, 1997, the amounts owed to affiliates were as follows(in
thousands):
<TABLE>
<CAPTION>
Authorized
Admin- Distri- Dealer Transfer
Fund Adviser istrator butor Service Agent Total
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balanced $ 33 $ 10 $ 2 $ 15 $ 38 $ 98
Select Equity 143 49 56 57 84 389
Growth and
Income 284 78 28 119 207 716
Capital
Growth 568 190 2 190 210 1,160
Small Cap
Equity 134 45 2 45 120 346
International
Equity 391 78 105 116 143 833
Asia Growth 171 36 50 53 90 400
</TABLE>
4. Portfolio Securities Transactions
Purchases and proceeds of sales or maturities of securities (excluding
short-term investments, futures and options) for the year ended January 31,
1997, were as follows:
<TABLE>
<CAPTION>
Sales or
Fund Purchases Maturities
- --------- --------------- -------------
<S> <C> <C>
Balanced $146,297,709 $123,056,708
Select Equity 242,635,637 102,479,847
Growth and Income 330,177,173 256,802,366
Capital Growth 436,178,218 569,122,643
Small Cap Equity 202,036,820 256,627,457
International Equity 400,682,323 166,164,906
Asia Growth 192,125,629 118,802,040
</TABLE>
Included in the above amounts were purchases and proceeds of sales or
maturities of governmental securities for the Balanced Fund in the amounts of
$99,727,748 and $91,845,598, respectively.
For the year ended January 31, 1997, written put option transactions in the
Balanced Fund were as follows:
<TABLE>
<CAPTION>
Number of Premium
Written Options Contracts Received
- ---------------------- ------------- -------------
<S> <C> <C>
Balance outstanding at
beginning of year 0 $ 0
Options written 32 5,416
Options repurchased (32) (5,416)
--------------- ---------------
Balance outstanding,
end of year 0 $ 0
=============== ===============
</TABLE>
For the year ended January 31, 1997, written call option transactions in the
Growth and Income Fund were as follows:
<TABLE>
<CAPTION>
Number of Premium
Written Options Contracts Received
- ---------------------- ------------- -------------
<S> <C> <C>
Balance outstanding at
beginning of year 0 $ 0
Options written 438 73,608
Options repurchased (438) (73,608)
--------------- ---------------
Balance outstanding,
end of year 0 $ 0
=============== ===============
</TABLE>
- --------------------------------------------------------------------------------
68
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
For the year ended January 31, 1997, written put option transactions in the
Small Cap Equity Fund were as follows:
<TABLE>
<CAPTION>
Number of Premium
Written Options Contracts Received
- ---------------------- ------------- -------------
<S> <C> <C>
Balance outstanding at
beginning of year 0 $ 0
Options written 2,100 575,871
Options expired (9) (2,026)
Options exercised (1,091) (238,096)
Options repurchased (1,000) (335,749)
--------------- ---------------
Balance outstanding,
end of year 0 $ 0
=============== ===============
</TABLE>
Certain risks arise related to call and put options from the possible
inability of counterparties to meet the terms of their contracts.
At January 31, 1997, the Balanced Fund had the following outstanding forward
foreign currency exchange contracts:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Foreign Currency Value on Unrealized
Sale Contracts Settlement Date Current Value Gain
- --------------------------------------------------------------------
<S> <C> <C> <C>
Australian Dollar
expiring 3/14/97 $777,277 $770,585 $6,692
- --------------------------------------------------------------------
Total Foreign
Currency Sale
Contracts $777,277 $770,585 $6,692
- --------------------------------------------------------------------
</TABLE>
At January 31, 1997, the International Equity Fund had the following
outstanding forward foreign currency exchange contracts:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Foreign Currency Value on Unrealized
Sale Contracts Settlement Date Current Value Gain (Loss)
- --------------------------------------------------------------------
<S> <C> <C> <C>
Swiss Franc
expiring 4/28/97 $39,343,000 $39,665,062 $ (322,062)
Deutsche Mark
expiring 2/27/97 22,305,725 22,183,180 122,545
Hong Kong Dollar
expiring 8/8/97 38,565,981 38,530,005 35,976
Japanese Yen
expiring 4/24/97 122,316,352 119,792,909 2,523,443
- --------------------------------------------------------------------
Total Foreign Currency
Sale Contracts $222,531,058 $220,171,156 $2,359,902
- --------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------
Foreign Currency Value on Unrealized
Purchase Contracts Settlement Date Current Value Gain (Loss)
- --------------------------------------------------------------------
<S> <C> <C> <C>
Hong Kong Dollar
expiring 2/3/97 $35,454 $35,454 $--
- --------------------------------------------------------------------
Total Foreign Currency
Purchase Contracts $35,454 $35,454 $--
- --------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 January 31,
1997, the Balanced and International Equity Fund's had sufficient cash and
securities to cover any commitments under these contracts.
The Balanced and International Equity Funds have 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 $6,692 and $0, and $2,684,757 and
$3,434,535, respectively, in the accompanying Statements of Assets and
Liabilities. Included in these amounts for the International Equity Fund are
$2,793 and $3,112,473, respectively, related to forward contracts closed but not
settled as of January 31, 1997.
For the year ended January 31, 1997, Goldman Sachs earned approximately
$5,000, $78,000, $304,000, $36,000, $11,000 and $66,000 of brokerage commissions
from portfolio transactions executed on behalf of the Balanced, Growth and
Income, Capital Growth, Small Cap Equity, International Equity and Asia Growth
Funds, respectively.
5. Repurchase Agreements
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping at the Funds' custodian.
- --------------------------------------------------------------------------------
69
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
January 31, 1997
- --------------------------------------------------------------------------------
6. Joint Repurchase Agreement Account
The Funds, together with other registered investment companies having advisory
agreements with GSAM or GSFM, transfer uninvested cash balances into joint
accounts, 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 and agency obligations. At January 31, 1997, the Balanced,
Select Equity, Growth and Income, Capital Growth and Small Cap Equity Funds had
undivided interests in the repurchase agreements in the following joint account
which equaled $9,200,000, $3,600,000, $26,800,000, $18,300,000 and $16,600,000,
respectively, in principal amount. At January 31, 1997, the repurchase
agreements held in this joint account, along with the corresponding underlying
securities (including the type of security, market value, interest rate and
maturity date) were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------
Bear Stearns Securities, Inc., dated 01/31/97, repurchase
price $800,375,333 (GNMA: $26,604,837, 7.50%, 10/15/26;
FNMA: $720,411,516, 5.50%-8.00%, 02/01/09-09/01/26;
FHLMC: $77,372,676, 6.00%-8.00%, 04/01/98-07/01/26)
<S> <C> <C> <C>
$800,000,000 5.63% 02/03/97 $ 800,000,000
<CAPTION>
Nomura Securities, Inc. dated 01/31/97, repurchase price
$100,047,083 (GNMA: $102,007,864, 5.50%-10.25%
01/15/20-01/20/27)
<S> <C> <C> <C>
100,000,000 5.65 02/03/97 100,000,000
<CAPTION>
Lehman Government Securities, dated 01/31/97, repurchase
price $201,894,173 (U.S. Treasury Notes: $191,656,654,
6.38%, 01/15/00-08/15/02; U.S. Treasury Stripped
Securities: $14,095,535, 05/15/02-11/15/03)
<S> <C> <C> <C>
201,800,000 5.60 02/03/97 201,800,000
</TABLE>
- --------------------------------------------------------------------
Total Joint Repurchase Agreement Account $ 1,101,800,000
- --------------------------------------------------------------------
7. Line of Credit Facility
The Funds participate in a $250,000,000 uncommitted, unsecured revolving line of
credit facility. In addition, the Funds, except the Select Equity Fund,
participate in a $50,000,000 committed, unsecured revolving line of credit
facility. Both facilities are 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. The
committed facility also requires a fee to be paid based on the amount of the
commitment which has not been utilized. During the year ended January 31, 1997,
the Funds did not have any borrowings under these facilities.
8. Transactions With Affiliated Companies
A Fund is considered to be invested in an affiliated company if that Fund owns
greater than five percent of the outstanding voting securities of such company.
Transactions during the year ended January 31, 1997 which are considered to be
affiliates of Small Cap Equity are as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
Purchases Sales Realized Dividend Market
Affiliate Name at Cost Proceeds Gain/(Loss) Income Value
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
American Safety
Razor $ -- $5,751 $ 289 $ -- $ --
- --------------------------------------------------------------------
Alpine Lace
Brands, Inc. 7,790 -- -- -- 2,341
- --------------------------------------------------------------------
APS Holding
Corp. 10,305 654 290 -- 7,869
- --------------------------------------------------------------------
J. Baker, Inc. 1,591 1,349 (1,090) 60 7,565
- --------------------------------------------------------------------
Black Box, Inc. -- 23,013 14,149 -- --
- --------------------------------------------------------------------
Brookstone, Inc. -- 2,722 (758) -- 5,939
- --------------------------------------------------------------------
Congoleum Corp. -- 2,323 (102) -- 3,156
- --------------------------------------------------------------------
Hollinger
International
Corp. -- 10,903 (1,311) 112 --
- --------------------------------------------------------------------
International Post
Ltd. -- 2,215 (3,933) -- 1,729
- --------------------------------------------------------------------
Morningstar
Group Inc. -- 12,216 6,346 -- --
- --------------------------------------------------------------------
Mortons
Restaurant
Group, Inc. -- 4,106 1,625 -- 6,439
- --------------------------------------------------------------------
Opinion Research
Corp. -- -- -- -- 2,022
- --------------------------------------------------------------------
Pegasus
Communications
Corp. 3,697 -- -- -- 3,224
- --------------------------------------------------------------------
Platinum
Entertainment
Corp. 3,354 -- -- -- 2,675
- --------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
70
<PAGE>
9. Other Matters
As of January 31, 1997, Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 14% of the
outstanding shares of the Select Equity Fund.
10. Certain Reclassifications
In accordance with Statement of Position 93-2, the Balanced, Select Equity,
Growth and Income, International Equity and Asia Growth Funds have reclassified
$13,068, $9,549, $18,764, $302,042 and $31,712, respectively, from paid-in
capital to accumulated undistributed net investment income. Additionally, the
Small Cap Equity Fund has reclassified $1,532,848 from accumulated net realized
gains on investments to accumulated net investment loss and $18,742 from paid-in
capital to accumulated net investment loss. The Select Equity Fund reclassified
$40,540 from accumulated net realized gains on investments to distributions in
excess of net investment income. The International Equity Fund and the Asia
Growth Fund have reclassified $205,942 and $338,857 from accumulated net
realized foreign currency loss to distributions in excess of net investment
income, respectively. The Asia Growth Fund also reclassified $377,435 from
accumulated net realized gains on investments to distributions in excess of net
investment income. These reclassifications have no impact on the net asset value
of the Funds and are designed to present the Funds' capital accounts on a tax
basis.
71
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
January 31, 1997
- --------------------------------------------------------------------------------
11. Summary of Share Transactions
Share activity for the year ended January 31, 1997 is as follows:
<TABLE>
<CAPTION>
Balanced Fund Select Equity Fund Growth and Income Fund
- ------------------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A shares
Shares sold 1,529,469 $27,172,279 3,862,697 $81,642,386 5,616,082 $121,074,992
Reinvestment of dividends
and distributions 310,437 5,598,883 370,586 8,175,333 2,390,917 52,287,188
Shares repurchased (446,535) (7,533,272) (1,109,202) (23,823,146) (3,328,038) (72,163,062)
-------------------------------------------------------------------------------------
1,393,371 25,237,890 3,124,081 65,994,573 4,678,961 101,199,118
-------------------------------------------------------------------------------------
Class B shares
Shares sold 109,171 2,001,768 733,802 15,946,016 729,877 16,222,639
Reinvestment of dividends
and distributions 5,284 95,768 24,314 535,407 35,976 787,421
Shares repurchased (1,795) (32,396) (13,894) (310,118) (14,764) (340,546)
-------------------------------------------------------------------------------------
112,660 2,065,140 744,222 16,171,305 751,089 16,669,514
-------------------------------------------------------------------------------------
Institutional shares
Shares sold -- -- 3,151,881 66,277,175 8,228 186,173
Reinvestment of dividends
and distributions -- -- 275,197 6,102,331 92 2,020
Shares repurchased -- -- (363,536) (7,991,198) -- --
-------------------------------------------------------------------------------------
-- -- 3,063,542 64,388,308 8,321 188,193
-------------------------------------------------------------------------------------
Service shares
Shares sold -- -- 154,590 3,344,141 134,652 2,879,042
Reinvestment of dividends
and distributions -- -- 4,126 91,166 12,587 276,180
Shares repurchased -- -- (1,252) (28,032) (10,262) (227,331)
-------------------------------------------------------------------------------------
-- -- 157,464 3,407,275 136,977 2,927,891
-------------------------------------------------------------------------------------
Net increase (decrease) in
shares 1,506,031 $27,303,030 7,089,309 $149,961,461 5,575,348 $120,984,716
=====================================================================================
<CAPTION>
Capital Growth Fund
- -------------------------------------------------------
Shares Dollars
--------------------------
<S> <C> <C>
Class A shares
Shares sold 4,677,047 $73,029,007
Reinvestment of dividends
and distributions 5,870,272 89,898,521
Shares repurchased (14,635,348) (229,277,58)
----------------------------
(4,088,029) (66,350,058)
----------------------------
Class B shares
Shares sold 188,331 2,979,890
Reinvestment of dividends
and distributions 12,408 190,353
Shares repurchased (7,499) (122,231)
----------------------------
193,240 3,048,012
----------------------------
Institutional shares
Shares sold -- --
Reinvestment of dividends
and distributions -- --
Shares repurchased -- --
----------------------------
----------------------------
Service shares
Shares sold -- --
Reinvestment of dividends
and distributions -- --
Shares repurchased -- --
----------------------------
-- --
----------------------------
Net increase (decrease) in
shares (3,894,789) $(63,302,046)
============================
</TABLE>
- --------------------------------------------------------------------------------
72
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Small Cap Equity Fund International Equity Fund Asia Growth Fund
- ----------------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A shares
Shares sold 2,508,268 $52,353,524 12,103,239 $230,847,197 7,588,351 $124,281,405
Reinvestment of dividends
and distributions 475,255 9,732,097 241,377 4,749,851 11,669 184,607
Shares repurchased (4,697,902) (94,933,279) (3,820,157) (72,226,935) (3,945,614) (63,723,269)
------------------------------------------------------------------------------------
(1,714,379) (32,847,658) 8,524,459 163,370,113 3,654,406 60,742,743
------------------------------------------------------------------------------------
Class B shares
Shares sold 173,849 3,765,689 1,000,064 19,327,085 210,879 3,433,876
Reinvestment of dividends
and distributions 7,086 144,474 7,924 155,475 279 4,391
Shares repurchased (4,391) (91,616) (10,181) (198,263) (4,771) (76,391)
------------------------------------------------------------------------------------
176,544 3,818,547 997,807 19,284,297 206,387 3,361,876
------------------------------------------------------------------------------------
Institutional shares
Shares sold -- -- 3,657,119 70,627,799 1,041,822 16,733,545
Reinvestment of dividends
and distributions -- -- 28,973 572,219 2,040 32,281
Shares repurchased -- -- (161,923) (3,153,741) (228,363) (3,651,351)
------------------------------------------------------------------------------------
-- -- 3,524,169 68,046,277 815,499 13,114,475
------------------------------------------------------------------------------------
Service shares
Shares sold -- -- 34,686 673,880 -- --
Reinvestment of dividends
and distributions -- -- 200 3,947 -- --
Shares repurchased -- -- (56) (1,098) -- --
------------------------------------------------------------------------------------
-- -- 34,830 676,729 -- --
------------------------------------------------------------------------------------
Net increase (decrease) in
shares (1,537,835) $(29,029,111) 13,081,265 $251,377,416 4,676,292 $77,219,094
=====================================================================================
<CAPTION>
Share activity for the year ended January 31, 1996 is as follows:
Select Equity Fund
- -------------------------------------------------------------
Shares Dollars
------------- ---------------
<S> <C> <C>
Class A shares
Shares sold 2,479,285 $44,569,920
Reinvestment of dividends and 161,481
distributions 3,032,597
Shares repurchased (2,578,247) (45,692,944)
------------- ---------------
62,519 1,909,573
------------- ---------------
Institutional shares
Shares sold 3,220,915 57,579,398
Reinvestment of dividends and
distributions 97,993 1,847,978
Shares repurchased (30,492) (567,188)
------------- ----------------
3,288,416 $58,860,188
------------- ----------------
Net increase 3,350,935 $60,769,761
============= ================
</TABLE>
- --------------------------------------------------------------------------------
73
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) from Distributions to
investment operations/h/ shareholders
------------------------------- ------------------------------------------
Net realized From
and unrealized net realized
Net asset gain (loss) on From gain on In excess
value, Net investments, net investment of net
beginning investment options and investment and futures investment
of period income futures income transactions income
-----------------------------------------------------------------------------------------
BALANCED FUND
- ------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares................ $17.31 $0.66 $2.47 $(0.66) $(1.00) --
1997 - Class B Shares/b/............. 17.46 0.42 2.34 (0.42) (1.00) (0.07)
1996 - Class A Shares................ 14.22 0.51 3.43 (0.50) (0.35) --
For the Period Ended January 31,
- --------------------------------
1995 - Class A Shares/d/............. 14.18 0.10 0.02 (0.08) -- --
<CAPTION>
Net asset
Net increase value, Portfolio Average
in net end of Total turnover commission
asset value period return/a/ rate rate/g/
---------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C>
1997 - Class A Shares................ $1.47 $18.78 18.59% 208.11/f/ $.0587
1997 - Class B Shares(b)............. 1.27 18.73 16.22/c/ 208.11/f/ .0587
1996 - Class A Shares................ 3.09 17.31 28.10 197.10/f/ --
For the Period Ended January 31,
- -------------------------------------
1995 - Class A Shares/d/............. 0.04 14.22 0.87/c/ 14.71/c/ --
<CAPTION>
Ratio assuming no
voluntary waiver of fees
or expense limitations
-------------------------------
Net Ratio of Ratio of net Ratio of net
assets at net investment Ratio of investment
end of expenses to income to expenses to income (loss)
period average net average net average to average
(in 000s) assets assets net assets net assets
-----------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C>
1997 - Class A Shares................ $81,410 1.00% 3.76% 1.77% 2.99%
1997 - Class B Shares/b/............. 2,110 1.75/e/ 2.59/e/ 2.27/e/ 2.07/e/
1996 - Class A Shares................ 50,928 1.00 3.65 1.90 2.75
For the Period Ended January 31,
- --------------------------------
1995 - Class A Shares/d/............. 7,510 1.00/e/ 3.39/e/ 8.29/e/ (3.90)/e/
</TABLE>
- --------------------------
/a/ 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
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
/b/ For the period from May 1, 1996 (commencement of operations) to January 31,
1997.
/c/ Not annualized.
/d/ For the period from October 12, 1994 (commencement of operations) to
January 31, 1995.
/e/ Annualized.
/f/ Includes the effect of mortgage dollar roll transactions.
/g/ For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/h/ Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
(The accompanying notes are an integral part of these financial statements.)
74
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) from Distributions to
investment operations/(h)/ shareholders
========================== ====================================
Net realized From
and unrealized net realized
Net asset gain (loss) on From gain on In excess
value, Net investments, net investment of net
beginning investment options and investment and futures investment
of period income futures income transactions income
============================================================================
SELECT EQUITY FUND
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
==============================
1997 - Class A Shares ........................ 19.66 $0.16 $4.46 $(0.16) $(0.80) --
1997 - Class B Shares/(f)/.................... 20.44 0.04 3.70 (0.04) (0.80) (0.16)
1997 - Institutional Shares .................. 19.71 0.30 4.51 (0.28) (0.80) --
1997 - Service Shares/(f)/.................... 21.02 0.13 3.15 (0.13) (0.80) (0.10)
1996 - Class A Shares ........................ 14.61 0.19 5.43 (0.16) (0.41) --
1996 - Institutional Shares/(d)/.............. 16.97 0.16 3.23 (0.24) (0.41) --
1995 - Class A Shares ........................ 15.93 0.20 (0.38) (0.20) (0.94) --
1994 - Class A Shares ........................ 15.46 0.17 2.08 (0.17) (1.61) --
1993 - Class A Shares ........................ 15.05 0.22 0.41 (0.22) -- --
For the Period Ended January 31,
================================
1992 - Class A Shares/(e)/.................... 14.17 0.11 0.88 (0.11) -- --
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Net Net Net
increase asset assets
(decrease) value, Portfolio Average end of
in net end of Total turnover commission period
asset value period return/(a)/ rate rate/(g)/ (in 000s)
======================================================================
SELECT EQUITY FUND
- ------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
===============================
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares .............. $3.66 $23.32 23.75% 37.28% $.0417 $225,968
1997 - Class B Shares/(f)/.......... 2.74 23.18 18.59/(b)/ 37.28 .0417 17,258
1997 - Institutional Shares ........ 3.73 23.44 24.63 37.28 .0417 148,942
1997 - Service Shares/(f)/.......... 2.25 23.27 15.92/(b)/ 37.28 .0417 3,666
1996 - Class A Shares .............. 5.05 19.66 38.63 39.35 -- 129,045
1996 - Institutional Shares/(d)/.... 2.74 19.71 20.14/(b)/ 39.35/(b)/ -- 64,829
1995 - Class A Shares .............. (1.32) 14.61 (1.10) 56.18 -- 94,968
1994 - Class A Shares .............. 0.47 15.93 15.12 87.73 -- 92,769
1993 - Class A Shares .............. 0.41 15.46 4.30 144.93 -- 117,757
For the Period Ended January 31,
================================
1992 - Class A Shares/(e)/............ 0.88 15.05 7.01/(b)/ 135.02(c) -- 151,142
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming no
voluntary waiver of fees
or expense limitations
-------------------------
Ratio of Ratio of net Ratio of net
net investment Ratio of investment
expenses income to expenses to income
to average average net average to average
assets assets net assets net assets
==================================================
SELECT EQUITY FUND
- -----------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C>
1997 - Class A Shares ........................ 1.29% 0.91% 1.53% 0.67%
1997 - Class B Shares/(f)/.................... 1.83/(c)/ 0.06/(c)/ 2.00/(c)/ (0.11)/(c)/
1997 - Institutional Shares .................. 0.65 1.52 0.85 1.32
1997 - Service Shares/(f)/.................... 1.15/(c)/ 0.69/(c)/ 1.35/(c)/ 0.49/(c)/
1996 - Class A Shares ........................ 1.25 1.01 1.55 0.71
1996 - Institutional Shares/(d)/.............. 0.65/(c)/ 1.49/(c)/ 0.96/(c)/ 1.18/(c)/
1995 - Class A Shares ........................ 1.38 1.33 1.63 1.08
1994 - Class A Shares ........................ 1.42 0.92 1.67 0.67
1993 - Class A Shares ........................ 1.28 1.30 1.53 1.05
For the Period Ended January 31,
================================
1992 - Class A Shares/(e)/.................... 1.57/(c)/ 1.24/(c)/ 1.82/(c)/ 0.99/(c)/
</TABLE>
- --------------
/(a)/ 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 or redemption charges. Total return would be reduced if
a sales or redemption charge were taken into account.
/(b)/ Not annualized.
/(c)/ Annualized.
/(d)/ For the period from June 15, 1995 (commencement of operations) to January
31, 1996.
/(e)/ For the period from May 24, 1991 (commencement of operations) to January
31, 1992.
/(f)/ For the period from May 1 and June 7, 1996 (commencement of operations) to
January 31, 1997 for Class B and Service shares, respectively.
/(g)/ For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/(h)/ Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
75
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from
investment
operations/(h)/ Distributions to shareholders
====================== =====================================
Net
realized
and From net
Net unrealized realized
asset gain(loss) gain In Net
value, on on excess Increase
beginning Net investments From net investment of net Additional in net
of investment and investment and option investment paid-in asset
period income options income transactions income capital value
===============================================================================================
GROWTH AND INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares ............. $19.98 $0.35 $5.18 $(0.35) $(1.97) $ (0.01) $ -- $3.20
1997 - Class B Shares/(f)/ ........ 20.82 0.17 4.31 (0.17) (1.97) (0.06) -- 2.28
1997 - Institutional Shares/(f)/ .. 21.25 0.29 3.96 (0.30) (1.97) (0.04) -- 1.94
1997 - Service Shares/(f)/ ........ 20.71 0.28 4.50 (0.28) (1.97) (0.07) -- 2.46
1996 - Class A Shares ............. 15.80 0.33 4.75 (0.30) (0.60) -- -- 4.18
1995 - Class A Shares ............. 15.79 0.20/(b)/ 0.30/(b)/ (0.20) (0.33) (0.07) 0.11/(b)/ 0.01
<CAPTION>
For the Period Ended January 31,
==================================
<S>
1994 - Class A Shares/(c)/......... 14.18 0.15 1.68 (0.15) (0.06) (0.01) -- 1.61
</TABLE>
<TABLE>
<CAPTION>
Ratio of Ratio of
Net net net
Net assets expenses investment
asset at to income to
value Total Portfolio Average end of average average
end of return turnover commission period net net
period /(a)/ rate rate/(g)/ (in 000s) assets assets
===================================================================================
GROWTH AND INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares ............. $23.18 28.42% 53.03% $.0586 $615,103 1.22% 1.60%
1997 - Class B Shares/(f)/ ........ 23.10 22.23/(d)/ 53.03 .0586 17,346 1.93/(e)/ 0.15/(e)/
1997 - Institutional Shares/(f)/ .. 23.19 20.77/(d)/ 53.03 .0586 193 0.82/(e)/ 1.36/(e)/
1997 - Service Shares/(f)/ ........ 23.17 23.87/(d)/ 53.03 .0586 3,174 1.32/(e)/ 0.94/(e)/
1996 - Class A Shares ............. 19.98 32.45 57.93 -- 436,757 1.20 1.67
1995 - Class A Shares ............. 15.80 3.97 71.80 -- 193,772 1.25 1.28
<CAPTION>
For the Period Ended January 31,
==================================
<S> <C> <C> <C> <C> <C> <C> <C>
1994 - Class A Shares/(c)/......... 15.79 13.08/(d)/102.23/(d)/ -- 41,528 1.25/(e)/ 1.23/(e)/
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming no
voluntary waiver of fees
or expense limitations
=================================
Ratio of
Ratio of net investment
expenses income (loss)
to average to average
net assets net assets
=================================
GROWTH AND INCOME FUND
- -----------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C>
1997 - Class A Shares ............. 1.43% 1.39%
1997 - Class B Shares/(f/) ........ 1.93/(e)/ 0.15/(e)/
1997 - Institutional Shares/(f)/ .. 0.82/(e)/ 1.36/(e)/
1997 - Service Shares/(f)/ ........ 1.32/(e)/ 0.94/(e)/
1996 - Class A Shares ............. 1.45 1.42
1995 - Class A Shares ............. 1.58 0.95
<CAPTION>
For the Period Ended January 31,
==================================
<S>
1994 - Class A Shares/(c)/......... 3.24/(e)/ (0.76)/(e)/
</TABLE>
- ----------------------------------
/(a)/Assumes investment at the net asset v alue 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
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
/(b)/Calculated based on the average shares outstanding methodology.
/(c)/For the period from February 5, 1993 (commencement of operations) to
January 31, 1994.
/(d)/Not annualized.
/(e)/Annualized.
/(f)/For the period from March 6, May 1 and June 3, 1996 (commencement of
operations) to January 31, 1997 for Service, Class B and Institutional
shares, respectively.
/(g)/For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/(h)/Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
76
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from
investment operations/(g)/ Distributions to shareholders
=========================== =============================================
Net realized
and unrealized From net
Net asset gain (loss) on realized gain In excess
value, Net investments, From net on investments, of net
beginning investment options and investment options investment
of period income futures income and futures income
=======================================================================================
CAPITAL GROWTH FUND
- -----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares.................... $14.91 $0.10 $3.56 $ (0.10) $ (1.72) $(0.02)
1997 - Class B Shares(b)................. 15.67 0.01 2.81 (0.01) (1.72) (0.09)
1996 - Class A Shares.................... 13.67 0.12 3.93 (0.12) (2.69) --
1995 - Class A Shares.................... 15.96 0.03 (0.69) (0.01) (1.62) --
1994 - Class A Shares.................... 14.64 0.02 2.40 (0.01) (1.07) (0.02)
1993 - Class A Shares.................... 13.65 0.06 2.28 (0.07) (1.28) --
1992 - Class A Shares.................... 11.10 0.28 2.90 (0.31) (0.32) --
For the Period Ended January 31,
================================
1991 - Class A Shares/(c)/............... 11.34 0.34 (0.27) (0.31) -- --
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Net
Net increase Net asset assets at
(decrease) value, Portfolio Average end of
in net end of Total turnover commission period
asset value period return/(a)/ rate rate/(f)/ (in 000s)
=======================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares.................... $1.82 $16.73 25.97% 52.92% $.0563 $920,646
1997 - Class B Shares(b)................. 1.00 16.67 19.39/(d)/ 52.92 .0563 3,221
1996 - Class A Shares.................... 1.24 14.91 30.45 63.90 -- 881,056
1995 - Class A Shares.................... (2.29) 13.67 (4.38) 38.36 -- 862,105
1994 - Class A Shares.................... 1.32 15.96 16.89 36.12 -- 833,682
1993 - Class A Shares.................... 0.99 14.64 18.01 58.93 -- 665,976
1992 - Class A Shares.................... 2.55 13.65 29.31 48.93 -- 500,307
For the Period Ended January 31,
================================
1991 - Class A Shares(c)................. (0.24) 11.10 0.84/(d)/ 35.63/(d)/ -- 437,533
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Ratios assuming no
voluntary waiver of fees
=============================
Ratio of Ratio of net Ratio of net
net investment Ratio of investment
expenses to income (loss) to expenses to income (loss)
average net average average to average
assets net assets net assets net assets
====================================================================
- ----------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C>
1997 - Class A Shares.................... 1.40% 0.62% 1.65% 0.37%
1997 - Class B Shares/(b)/................. 2.15/(e)/ (0.39)/(e)/ 2.15/(e)/ (0.39)/(e)/
1996 - Class A Shares.................... 1.36 0.65 1.61 0.40
1995 - Class A Shares.................... 1.38 0.16 1.63 (0.09)
1994 - Class A Shares.................... 1.38 0.13 1.63 (0.12)
1993 - Class A Shares.................... 1.41 0.42 1.66 0.17
1992 - Class A Shares.................... 1.53 2.09 1.78 1.84
For the Period Ended January 31,
- --------------------------------
1991 - Class A Shares/(c)/............... 1.27/(d)/ 3.24/(d)/ 1.47/(d)/ 3.04/(d)/
</TABLE>
- --------------------------
/(a)/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
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
/(b)/For the period from May 1, 1996 (commencement of operations) to
January 31, 1997.
/(c)/For the period from April 20, 1990 (commencement of operations) to January
31, 1991.
/(d)/Not annualized.
/(e)/Annualized.
/(f)/For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/(g)/Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
77
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from Distributions to
investment operations/(g)/ shareholders
=========================== =======================================
From In excess
net of
Net realized realized realized Net
and unrealized gain on gains on increase
Net asset Net gain (loss) on From investment, investment (decrease)
value, investment investments, net option and option and in net
beginning income options and investment futures futures asset
of period (loss) futures income transactions transactions value
==============================================================================================
SMALL CAP EQUITY FUND
- -----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
===================================
<S> <C> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares ............. $17.29 $(0.21) $4.92 $ - $(1.09) $ - $3.62
1997 - Class B Shares/(b)/......... 20.79 (0.11) 1.21 - (1.09) - 0.01
1996 - Class A Shares ............. 16.14 (0.23) 1.39 - (0.01) - 1.15
1995 - Class A Shares ............. 20.67 (0.07) (3.53) - (0.69) (0.24) (4.53)
1994 - Class A Shares ............. 16.68 (0.04) 5.03 - (1.00) - 3.99
For the Period Ended January 31,
===================================
1993 - Class A Shares/(c)/......... 14.18 0.03 2.50 (0.03) - - 2.50
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Net asset Net assets
value, Portfolio Average at end of
end of Total turnover commission period
period return/(a)/ rate rate/(f)/ (in 000s)
================================================================
SMALL CAP EQUITY FUND
- ---------------------------------------------------------------------------------------------------
For the Year Ended January 31,
===================================
<S> <C> <C> <C> <C> <C>
1997 - Class A Shares ............. $20.91 27.28% 99.46% $.0461 $212,061
1997 - Class B Shares/(b)/......... 20.80 5.39/(d)/ 99.46 .0461 3,674
1996 - Class A Shares ............. 17.29 7.20 57.58 - 204,994
1995 - Class A Shares ............. 16.14 (17.53) 43.67 - 319,487
1994 - Class A Shares ............. 20.67 30.13 56.81 - 261,074
For the Period Ended January 31,
===================================
1993 - Class A Shares/(c)/......... 16.68 17.86/(d)/ 7.12/( e)/ - 59,339
<CAPTION>
- ---------------------------------------------------------------------------------------------
Ratios assuming no
voluntary waiver of fees
Ratio of ===========================
Ratio of net Ratio of
net investment Ratio of net
expenses income expenses investment
to average (loss) to to average loss to
net average net net average net
assets assets assets assets
=======================================================
SMALL CAP EQUITY FUND
- ---------------------------------------------------------------------------------------------
For the Year Ended January 31,
===================================
<S> <C> <C> <C> <C>
1997 - Class A Shares ............. 1.60% (0.72)% 1.85% (0.97)%
1997 - Class B Shares/(b)/......... 2.35/(e)/ (1.63)/(e)/ 2.35/(e)/ (1.63)/(e)/
1996 - Class A Shares ............. 1.41 (0.59) 1.66 (0.84)
1995 - Class A Shares ............. 1.53 (0.53) 1.78 (0.78)
1994 - Class A Shares ............. 1.60 (0.45) 1.85 (0.70)
For the Period Ended January 31,
===================================
1993 - Class A Shares/(c)/......... 1.65/(e)/ 0.62/(e)/ 2.70/(e)/ (0.43)/(e)/
- ------------------
</TABLE>
/(a)/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
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
/(b)/For the period from May 1, 1996 (commencement of operations) to January 31,
1997.
/(c)/For the period from October 22, 1992 (commencement of operations) to
January 31, 1993.
/(d)/Not annualized.
/(e)/Annualized.
/(f)/For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/(g)/Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
78
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from Distributions
investment operations/(g)/ to shareholders
================================================= ==============================
Net Net realized From net
realized and unrealized realized
and unrealized gain (loss) gain on
Net asset gain (loss) on on foreign From investment,
value, Net investments, currency net option and
beginning investment options related investment futures
of period income (loss) and futures transactions income transactions
============================================================================================
INTERNATIONAL EQUITY FUND
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
=====================================
1997 - Class A Shares............... $17.20 $0.10 $3.51 $(1.28) $ -- $(0.21)
1997 - Class B Shares/(e)/.......... 18.91 (0.06) 0.94 (0.34) -- (0.21)
1997 - Institutional Shares/(e)/.... 17.45 0.04 3.39 (1.24) (0.03) (0.21)
1997 - Service Shares/(e)/.......... 17.70 (0.02) 2.95 (1.08) -- (0.21)
1996 - Class A Shares .............. 14.52 0.13 2.58 1.42 (0.58) (0.87)
1995 - Class A Shares............... 18.10 0.06 (3.04) (0.01) -- (0.59)
1994 - Class A Shares............... 14.35 0.05 4.08 (0.38) -- --
For the Period Ended January 31,
=====================================
1993 - Class A Shares/(b)/.......... 14.18 (0.01) 0.29 (0.11) -- --
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Net
increase Net asset
(decrease) value, Portfolio Average Net assets at
in net asset end of Total turnover commission end of period
value period return/(a)/ rate rate/(f)/ (in 000s)
==================================================================================
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
========================================
1997 - Class A Shares................... $ 2.12 $19.32 13.48% 38.01% $.0318 $536,283
1997 - Class B Shares/(e)/.............. 0.33 19.24 2.83/(c)/ 38.01 .0318 19,198
1997 - Institutional Shares/(e)/........ 1.95 19.40 12.53/(c)/ 38.01 .0318 68,374
1997 - Service Shares/(e)/.............. 1.64 19.34 10.42/(c)/ 38.01 .0318 674
1996 - Class A Shares .................. 2.68 17.20 28.68 68.48 -- 330,860
1995 - Class A Shares................... (3.58) 14.52 (16.65) 84.54 -- 275,086
1994 - Class A Shares................... 3.75 18.10 26.13 60.04 -- 269,091
For the Period Ended January 31,
========================================
1993 - Class A Shares/(b)/.............. 0.17 14.35 1.23/(c)/ 0.00 -- 66,063
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Ratios assuming no
voluntary waiver of fees or
expense limitations
===============================
Ratio of net Ratio of
Ratio of investment net investment
net income Ratio of income
expenses to (loss) to expenses (loss)
average net average net to average to average
assets assets net assets net assets
=============================================================
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For the Year Ended January 31,
========================================
1997 - Class A Shares................... 1.69% (0.07)% 1.88% (0.26)%
1997 - Class B Shares/(e)/.............. 2.23/(d)/ (0.97)/(d)/ 2.38/(d)/ (1.12)/(d)/
1997 - Institutional Shares/(e)/........ 1.10/(d)/ 0.43/(d)/ 1.25/(d)/ 0.28/(d)/
1997 - Service Shares/(e)/.............. 1.60/(d)/ (0.40)/(d)/ 1.75/(d)/ (0.55)/(d)/
1996 - Class A Shares .................. 1.52 0.26 1.77 0.01
1995 - Class A Shares................... 1.73 0.40 1.98 0.15
1994 - Class A Shares................... 1.76 0.51 2.01 0.26
For the Period Ended January 31,
========================================
1993 - Class A Shares/(b)/.............. 1.80/(d)/ (0.42)/(d)/ 2.58/(d)/ (1.20)/(d)/
</TABLE>
- --------------------------
/(a)/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
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
/(b)/For the period from December 1, 1992 (commencement of operations) to
January 31, 1993.
/(c)/Not annualized.
/(d)/Annualized.
/(e)/For the period from February 7, March 6 and May 1, 1996 (commencement of
operations) to January 31, 1997 for Institutional, Service and Class B
shares, respectively.
/(f)/For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/(g)/Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
79
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) Distributions to
from investment operations /(g)/ shareholders
--------------------------------------------- ------------------------------
Net
realized and
unrealized
Net Net gain on
asset Net realized and foreign
value, investment unrealized currency From net In excess
beginning income gain(loss) on related investment of net investment
of period (loss) investments transactions income income
----------------------------------------------------------------------------------------
ASIA GROWTH FUND
- ----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares..................... $16.49 $ 0.06 $(0.11) $(0.12) $(0.01) $ --
1997 - Class B Shares/(e)/................ 17.31 (0.05) (0.48) (0.51) -- (0.03)
1997 - Institutional Shares/(e)/.......... 16.61 0.04 (0.11) (0.11) (0.04) (0.06)
1996 - Class A Shares..................... 13.31 0.17 3.44 (0.12) (0.17) (0.14)
For the Period Ended January 31,
- --------------------------------
1995 - Class A Shares/(b)/................ 14.18 0.11 (0.89) 0.01 (0.10) --
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Net
increase Net
(decrease) asset
in net value, Portfolio Average Net assets at
asset end of Total turnover commission end of period
value period return/(a)/ rate rate/(f)/ (000s)
------------------------------------------------------------------------------------
ASIA GROWTH FUND
- ------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares..................... $(0.18) $16.31 (1.01)% 48.40% $.0151 $263,014
1997 - Class B Shares/(e)/................ (1.07) 16.24 (6.02)/(c)/ 48.40 .0151 3,354
1997 - Institutional Shares/(e)/.......... (0.28) 16.33 (1.09)/(c)/ 48.40 .0151 13,322
1996 - Class A Shares..................... 3.18 16.49 26.49 88.80 -- 205,539
For the Period Ended January 31,
- --------------------------------
1995 - Class A Shares/(b)/................ (0.87) 13.31 (5.46)/(c)/ 36.08/(c)/ -- 124,298
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios assuming no
voluntary waiver of fees
or expense limitations
------------------------------
Ratio Ratio Ratio
of net of net Ratio of of net
expenses to investment expenses investment
Net assets at average income(loss) to average income(loss)
end of period net to average net to average
(000s) assets net assets assets net assets
-------------------------------------------------------------------------------
ASIA GROWTH FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C>
1997 - Class A Shares................................ $263,014 1.67% 0.20% 1.87% 0.00%
1997 - Class B Shares/(e)/........................... 3,354 2.21/(d)/ (0.56)/(d)/ 2.37/(d)/ (0.72)/(d)/
1997 - Institutional Shares/(e)/..................... 13,322 1.10/(d)/ 0.54/(d)/ 1.26/(d)/ 0.38/(d)/
1996 - Class A Shares................................ 205,539 1.77 1.05 2.02 0.80
For the Period Ended January 31,
- --------------------------------
1995 - Class A Shares/(b)/........................... 124,298 1.90/(d)/ 1.83/(d)/ 2.38/(d)/ 1.35/(d)/
</TABLE>
- --------------------------
(a) 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
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
(b) For the period from July 8, 1994 (commencement of operations) to January 31,
1995.
(c) Not annualized.
(d) Annualized.
(e) For the period from February 2 and May 1, 1996 (commencement of operations)
to January 31, 1997 for Institutional and Class B shares, respectively.
(f) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate on security transactions on which
commissions are charged. This rate may vary due to various types of
transactions and number of security trades executed.
(g) Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
80
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of the
Goldman Sachs Equity Portfolios, Inc.:
We have audited the accompanying statements of assets and liabilities of the
Goldman Sachs Equity Portfolios, Inc. (a Maryland Corporation), comprising the
Balanced Fund, Select Equity Fund, Growth and Income Fund, Capital Growth Fund,
Small Cap Equity Fund, International Equity Fund and Asia Growth Fund, including
the statements of investments, as of January 31, 1997 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
January 31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of each of the respective portfolios constituting Goldman Sachs Equity
Portfolios, Inc. as of January 31, 1997 the results of their operations and the
changes in their net assets and the financial highlights for the periods
presented, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 15, 1997
- --------------------------------------------------------------------------------
81
<PAGE>
- --------------------------------------------------------------------------------
- -------------------------------------- ----------------------------------------
[This Page Intentionally Left Blank]
- -------------------------------------- ----------------------------------------
82
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Equity Portfolios, Inc.
Prospectus which contains facts concerning the Fund's objectives and policies,
management, expenses and other information.
- --------------------------------------------------------------------------------
83
<PAGE>
Goldman Sachs
One New York Plaza
New York, NY 10004
Directors
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Equity Portfolios
- -------------------
Annual Report
January 31, 1997
Goldman Sachs Balanced Fund
Goldman Sachs Select Equity Fund
Goldman Sachs Growth and Income Fund
Goldman Sachs Capital Growth Fund
Goldman Sachs Small Cap Equity Fund
Goldman Sachs International Equity Fund
Goldman Sachs Asia Growth Fund
[LOGO OF GOLDMAN SACHS APPEARS HERE]
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MID-CAP EQUITY FUND
- --------------------------------------------------------------------------------
DEAR SHAREHOLDERS:
We are pleased to have the opportunity to discuss the performance and holdings
of the Goldman Sachs Mid-Cap Equity Fund for the 12 months ended January 31,
1997. The U.S. equity market rewarded investors with excellent returns once
again in 1996, with the Goldman Sachs Mid-Cap Equity Fund outperforming its
benchmark by a wide margin during the period under review. To help put the
fund's performance in perspective, we will also provide a brief overview of the
economic and investment environment.
OBJECTIVE AND INVESTMENT APPROACH
The Goldman Sachs Mid-Cap Equity Fund seeks long-term capital growth primarily
by investing at least 65% of its total assets in equities with market
capitalizations of between $500 million and $7 billion at the time of
investment. However, the fund currently intends to emphasize investments in
companies with market capitalizations of under $5 billion at the time of
investment. The fund is managed with a value style, which means we focus on
companies whose stocks we believe are inexpensive relative to their expected
long-term earnings growth and their asset value. Investments may include well-
known companies that are temporarily out of favor due to cyclical economic
conditions or are experiencing near-term difficulties the portfolio managers
judge to be temporary in nature. In-depth fundamental research of a company's
financial structure, its competitive position in the market and its management's
commitment to increasing shareholder value are all critical parts of the fund's
investment approach. Though we are not sector investors, we closely monitor the
fund's sector and industry exposures compared with the benchmark in an effort to
avoid unintentional over- or underweightings.
MID-CAPS PERFORMED WELL, BUT LAGGED LARGE-CAPS
The U.S. stock market surged to record levels during the period under review,
rising an impressive 26.3% (as measured by the Standard & Poor's 500 stock
index). After a run-up from January through mid-February, market volatility
notably increased, as investor sentiment vacillated between two contradictory
concerns. With some economic news, investors feared that the economy was growing
too quickly, making higher inflation a possibility, while other news caused them
to worry that the economy was slowing, putting earnings at risk. In May,
investors briefly overcame their fears and sent the market higher, but their
concerns quickly reemerged and caused the market to settle into another choppy
trading range that culminated in a sharp sell-off in July. However, stock
prices rebounded throughout the second half of the period, as investors became
more confident that the environment of low inflation, moderate economic growth
and healthy corporate earnings would persist. Though small-cap stocks led the
market during the first half of the year, the post-July rally was dominated by a
handful of large-cap, growth companies.
During the period, the mid-cap sector of the stock market recorded a total
return of 20.9% (as measured by the Russell Midcap index), lagging its larger
peers but slightly outperforming small-cap stocks, which rose 19.0% (as measured
by the Russell 2000 index). The divergence between the performance of the
different stock capitalizations was primarily a reflection of investors "flight
to quality" in the uncertain market, with investors favoring large-cap growth
companies that were highly liquid.
1
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MID-CAP EQUITY FUND (cont'd)
- --------------------------------------------------------------------------------
ECONOMIC GROWTH REBOUNDED AFTER A WEAK START, THEN MODERATED
When the period began, lackluster consumer spending, harsh winter weather and
the General Motors strike restrained economic growth. Despite these adverse
conditions, the economy advanced faster than expected, with first-quarter real
GDP growth reported at 2.0% (annualized). Momentum accelerated even more
dramatically during the second quarter, as industrial activity, automobile sales
and home sales all showed significant improvement. As a result, second-quarter
GDP rose a robust 4.7% (annualized), its highest rate in two years.
The economy's torrid growth cooled markedly during the third quarter, with
annualized real GDP slowing to 2.1%, largely due to lackluster consumer spending
and a widening U.S. trade deficit. This slowdown proved to be temporary,
however, as a wide range of economic reports pointed toward renewed strength
from October through December. Fourth-quarter real GDP growth was revised to
3.9% (annualized), reflecting a narrowing trade deficit, rising consumer
spending and accelerating manufacturing activity. In January 1997, the economic
data suggested that the economy's advance was continuing. Despite firm growth,
underlying inflation remained surprisingly mild. For all of 1996, consumer
prices rose only 2.9%.
The U.S. Federal Reserve cut the Federal funds rate by 25 basis points in
January 1996, just prior to the start of the period. Though stronger than
expected growth shifted investor expectations from further Federal Reserve
interest rate cuts to potential tightening, the Fed then left rates unchanged.
As of January 31, 1997, the Federal funds rate remained at 5.25%.
PERFORMANCE REVIEW: STRONG OUTPERFORMANCE, LED BY OUR TECHNOLOGY, FINANCIAL AND
ENERGY STOCKS
For the 12-month period ended January 31, 1997, the Goldman Sachs Mid-Cap
Equity Fund had a total return of 25.63% based on net asset value, significantly
outperforming the 20.90% total return of the fund's benchmark, the Russell
Midcap Index. We are also pleased to note that the fund fared very well
compared with its peers. For the 12-month period ended January 31, 1997, the
fund ranked within the top 20% of the Lipper mid-cap fund category (30th of
157), according to Lipper Analytical Services, Inc. (Please note that Lipper
rankings do not take sales charges into account and that past performance is not
a guarantee of future results.)
The fund's strong results came primarily during the second half of the period,
and can be attributed to successful stock selection. The best performing stocks
came from a wide range of sectors, with technology, financial and energy-related
investments performing particularly well. In addition, the fund benefited from
several of its positions in consumer nondurables, a sector that had been
underweighted early in the period and subsequently increased.
The fund's top performers included a number of manufacturers of computer-
related components. For example, we took advantage of the slump in technology
stocks in early 1996 by establishing a position in TERADYNE, INC., a
manufacturer of semiconductor testing equipment, at an extremely inexpensive
price. The stock then rebounded much faster than we anticipated in advance of
the turnaround of the semiconductor cycle. Other successful holdings in the
sector were the best performing initial public offering of 1996, CYMER, INC., a
producer of excimer lasers used to etch semiconductors, and SEAGATE TECHNOLOGY,
INC., the world's largest independent disk-drive maker. Seagate Technology
spent much of the past year
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MID-CAP EQUITY FUND (cont'd)
- --------------------------------------------------------------------------------
integrating its acquisition of Conner Peripherals, Inc., which gave it a
dominant market share and made it the most vertically integrated hard disk-drive
manufacturer. By the end of the period, we sold the fund's position in Cymer and
reduced Teradyne and Seagate Technology as they appreciated and became less
undervalued.
In the financial sector, several of our bank and insurance holdings performed
extremely well. Bank stocks included GREENPOINT FINANCIAL CORP., which reported
strong demand for its "no-documentation" and "low-documentation" mortgages;
REPUBLIC BANK OF NEW YORK CORP., which achieved an earnings improvement due to
better than expected revenues and non-interest expense control; and STANDARD FED
BANCORPORATION, a Michigan-based thrift that is in the process of being
acquired, which we sold after it reached our target price. In the insurance
industry, OLD REPUBLIC INTERNATIONAL CORP. enhanced shareholder value in a slow
premium growth environment by improving its capital management, which included a
stock buyback program; USLIFE CORP. surged amid takeover speculation, and
ALLMERICA FINANCIAL CORP. announced a restructuring that would combine its four
units.
The fund also benefited from several of its energy and consumer nondurable
investments. TOSCO CORP., an oil refiner and distributor, continued to
consolidate its market position through an ambitious acquisition strategy, and
LONG ISLAND LIGHTING CO., a New York-based utility, agreed to be acquired by
Brooklyn Union Gas Co. at a very attractive price. In the consumer nondurable
sector, SUNBEAM CORP., a leading consumer products company, surged due to the
aggressive restructuring program initiated by its new CEO; and FRUIT OF THE
LOOM, INC. performed well due to increased investor recognition of its ability
to improve future cash flow.
DIFFICULT INDUSTRY CONDITIONS IMPACTED SEVERAL HOLDINGS
Fund holdings that did not fulfill our expectations included several companies
that were affected by difficult industry conditions. These included GEON CORP.,
VISHAY INTERTECHNOLOGY, INC. and STONE CONTAINER CORP., which all suffered when
their respective businesses -- chemicals, electronic capacitors, and pulp and
paper products -- came under pressure due to increased competition and
overcapacity. Another disappointment was CENTRAL MAINE POWER CO., which was
impacted by continuing uncertainty in the regulatory environment for electric
utilities. We believe that the market has overreacted to the short-term
problems facing these companies and the fund continued to hold them as of the
end of the period.
NEW INVESTMENTS ADDED DIVERSIFICATION
After many holdings performed extremely well and were sold upon reaching our
price targets, we initiated several new investments that we determined were very
undervalued. These included two stocks that were among the fund's 10 largest
positions as of the end of the period under review: INTERNATIONAL MULTIFOODS
CORP. and UNICOM CORP. International Multifoods Corp., a distributor of
specialty foods, has a relatively low valuation, a high degree of operating
leverage and new management that is expected to improve profitability,
particularly in its vending distribution business. Unicom Corp., an electric
utility that operates 12 nuclear units at six sites, generates excess capital
and, unlike many other electric utilities, has no utility power purchase
problems. We established a position after its stock price declined due to a
mandated increase in spending on operations and maintenance, an issue that
management believes will not impair the company's long-term prospects.
We established a major position in PERRIGO CO., the largest manufacturer of
store-brand health and
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MID-CAP EQUITY FUND (cont'd)
- --------------------------------------------------------------------------------
beauty aids, over-the-counter pharmaceuticals and nutritional products. We
expect Perrigo to benefit from stricter cost controls as well as its "over-the-
counter switch" business, where it produces drugs that are equivalent to brand-
name products after the original drug patents expire. These products are a
significant new source of revenues because they command higher margins and have
higher unit growth. Another new position was IMATION CORP., a spin-off of 3M
Co., which manufactures products for data storage, printing and publishing,
medical imaging and photography. Imation has a strong balance sheet and is using
the cash flow generated by its older businesses to develop new products such as
high-capacity disks.
We significantly increased the fund's existing position in THIOKOL CORP., a
defense/aerospace company that has a debt-free balance sheet, trades at a very
low earnings multiple and is reducing its dependence on the federal government.
As part of this strategy, Thiokol formed a joint venture to manufacture
components for commercial aircraft, which will enable it to benefit from an
expected upturn in the aircraft cycle.
<TABLE>
<CAPTION>
TOP 10 EQUITY HOLDINGS AS OF JANUARY 31, 1997
COMPANY LINE OF BUSINESS PERCENTAGE OF TOTAL NET ASSETS
<S> <C> <C>
Thiokol Corp. Defense/Aerospace 3.0%
Shopko Stores, Inc. Discount Retailer 2.5%
Goodyear Tire & Rubber Co. Tire and Rubber Products 2.5%
Republic Bank of New York Corp. Bank 2.5%
Long Island Lighting Co. Electric Utilities 2.5%
International Multi-foods Corp. Food Distributor 2.4%
Avnet, Inc. Electronic Components Distributor 2.4%
USLife Corporation Insurance 2.4%
Unicom Corp. Utility 2.4%
Owens-Illinois, Inc. Packaging 2.4%
</TABLE>
OUTLOOK
As of this writing, we believe the stock market, in general, is somewhat
overvalued. Though we still expect the market to achieve positive results in
1997, its returns are unlikely to match the strong returns of 1995 or 1996.
Despite the expensive market, the fund's current holdings are attractively
valued and we expect them to continue to perform well. We intend to continue to
utilize extensive fundamental research to identify attractive, undervalued
stocks with solid long-term prospects.
Sincerely,
/s/ Eileen A. Aptman
Eileen A. Aptman
Portfolio Manager
/s/ Ronald E. Gutfleish
Ronald E. Gutfleish
Portfolio Manager
U.S. Active Equity Value
March 3, 1997
4
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MID-CAP EQUITY FUND
- --------------------------------------------------------------------------------
The following graph shows the value, as of January 31, 1997, of a $1,000,000
investment made on the inception date of the Fund. For comparative purposes,
the performance of the Fund's benchmark (the Russell Midcap Index ("Russell
Midcap")) is shown for the appropriate time periods. All performance data shown
represents past performance and should not be considered indicative of future
performance which will fluctuate with changes in market conditions. These
performance fluctuations will cause an investor's shares, when redeemed, to be
worth more or less than their original cost.
(dollars in thousands)
[LINE GRAPH APPEARS HERE]
GS MIDCAP RUSSELL MIDCAP
8/1/95 $1,000 $1,000
1/31/96 $1,069 $1,094
1/31/97 $1,344 $1,523
<TABLE>
<CAPTION>
Average Annual Total Return
-----------------------------------
One Year Since Inception
(a)
-----------------------------------
<S> <C> <C>
Institutional 25.63% 21.65%
Shares
</TABLE>
(a) Institutional shares commenced operations on August 1, 1995.
5
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS
January 31, 1997
<TABLE>
<CAPTION>
Shares Description Value
- -------------------------------------------------------------
<S> <C> <C>
Common Stocks--96.5%
Airlines--2.0%
102,400 Continental Airlines, $ 2,867,200
Inc.*
- -------------------------------------------------------------
APPLIANCE MANUFACTURER--1.8%
95,300 Sunbeam Corp., Inc. 2,644,575
- -------------------------------------------------------------
AUTO--ORIGINAL EQUIPMENT MANUFACTURER--0.7%
48,500 Exide Corp. 1,091,250
- -------------------------------------------------------------
BANKS--4.1%
27,600 Greenpoint Financial Corp. 1,504,200
40,700 Republic Bank of New York 3,607,038
Corp.
14,800 Unionbancal Corp. 791,800
5,903,038
- -------------------------------------------------------------
CHEMICALS--COMMODITY--1.2%
94,600 Geon Co. 1,773,750
- -------------------------------------------------------------
COMPUTERS AND PERIPHERALS--3.2%
124,300 Decisionone Corp. 2,175,250
48,000 Seagate Technology, Inc.* 2,472,000
4,647,250
- -------------------------------------------------------------
CONSUMER STAPLES--1.8%
56,135 Block Drug Company, Inc. 2,638,345
- -------------------------------------------------------------
DEFENSE--3.0%
76,600 Thiokol Corp. 4,289,600
DEPARTMENT STORES--2.5%
228,000 Shopko Stores, Inc. 3,619,500
- -------------------------------------------------------------
ELECTRIC UTILITIES--8.6%
242,100 Central Maine Power Co. 2,693,362
38,500 CMS Energy Corp. 1,289,750
158,100 Long Island Lighting Co. 3,596,775
147,500 Niagara Mohawk Power 1,493,437
Corp.*
145,900 Unicom Corp. 3,446,888
12,520,212
- -------------------------------------------------------------
FOOD--4.1%
161,900 Chiquita Brands 2,367,788
International, Inc.
197,000 International Multifoods 3,546,000
Corp.
5,913,788
- -------------------------------------------------------------
FOREST PRODUCTS--2.7%
31,000 Georgia-Pacific Corp. 2,282,375
130,000 Stone Container Corp. 1,755,000
4,037,375
- -------------------------------------------------------------
HEALTHCARE MANAGEMENT--4.8%
57,800 Health Systems 1,495,575
International, Inc.*
104,900 Horizon CMS Healthcare 1,442,375
Corp.
126,400 Tenet Healthcare Corp.* 3,412,800
33,000 Trigon Healthcare Inc. 585,750
6,936,500
- -------------------------------------------------------------
HOME BUILDERS--3.1%
46,000 Centex Corp. 1,794,000
104,600 Lennar Corp. 2,784,975
4,578,975
- -------------------------------------------------------------
INSURANCE--LIFE--3.8%
36,900 Reliastar Financial Corp. 2,047,950
84,700 US Life Corp. 3,472,700
5,520,650
- -------------------------------------------------------------
<CAPTION>
Shares Description Value
- -------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INSURANCE--PROPERTY AND CASUALTY--3.8%
90,100 Allmerica Financial Group $ 3,299,912
84,300 American States Financial 2,223,413
Corp.*
5,523,325
- -------------------------------------------------------------
INSURANCE BROKERS--1.5%
80,900 Old Republic 2,174,187
International
Corp.
- -------------------------------------------------------------
INVESTMENT BROKERS AND MANAGERS--1.0%
44,300 Lehman Brothers Holdings, 1,400,987
Inc.
- -------------------------------------------------------------
LOGISTICS/TRUCKING--1.9%
106,800 Consolidated Freightways, 2,710,050
Inc.
- -------------------------------------------------------------
LEISURE--2.1%
115,300 Royal Caribbean Cruise 3,041,038
Lines
- -------------------------------------------------------------
MACHINERY--0.9%
22,400 Tecumseh Products, Inc. 1,293,600
MEDIA--1.2%
76,200 Carmike Cinemas 1,809,750
- -------------------------------------------------------------
MEDICAL--2.5%
68,800 Owens and Minor, Inc. 705,200
272,700 Perrigo Co. 2,897,438
3,602,638
- -------------------------------------------------------------
OIL REFINING AND MARKETING--5.5%
59,400 Ashland Inc. 2,561,625
34,600 Tosco Corp. 3,062,100
71,700 Valero Energy Corp. 2,419,875
8,043,600
- -------------------------------------------------------------
PACKAGING--2.4%
144,000 Owens-Illinois Inc.* 3,420,000
- -------------------------------------------------------------
RECREATIONAL PRODUCTS--1.7%
149,300 Outboard Marine Corp. 2,482,112
RESTAURANTS--1.8%
369,800 Darden Restaurants 2,681,050
- -------------------------------------------------------------
SEMICONDUCTORS AND ELECTRONICS--7.8%
56,600 Avnet, Inc. 3,502,125
98,000 Imation Corp. 2,854,250
69,200 Silicon Valley Group, 1,859,750
Inc.*
124,250 Vishay Intertechnology, 2,997,531
Inc.*
11,213,656
- -------------------------------------------------------------
SOFTWARE--1.4%
62,900 Autodesk, Inc. 1,989,213
- -------------------------------------------------------------
STEEL--1.8%
63,600 AK Steel Holding Corp. 2,559,900
- -------------------------------------------------------------
SUPERMARKETS--1.9%
168,800 Fleming Companies, Inc. 2,721,900
TECHNOLOGY CAPITAL GOODS--1.9%
91,700 Teradyne, Inc.* 2,831,238
- -------------------------------------------------------------
TEXTILES--4.1%
141,100 Angelica Corp. 2,698,537
82,300 Fruit of the Loom, Inc.* 3,302,287
6,000,824
- -------------------------------------------------------------
TIRE AND OTHER RELATED
RUBBER PRODUCTS--2.5%
66,200 Goodyear Tire & Rubber Co. 3,607,900
- -------------------------------------------------------------
TOBACCO--1.4%
67,000 Universal Corp. 2,077,000
- -------------------------------------------------------------
TOTAL COMMON STOCKS (Cost $118,250,113) $ 140,165,976
- -------------------------------------------------------------
</TABLE>
6
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS (continued)
January 31, 1997
<TABLE>
<CAPTION>
Principal Amount
Interest Rate Maturity Date Value
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
REPURCHASE AGREEMENT--2.8%
Joint Repurchase Agreement Account
$4,100,000 5.63% 02/03/97 $ 4,100,000
- -----------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENT
(Cost $4,100,000) $ 4,100,000
TOTAL INVESTMENTS (COST $122,350,113)** $144,265,976
- -----------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION:
Gross unrealized gain for investments in which value exceeds cost
$ 27,053,378
Gross unrealized loss for investments in which cost exceeds value
(5,196,819)
- -----------------------------------------------------------------------------------
Net unrealized gain $ 21,856,559
- -----------------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
** The aggregate cost for federal income tax purposes is $122,409,417.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
7
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
January 31, 1997
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investment in securities, at value (identified cost $144,265,976
$122,350,113)
Cash 31,121
Receivables:
Fund shares sold 87,576
Investment securities sold 4,552,534
Dividends and interest 56,999
Deferred organization expenses, net 60,056
Other assets 10,218
TOTAL ASSETS 149,064,480
LIABILITIES:
Payables:
Investment securities purchased 3,687,585
Investment advisory fees 71,762
Administration fees 18,370
Transfer agent fees 4,807
Accrued expenses and other liabilities 28,626
TOTAL LIABILITIES 3,811,150
NET ASSETS:
Paid-in capital 115,859,949
Distributions in excess of net investment income (25,142)
Accumulated undistributed net realized gain on investment and 7,502,660
option transactions
Net unrealized gain on investments 21,915,863
NET ASSETS $145,253,330
Total shares of beneficial interest outstanding, $.001 par 7,755,774
value (50,000,000 shares authorized)
Net asset value, offering and redemption price per share (net $18.73
assets/shares outstanding)
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Goldman Sachs Mid-Cap Fund
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the Year Ended January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Dividends $ 2,631,906
Interest 188,358
TOTAL INCOME 2,820,264
- -----------------------------------------------------
EXPENSES:
Investment adviser fees 771,956
Administration fees 192,989
Professional fees 68,906
Transfer agent fees 51,464
Custodian fees 29,506
Amortization of deferred organization 17,213
expenses
Directors' fees 2,234
Other 31,778
- -----------------------------------------------------
TOTAL EXPENSES $1,166,046
Less Expenses reimbursable by Goldman (72,441)
Sachs
NET EXPENSES 1,093,605
NET INVESTMENT INCOME 1,726,659
- -----------------------------------------------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENT AND OPTION TRANSACTIONS:
Net realized gain on investment 13,627,039
transactions
Net realized gain on options written 40,466
Net change in unrealized gain on 14,749,074
investments
- -----------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON 28,416,579
INVESTMENT AND OPTION TRANSACTIONS
- -----------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING $30,143,238
FROM OPERATIONS
- -----------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Share Outstanding throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED PERIOD ENDED
JANUARY 31, 1997 JANUARY 31, 1996 (A)
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income $ 1,726,659 $ 1,088,855
Net realized gain on investment 13,627,039 547,655
transactions
Net realized gain (loss) on options 40,466 (83,442)
written
Net change in unrealized gain on 14,749,074 7,166,789
investments
- ------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting
from operations 30,143,238 8,719,857
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (1,837,675) (986,293)
In excess of net investment income (25,142) ---
From net realized gains (6,629,058) ---
Total distributions to shareholders (8,491,875) (986,293)
- ------------------------------------------------------------------------------------------------------------
FROM SHARE TRANSACTIONS: SHARES SHARES
- ------------------------------------------------------------------------------------------------------------
Proceeds from sales of shares 227,071 3,933,239 9,029,858 135,730,361
Reinvestment of dividends and 483,747 8,489,760 64,045 986,293
distributions
Cost of shares repurchased (1,480,859) (24,491,993) (568,088) (8,779,257)
Net increase (decrease) in net assets
resulting from share transactions (770,041) (12,068,994) 8,525,815 127,937,397
- ------------------------------------------------------------------------------------------------------------
TOTAL INCREASE 9,582,369 135,670,961
NET ASSETS:
Beginning of period 135,670,961 ---
End of period $145,253,330 $135,670,961
- ------------------------------------------------------------------------------------------------------------
Accumulated undistributed
(distributions in excess of) net $ (25,142) $ 102,562
investment income
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(a) For the period from August 1, 1995 (commencement of operations) to January
31, 1996.
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED PERIOD ENDED
JANUARY 31, 1997 JANUARY 31, 1996 (a)
------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $ 15.91 $ 15.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.24 0.13
Net realized and unrealized gain on investments 3.77 0.90
and options
- ------------------------------------------------------------------------------------------------------------
Total income (loss) from investment operations 4.01 1.03
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.24) (0.12)
- ------------------------------------------------------------------------------------------------------------
In excess of net investment income (0.02) --
Net realized gain on investments and option (0.93) --
transactions
- ------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1.19) (0.12)
- ------------------------------------------------------------------------------------------------------------
Net increase in net asset value 2.82 0.91
- ------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 18.73 $ 15.91
Total return /(b)/ 25.63% 6.89% /(d)/
Portfolio turnover rate 74.03% 58.77% /(d)/
Average commission rate /(e)/ $ 0.0547 --
Net assets at end of period $145,253,330 $135,670,961
Ratio of net expenses to average net assets /(c)/ 0.85% 0.85%
Ratio of net investment income to average net assets /(c)/ 1.35% 1.67%
Ratios assuming no expense limitations:
Ratio of expenses to average net assets /(c)/ 0.91% 0.98%
Ratio of net investment income to average net assets /(c)/ 1.29% 1.54%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ For the period from August 1, 1995 (commencement of operations) to January
31, 1996.
/(b)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption
of the investment at the net asset value at the end of the period.
/(c)/ Annualized.
/(d)/ Not annualized.
/(e)/ For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
January 31, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION
Goldman Sachs Mid-Cap Equity Fund ("the Fund") is a separate diversified
portfolio of Goldman SachsEquity Portfolios, Inc. (the "Company"). The Company
consists of eight funds and is a Marylandcorporation registered under the
Investment Company Act of 1940, as amended, as an open-end,management investment
company. The Fund offers two classes of shares - Institutional shares
andService shares. No Service shares were outstanding as of January 31, 1997.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significantaccounting policies consistently
followed by the Fund. The preparation of financial statements inconformity with
generally accepted accounting principles requires management to make
estimatesand assumptions that may affect the reported amounts.
A. Investment Valuation
- -- --------------------
Investments in securities traded on a U.S. or foreignsecurities exchange or the
NASDAQ system are valued daily at their last sale or closing price on
theprincipal exchange on which they are traded or NASDAQ. If no sale occurs,
securities traded on aU.S. exchange or NASDAQ are valued at the mean between the
closing bid and asked price, andsecurities traded on a foreign exchange will be
valued at the official bid price. Unlisted equity anddebt securities for which
market quotations are available are valued at the mean between the mostrecent
bid and asked prices. Debt securities are valued at prices supplied by an
independent pricingservice, which reflect broker/dealer-supplied valuations and
matrix pricing systems. Short-termdebt obligations maturing in sixty days or
less are valued at amortized cost. Restricted securities, andother securities
for which quotations are not readily available, are valued at fair value using
methodsapproved by the Board of Directors of the Company.
B. Securities Transactions and Investment Income
- -- ---------------------------------------------
Securities transactions are recorded on the tradedate. Realized gains and
losses on sales of investments are calculated on the identified-costbasis.
Dividend income is recorded on the ex-dividend date. Dividends for which the
Fund hasthe choice to receive either cash or stock are recognized as investment
income in an amountequal to the cash dividend. This amount is also used as an
estimate of the fair value of the stockreceived. Interest income is determined
on a basis of interest accrued, premium amortized anddiscount earned.
C. Federal Taxes
- -- -------------
It is the Fund's policy to comply with the requirements of the Internal Revenue
Codeapplicable to regulated investment companies and to distribute substantially
all of its investmentcompany taxable income and capital gains to its
shareholders. Accordingly, no federal tax provisionis required. The
characterization of distributions to shareholders for financial reporting
purposes isdetermined in accordance with income tax rules. Therefore, the source
of a portfolio's distributionsmay be shown in the accompanying financial
statements as either from or in excess of netinvestment income or net realized
gain on investment transactions, or from capital, dependingon the type of
book/tax differences that may exist.
D. Deferred Organization Expenses
- -- ------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
12
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
January 31, 1997
- --------------------------------------------------------------------------------
E. Expenses
- -- --------
Expenses incurred by the Company which do notspecifically relate to an
individual fund of the Company are allocated to the funds based on eachfund's
relative average net assets for the period.
F. Option Accounting Principles
- -- ----------------------------
When the Fund writes call or put options, an amount equal to the premium
received is recordedas an asset and as an equivalent liability. The amount of
the liability is subsequently marked-to-market to reflect the current market
value of the option written. When a written option expires onits stipulated
expiration date or the Fund enters into a closing purchase transaction, the Fund
realizes again or loss without regard to any unrealized gain or loss on the
underlying security, and the liabilityrelated to such option is extinguished.
When a written call option is exercised, the Fund realizes again or loss from
the sale of the underlying security, and the proceeds of the sale are
increasedby the premium originally received. When a written put option is
exercised, the amount of thepremium originally received will reduce the cost of
the security which the Fund purchases uponexercise. There is a risk of loss
from a change in value of such options which may exceed the relatedpremiums
received.
Upon the purchase of a call option or aprotective put option by the Fund, the
premium paid is recorded as an investment and subsequentlymarked-to-market to
reflect the current market value of the option. If an option which the Fundhas
purchased expires on the stipulated expiration date, the Fund will realize a
loss in the amount ofthe cost of the option. If the Fund enters into a closing
sale transaction, the Fund will realize a gainor loss, depending on whether the
sale proceeds from the closing sale transaction are greater or lessthan the cost
of the option. If the Fund exercises a purchased put option, the Fund will
realize a gainor loss from the sale of the underlying security, and the proceeds
from such sale will be decreased bythe premium originally paid. If the Fund
exercises a purchased call option, the cost of the securitywhich the Fund
purchases upon exercise will be increased by the premium originally paid.
G. Futures Contracts
- -- -----------------
The Fund may enter into financial futures contracts for hedging purposes or to
increase total return. Upon entering into a futures contract, the Fund is
required to deposit with a broker an amount of cashor securities equal to the
minimum "initial margin" requirement of the futures exchange on which
thecontract is traded. Subsequent payments ("variation margin") are made or
received by theFund each day, dependent on the daily fluctuations in the value
of the underlying index, and arerecorded for financial reporting purposes as
unrealized gains or losses by the Fund. Whenentering into a closing
transaction, for book purposes, the Fund will realize a gain or loss equalto the
difference between the value of the futures contract to sell and the futures
contract to buy. Futures contracts are valued at the most recent settlement
price, unless such price does not reflectthe fair market value of the contract,
in which case the position will be valued using methods approvedby the Board of
Directors of the Company.
Certain risks may arise upon entering intofutures contracts. The predominant
risk is that the changes in the value of the futures contract may notdirectly
correlate with changes in the value of the underlying securities. This risk may
decrease theeffectiveness of the Fund's hedging strategies and may also result
in a loss to the Fund.
13
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
January 31, 1997
- --------------------------------------------------------------------------------
3. AGREEMENTS
Goldman Sachs Asset Management ("GSAM"), aseparate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), acts as the Fund'sinvestment adviser
pursuant to an Investment Advisory Agreement. Under the InvestmentAdvisory
Agreement, GSAM, subject to the general supervision of the Company's Board of
Directors,manages the Fund's portfolio. As compensation for the services
rendered under the AdvisoryAgreement and the assumption of the expenses related
thereto, GSAM is entitled to a fee,computed daily and payable monthly, at an
annual rate equal to .60% of the Fund's average daily netassets.
GSAM also acts as the Fund's administratorpursuant to an Administration
Agreement. Under the Administration Agreement, GSAM administersthe Fund's
business affairs, including providing facilities. As compensation for the
servicesrendered pursuant to the Administration Agreement, the Fund pays GSAM a
fee, computeddaily and payable monthly, at an annual rate equal to .15% of the
Fund's average daily net assets.
Goldman Sachs has voluntarily agreed to reduce or limit certain "Other
Expenses" (excludingadvisory, administration, service plan and transfer agent
fees and litigation, indemnification, taxes,interest, brokerage commissions and
extraordinary expenses) until further notice to the extent suchexpenses exceed
..06% of the average daily net assets of the Fund. For the year ended January
31,1997, these expense reimbursements amounted to $72,441 and Goldman Sachs owed
the Fund $8,717at year end.
Goldman Sachs serves as the Distributor ofshares of the Fund pursuant to a
distribution agreement and receives no fee. Goldman Sachsalso serves as the
Transfer Agent of the Fund for a fee.
4. LINE OF CREDIT FACILITY
The Fund participates in a $250,000,000 uncommitted, unsecured revolving line of
creditfacility. In addition, the Fund participates in a $50,000,000 committed,
unsecured revolving lineof credit facility. Both facilities are to be used
solely for temporary or emergency purposes. Under the most restrictive
arrangement, the Fund must own securities having a market value inexcess of 300%
of the total bank borrowings. The interest rate on the borrowings is based on
theFederal Funds rate. The committed facility also requires a fee to be paid
based on the amount of thecommitment which has not been utilized. During the
year ended January 31, 1997, the Fund did nothave any borrowings under these
facilities.
5. PORTFOLIO SECURITIES TRANSACTIONS
Purchases and proceeds of sales or maturities ofsecurities (excluding short-term
investments and options) for the year ended January 31, 1997 were$92,601,511 and
$112,186,001, respectively.
For the year ended January 31, 1997, optiontransactions in the Fund were as
follows:
<TABLE>
<CAPTION>
Put Options written Contracts Premium Received
- ----------------------------------------------------
<S> <C> <C>
Balance outstanding,
beginning of period -- $ --
Options written 240 40,466
Options expired (240) (40,466)
- ----------------------------------------------------
Balance outstanding,
end of period -- $ 0
- ----------------------------------------------------
</TABLE>
Certain risks arise related to written call or put options from the possible
inability of counterpartiesto meet terms of their contracts.
For the year ended January 31, 1997, GoldmanSachs earned approximately $22,000
of brokerage commissions from portfolio transactions executedon behalf of the
Fund.
14
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
January 31, 1997
- --------------------------------------------------------------------------------
6. REPURCHASE AGREEMENTS
During the term of a repurchase agreement, thevalue of the underlying
securities, including accrued interest, is required to equal or exceed thevalue
of the repurchase agreement. The underlying securities for all repurchase
agreements are held insafekeeping at the Fund's custodian.
7. JOINT REPURCHASE AGREEMENT ACCOUNT
The Fund, together with other registered investment companies having advisory
agreements withGSAM, transfer uninvested cash balances into joint accounts, the
daily aggregate balance of which isinvested in one or more repurchase
agreements. The underlying securities for the repurchaseagreements are U.S.
Treasury obligations. At January 31, 1997, the Fund had an undividedinterest
in the repurchase agreements in the following joint account which equaled
$4,100,000in principal amount. At January 31, 1997, the repurchase agreements
held in this joint account,along with the corresponding underlying securities
(including the type of security, market value,interest rate and maturity date)
were as follows:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Bear Stearns Securities, dated 01/31/97, repurchase price
$800,375,333 (GNMA: $26,604,837, 7.50%, 10/15/26; FNMA:
$720,411,516, 5.50% - 8.00%, 02/01/09 -09/01/26; FHLMC:
77,372,676, 6.0% -$ 8.0%, 04/01/98 - 07/01/26)
$800,000,000 5.63% 02/03/97 $ 800,000,000
Nomura Securities, dated 01/31/97, repurchase price
$100,047,083 (GNMA: $102,007,864, 5.5% - 10.25%
01/15/20 - 01/20/27)
100,000,000 5.65 02/03/97 100,000,000
Lehman Government Securities, dated 01/31/97, repurchase
price $201,894,173 (U.S. Treasury Notes: $191,656,654,
6.375%, 01/15/00-08/15/02; U.S. Treasury Stripped
Securities: $14,095,535 05/15/02 - 11/15/03)
201,800,000 5.60 02/03/97 201,800,000
TOTAL JOINT REPURCHASE AGREEMENT ACCOUNT $1,101,800,000
- --------------------------------------------------------------------------------
</TABLE>
8. CERTAIN RECLASSIFICATIONS
In accordance with Statement of Position 93-2, theMid-Cap Equity Fund has
reclassified $8,454 from paid-in capital to distributions in excess of
netinvestment income. These reclassifications have no impact on the net asset
value of the Fund and isdesigned to present the Fund's capital accounts on a tax
basis.
9. OTHER MATTERS
As of January 31, 1997, The Goldman, Sachs & Co. Employees Profit Sharing and
Retirement IncomePlan was the beneficial owner of approximately 98% of the
outstanding shares of the Fund.
15
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of GoldmanSachs Mid-Cap Equity Fund:
We have audited the accompanying statement ofassets and liabilities of Goldman
Sachs Mid-Cap Equity Fund, one of the portfolios constituting Goldman Sachs
Equity Portfolios, Inc., including the statement of investments, as of January
31, 1997, and the relatedstatement of operations and the statement of changes in
net assets and the financial highlights for the periodspresented. These
financial statements and the financial highlights are the responsibility of the
fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlightsbased on our audits.
We conducted our audits in accordance withgenerally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtainreasonable assurance about whether the financial statements and the
financial highlights are free ofmaterial misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts anddisclosures in
the financial statements. Our procedures included confirmation of securities
owned as of January 31, 1997 by correspondence with the custodian and brokers.
An audit also includes assessing the accountingprinciples used and significant
estimates made by management, as well as evaluating the overall
financialstatement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in allmaterial respects, the financial position of
Goldman Sachs Mid-Cap Equity Fund as of January 31, 1997, theresults of its
operations and the changes in its net assets and the financial highlights for
the periods presented, inconformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 15, 1997
16
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
DIRECTORS
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
OFFICERS
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
GOLDMAN SACHS
Investment Adviser, Administrator,
Distributor and Transfer Agent
17
<PAGE>
Appendix A
DESCRIPTION OF BOND RATINGS*
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 edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than 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 some time 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 system described herein are believed to be the most recent ratings
systems available from Moody's Investors Service, Inc. and Standard and 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 do not necessarily
represent ratings which will be given to these securities on the date of the
Fund's fiscal year end.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such
1-A
<PAGE>
issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Unrated: 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 or companies that
are not rated as a matter 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 judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believe
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
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 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.
BB, B, CCC, CC, C: Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal. BB indicates the least degree of speculation and C the
highest. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
D: Bonds rated D are in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired,
2-A
<PAGE>
unless Standard & Poor's believes that such payments will be made during such
grace period. The D rating also will be used upon the filing of a bankruptcy
petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
N.R.: Not rated.
3-A
<PAGE>
Appendix B
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 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-B
<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 partners' capital of approximately $5.3 billion as of November
29, 1996.
. With thirty-four offices around the world, Goldman Sachs employs over
9,000 professionals focused on opportunities in major markets.
. A research budget of $200 million for 1997.
. The number one lead manager of U.S. common stock offerings for the
past eight years (1989-1996).*
* Source: Securities Data Corporation. Common stock ranking excludes REITs,
====================================
Investment Trusts and Rights.
2-B
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs
1890 Dow Jones Industrial Average first published
1896 Goldman Sachs joins New York Stock Exchange
1906 Goldman Sachs takes Sears Roebuck public (oldest ongoing client)
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
1996 Dow Jones Industrial Average breaks 6000
3-B
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY STATE.
SUBJECT TO COMPLETION -- JUNE 13, 1997
PART B
STATEMENT OF ADDITIONAL INFORMATION
INSTITUTIONAL SHARES
GOLDMAN SACHS ADJUSTABLE RATE GOVERNMENT FUND
GOLDMAN SACHS SHORT DURATION GOVERNMENT FUND
GOLDMAN SACHS SHORT DURATION TAX-FREE FUND
GOLDMAN SACHS GOVERNMENT INCOME FUND
GOLDMAN SACHS MUNICIPAL INCOME FUND
GOLDMAN SACHS CORE FIXED INCOME FUND
GOLDMAN SACHS GLOBAL INCOME FUND
GOLDMAN SACHS HIGH YIELD 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 of the above-referenced
series of Goldman Sachs Trust. This Additional Statement should be read in
conjunction with the prospectus for the Institutional Shares of Goldman Sachs
Adjustable Rate Government Fund, Goldman Sachs Short Duration Government Fund,
Goldman Sachs Short Duration Tax-Free Fund, Goldman Sachs Government Income
Fund, Goldman Sachs Municipal Income Fund, Goldman Sachs Core Fixed Income Fund,
Goldman Sachs Global Income Fund and Goldman Sachs High Yield Fund, dated ____,
1997, as amended and/or supplemented from time to time (the "Prospectus"), which
may be obtained without charge from Goldman, Sachs & Co. by calling the
telephone number, or writing to one of the addresses, listed below.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Introduction B-3
<S> <C>
Other Investments and Practices B-10
Investment Restrictions B-53
Management B-70
Portfolio Transactions B-86
Shares of the Trust B-87
Net Asset Value B-92
Taxation B-93
Performance Information B-105
Other Information B-117
Financial Statements B-118
Appendix A 1-A
Appendix B 1-B
</TABLE>
The date of this Additional Statement is _______, 1997.
<PAGE>
<TABLE>
<S> <C>
GOLDMAN SACHS ASSET MANAGEMENT GOLDMAN SACHS ASSET
ADVISER TO GOLDMAN SACHS MANAGEMENT INTERNATIONAL
SHORT DURATION TAX-FREE FUND, ADVISER TO GOLDMAN SACHS
GOLDMAN SACHS GOVERNMENT GLOBAL INCOME FUND
INCOME FUND, GOLDMAN SACHS 133 PETERBOROUGH COURT
MUNICIPAL INCOME FUND, LONDON EC4A 2BB, ENGLAND
GOLDMAN SACHS CORE FIXED
INCOME FUND AND GOLDMAN
SACHS HIGH YIELD FUND GOLDMAN, SACHS & CO.
ONE NEW YORK PLAZA DISTRIBUTOR
NEW YORK, NEW YORK 10004 85 BROAD STREET
NEW YORK, NY 10004
GOLDMAN SACHS FUNDS
MANAGEMENT, L.P.
ADVISER TO GOLDMAN SACHS GOLDMAN, SACHS & CO.
ADJUSTABLE RATE GOVERNMENT FUND TRANSFER AGENT
AND GOLDMAN SACHS SHORT DURATION 4900 SEARS TOWER
GOVERNMENT FUND CHICAGO, ILLINOIS 60606
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
</TABLE>
TOLL FREE (IN U.S.) .......800-621-2550
<PAGE>
INTRODUCTION
Goldman Sachs Trust (the "Trust") was formed under the laws of the
state of Delaware on January 28, 1997. The Trust is a successor to a
Massachusetts business trust that was merged with the Trust on April 30, 1997.
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 the following series, among others: Goldman Sachs
Adjustable Rate Government Fund ("Adjustable Rate Fund"), Goldman Sachs 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"), Goldman Sachs
Short Duration Tax-Free Fund ("Short Duration Tax-Free Fund"), Goldman Sachs
Short Duration Government Fund ("Short Duration Government Fund") and Goldman
Sachs High Yield Fund ("High Yield Fund") and 27 other series of shares.
Adjustable Rate Fund, Core Fund, Global Income Fund, Government Income Fund,
Municipal Income Fund, Short Duration Tax-Free Fund, Short Duration Government
Fund and High Yield 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 six classes of shares:
Institutional Shares, Administration Shares, Service Shares, Class A Shares,
Class B Shares and Class C Shares. Adjustable Rate Fund is authorized to issue
four classes of shares: Institutional Shares, Administration Shares, Service
Shares and Class A Shares. Government Income Fund, Municipal Income Fund,
Global Income Fund and High Yield Fund are authorized to issue five classes of
shares: Institutional Shares, Service Shares, Class A Shares, Class B Shares and
Class C Shares. Additional series may be added in the future from time to time.
Goldman Sachs Asset Management ("GSAM"), a separate operating division
of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the investment adviser to
Core Fund, Government Income Fund, Municipal Income Fund, Short Duration Tax-
Free Fund and High Yield Fund. Goldman Sachs Asset Management International
("GSAMI"), an affiliate of Goldman Sachs, serves as investment adviser to the
Global Income Fund. Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate
of Goldman Sachs, serves as the investment adviser to Adjustable Rate Fund and
Short Duration Government Fund. GSAM, GSAMI and GSFM 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,
B-3
<PAGE>
unlike certificates of deposits, shares of the Funds are not insured by the
Federal Deposit Insurance Corporation.
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
B-4
<PAGE>
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, 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
three years. The duration target of the Short Duration Government Fund is that
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. 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 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
B-5
<PAGE>
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 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
B-6
<PAGE>
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 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.
B-7
<PAGE>
Core Fund's overall returns are generally likely to move in the
opposite direction from interest rates. Therefore, when interest rates decline,
Core Fund's return is likely to increase. Conversely, when interest rates
increase, Core Fund's return is likely to decline. However, the Adviser
believes that, given the flexibility of managers to invest in a diversified
portfolio of securities, Core Fund's return is not likely to decline as quickly
as that of other fixed-income funds with a comparable average portfolio
duration. In exchange for accepting a higher degree of potential share price
fluctuation, investors have the opportunity 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 will attempt to control
----------------------------------
its exposure to interest rate risk, including overall market exposure and the
spread risk of particular sectors and securities, 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
B-8
<PAGE>
access to input from Goldman Sachs' economists, fixed-income analysts and
mortgage specialists.
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 prospects 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
B-9
<PAGE>
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 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 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.
HIGH YIELD FUND
High Yield Fund's Investment Process. GSAM starts the investment
-------------------------------------
process with economic analysis based on research generated by the Goldman Sachs
Global Economic Research Group and others to determine broad growth trends,
industry-specific events and market forecasts. The market value of non-
investment grade fixed income securities tends to reflect individual
developments within a company to a greater extent than higher rated corporate
debt or Treasury bonds that react primarily to fluctuations in interest rates.
Therefore, determining the creditworthiness of issuers is critical. To that
end, the High Yield Fund's portfolio managers have access to Goldman, Sachs &
Co.'s highly regarded Credit Research and Global Investment Research
Departments, as well as analysis from the firm's High Yield Research Group, a
dedicated group of 14 professionals in the high yield and emerging market
corporate bond research area, consisting of industry and regional market
specialists. In addition, the Fund's portfolio managers may review the opinions
of the two largest independent credit rating agencies, Standard & Poor's Ratings
Group and Moody's Investors Services, Inc. High Yield Fund's portfolio managers
and credit analysts also conduct their own in-depth analysis of each issue
considered for inclusion in the Fund's portfolio. The portfolio managers and
credit analysts evaluate such factors as a company's competitive position, the
strength of its balance sheet, its ability to withstand economic downturns and
its potential to generate ample cash flow to service its debt. The ability to
accurately analyze a company's future cash flow by correctly anticipating the
impact of economic, industry-wide and specific events are critical to successful
high yield investing. GSAM's goal is to identify companies with the potential
to strengthen their balance sheets by increasing their earnings, reducing their
debt or effecting a turnaround. GSAM analyzes trends in a company's debt
picture (i.e., the level of its interest coverage) as well as new developments
in its capital structure on an ongoing basis. GSAM believes that this constant
reassessment is more
B-10
<PAGE>
valuable than relying on a "snapshot" view of a company's ability to service
debt at one or two points in time.
High Yield Fund's portfolio is diversified among different sectors and
industries on a global basis in an effort to reduce overall risk. While GSAM
will avoid excessive concentration in any one industry, the Fund's specific
industry weightings are the result of individual security selection. Emerging
market debt considered for the High Yield Fund's portfolio will be selected by
specialists knowledgeable about the political and economic structure of those
economies.
Return on and Risks of High Yield Securities. Over the past decade,
---------------------------------------------
high yield bonds have delivered consistently higher yields and total return (and
higher volatility) than either investment grade corporate bonds or U.S. Treasury
bonds. However, because these non-investment grade securities involve higher
risks in return for higher income, they are best suited to long-term investors
who are financially secure enough to withstand volatility and the risks
associated with such investments. See "Other Investments and Practices."
Different types of fixed income securities may react differently to changes in
the economy. High yield bonds, like stocks, tend to perform best when the
economy is strong, inflation is low and companies experience healthy profits,
which can lead to higher stock prices and higher credit ratings. Government
bonds are likely to appreciate more in a weaker economy when interest rates are
declining. In certain types of markets, adding some diversification in the high
yield asset class may help to increase returns and decrease overall portfolio
risk.
For high yield, non-investment grade securities, as for most
investments, there is a direct relationship between risk and return. Along with
their potential to deliver higher yields and greater capital appreciation than
most other types of fixed income securities, high yield securities are subject
to higher risk of loss, greater volatility and are considered speculative by
traditional investment standards. The most significant risk associated with
high yield securities is credit risk: the risk that the company issuing a high
yield security may have difficulty in meeting its principal and/or interest
payments on a timely basis. As a result, extensive credit research and
diversification are essential factors in managing risk in the high yield arena.
To a lesser extent, high yield bonds are also subject to interest rate risk:
when interest rates increase, the value of fixed income securities tends to
decline.
OTHER INVESTMENTS AND PRACTICES
OBLIGATIONS OF THE UNITED STATES, ITS AGENCIES, INSTRUMENTALITIES AND SPONSORED
ENTERPRISES
Each Fund may invest in U.S. government securities ("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
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<PAGE>
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, or 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 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
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<PAGE>
Adjustable Rate, Short Duration Government, Core, Global Income, High
Yield and Government Income Funds (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. 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
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<PAGE>
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 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
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<PAGE>
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, 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
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<PAGE>
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.
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
B-16
<PAGE>
primarily conventional Mortgage Loans. The lenders originating and servicing
the Mortgage Loans are subject to certain eligibility requirements established
by Fannie Mae.
Fannie Mae has certain contractual responsibilities. With respect to each
Pool, Fannie Mae is obligated to distribute scheduled monthly installments of
principal and interest after Fannie Mae's servicing and guaranty fee, whether or
not received, to Certificate holders. Fannie Mae also is obligated to
distribute to holders of Certificates an amount equal to the full principal
balance of any foreclosed Mortgage Loan, whether or not such principal balance
is actually recovered. The obligations of Fannie Mae under its guaranty of the
Fannie Mae Certificates are obligations solely of Fannie Mae.
FREDDIE MAC CERTIFICATES. The Federal Home Loan Corporation ("Freddie
------------------------
Mac") is a publicly held U.S. government sponsored enterprise. The principal
activity of Freddie Mac currently is the purchase of first lien, conventional,
residential mortgage loans and participation interests in such mortgage loans
and their resale in the form of mortgage securities, primarily Freddie Mac
Certificates. A Freddie Mac Certificate represents a pro rata interest in a
group of mortgage loans or participations in mortgage loans (a "Freddie Mac
Certificate group") purchased by Freddie Mac.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest at the rate provided for by such
Freddie Mac Certificate (whether or not received on the underlying loans).
Freddie Mac also guarantees to each registered Certificate holder ultimate
collection of all principal of the related mortgage loans, without any offset or
deduction, but does not, generally, guarantee the timely payment of scheduled
principal. The obligations of Freddie Mac under its guaranty of Freddie Mac
Certificates are obligations solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed-rate mortgage 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
B-17
<PAGE>
group may include whole loans, participation interests in whole loans, undivided
interests in 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 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
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<PAGE>
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, Global and
Government Income Funds, 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 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
B-19
<PAGE>
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 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
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<PAGE>
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
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
B-21
<PAGE>
Pass-Throughs, one or more classes of certificates may be subordinate
certificates which provide that the rights of the subordinate certificate-
holders to receive any or a specified portion of distributions with respect to
the underlying mortgage loans may be subordinated to the rights of the senior
certificate-holders. If so structured, the subordination feature may be
enhanced by distributing to the senior certificate-holders on certain
distribution dates, as payment of principal, a specified percentage (which
generally declines over time) of all principal payments received during the
preceding prepayment period ("shifting interest credit enhancement"). This will
have the effect of accelerating the amortization of the senior certificates
while increasing the interest in the trust fund evidenced by the subordinate
certificates. Increasing the interest of the subordinate certificates relative
to that of the senior certificates is intended to preserve the availability of
the subordination provided by the subordinate certificates. In addition,
because the senior certificate-holders in a shifting interest credit enhancement
structure are entitled to receive a percentage of principal prepayments which is
greater than their proportionate interest in the trust fund, the rate of
principal prepayments on the mortgage loans will have an even greater effect on
the rate of principal payments and the amount of interest payments on, and the
yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a
reserve fund may be established relating to such certificates (the "Reserve
Fund"). The Reserve Fund may be created with an initial cash deposit by the
originator or servicer and augmented by the retention of distributions otherwise
available to the subordinate certificate-holders or by excess servicing fees
until the Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate-holders of the full
amount of scheduled monthly payments of principal and interest due to 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 that 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
B-22
<PAGE>
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.
ASSET-BACKED SECURITIES
Core, Government Income, High Yield and Global Income Funds 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
B-23
<PAGE>
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, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS
Each Fund may invest in zero coupon bonds, deferred interest and capital
appreciation bonds and pay-in-kind ("PIK") securities. 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, capital appreciation bonds and PIK securities
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.
PIK securities may be debt obligations or preferred shares that provide the
issuer with the option of paying interest or dividends on such obligations in
cash or in the form of additional securities rather than cash. Similar to zero
coupon bonds and deferred interest bonds, PIK securities are designed to give an
issuer flexibility in managing cash flow. PIK securities that are debt
securities can either be senior or subordinated debt and generally trade flat
(i.e., without accrued interest). The trading price of PIK debt securities
generally reflects the market value of the underlying debt plus an amount
representing accrued interest since the last interest payment.
Zero coupon, deferred interest, capital appreciation and PIK 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 for each taxable year and generally are required to distribute
such accrued amounts (net of deductible expenses, if any) to avoid being subject
to tax. Because no cash is generally received at the time of the accrual, a
Fund may be required to liquidate other portfolio securities to
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<PAGE>
obtain sufficient cash 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, Global Income, Government Income and High Yield Funds 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 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.
High Yield Securities. Bonds rated BB or below by Standard & Poor's
---------------------
Ratings Group (Standard & Poor's) or Ba or below by Moody's Investor Service,
Inc. ("Moody's") (or comparable rated and unrated securities) are commonly
referred to as "junk bonds" and are considered speculative; the ability of their
issuers to make principal and interest payments may be questionable. In some
cases, such bonds may be highly speculative, have poor prospects
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<PAGE>
for reaching investment grade standing and be in default. As a result,
investment in such bonds will entail greater risks than those associated with
investment grade bonds (i.e., bonds rated AAA, AA, A or BBB by Standard and
Poor's or Aaa, Aa, A or Baa by Moody's). Analysis of the creditworthiness of
issuers of high yield securities may be more complex than for issuers of higher
quality debt securities, and the ability of a Fund to achieve its investment
objective may, to the extent of its investments in high yield securities, be
more dependent upon such creditworthiness analysis than would be the case if the
Fund were investing in higher quality securities. See Appendix B for a
description of the corporate bond and preferred stock ratings by Standard &
Poor's, Moody's, Fitch Investors Service Corp. and Duff & Phelps.
The amount of high yield, fixed income securities proliferated in the 1980s
and early 1990s as a result of increased merger and acquisition and leveraged
buyout activity. Such securities are also issued by less-established
corporations desiring to expand. Risks associated with acquiring the securities
of such issuers generally are greater than is the case with higher rated
securities because such issuers are often less creditworthy companies or are
highly leveraged and generally less able than more established or less leveraged
entities to make scheduled payments of principal and interest.
The market values of high yield, fixed income securities tends to reflect
those individual corporate developments to a greater extent than do those of
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. Issuers of such high yield securities may not be able
to make use of more traditional methods of financing and their ability to
service debt obligations may be more adversely affected than issuers of higher
rated securities by economic downturns, specific corporate developments or the
issuers' inability to meet specific projected business forecasts. These non-
investment grade securities also tend to be more sensitive to economic
conditions than higher-rated securities. Negative publicity about the junk bond
market and investor perceptions regarding lower-rated securities, whether or not
based on fundamental analysis, may depress the prices for such securities.
Since investors generally perceive that there are greater risks associated
with non-investment grade securities of the type in which High Yield Fund
invests, the yields and prices of such securities may tend to fluctuate more
than those for higher-rated securities. In the lower quality segments of the
fixed-income securities market, changes in perceptions of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
than do changes in higher quality segments of the fixed-income securities
market, resulting in greater yield and price volatility.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In
addition, the prices of fixed-income
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<PAGE>
securities fluctuate in response to the general level of interest rates.
Fluctuations in the prices of portfolio securities subsequent to their
acquisition will not affect cash income from such securities but will be
reflected in the High Yield Fund's net asset value.
The risk of loss from default for the holders of high yield, fixed-income
securities is significantly greater than is the case for holders of other debt
securities because such high yield, fixed-income securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities. Investment by the High Yield Fund in already
defaulted securities poses an additional risk of loss should nonpayment of
principal and interest continue in respect of such securities. Even if such
securities are held to maturity, recovery by the High Yield Fund of its initial
investment and any anticipated income or appreciation is uncertain. The High
Yield Fund may be required to liquidate other portfolio securities to satisfy
the High Yield Fund's annual distribution obligations in respect of accrued
interest income on securities which are subsequently written off, even though
the High Yield Fund has not received any cash payments of such interest.
The secondary market for high yield, fixed-income securities is
concentrated in relatively few markets and is dominated by institutional
investors, including mutual funds, insurance companies and other financial
institutions. Accordingly, the secondary market for such securities is not as
liquid as and is more volatile than the secondary market for higher-rated
securities. In addition, the trading volume for high-yield, fixed-income
securities is generally lower than that of higher rated securities and the
secondary market for high yield, fixed-income securities could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the High Yield Fund's ability to dispose of particular
portfolio investments. Prices realized upon the sale of such lower rated or
unrated securities, under these circumstances, may be less than the prices used
in calculating the High Yield Fund's net asset value. A less liquid secondary
market also may make it more difficult for the High Yield Fund to obtain precise
valuations of the high yield securities in its portfolio.
Certain proposed and recently enacted federal laws could adversely affect
the secondary market for high yield securities and the financial condition of
issuers of these securities. The form of proposed legislation and the
probability of such legislation being enacted is uncertain.
Non-investment grade or high-yield, fixed-income securities also present
risks based on payment expectations. High yield, fixed-income securities
frequently contain "call" or buy-back features which permit the issuer to call
or repurchase the security from its holder. If an issuer exercises such a "call
option" and redeems the security, the High Yield Fund may have to replace such
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<PAGE>
security with a lower-yielding security, resulting in a decreased return for
investors. In addition, if the High Yield Fund experiences unexpected net
redemptions of the High Yield Fund's shares, it may be forced to sell its
higher-rated securities, resulting in a decline in the overall credit quality of
the High Yield Fund's portfolio and increasing the exposure of the High Yield
Fund to the risks of high yield securities. The High Yield Fund may also incur
additional expenses to the extent that it is required to seek recovery upon a
default in the payment of principal or interest on a portfolio security.
Credit ratings issued by credit rating agencies are designed to evaluate
the safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the conditions of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in non-investment
grade and comparable unrated obligations will be more dependent on the Adviser's
credit analysis than would be the case with investments in investment-grade debt
obligations. The Adviser employs its own credit research and analysis, which
includes a study of existing debt, capital structure, ability to service debt
and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. The Adviser continually
monitors the investments in the High Yield Fund's portfolio and evaluates
whether to dispose of or to retain non-investment grade and comparable unrated
securities whose credit ratings or credit quality may have changed.
BANK OBLIGATIONS
Government Income, Global Income, High Yield and Core Funds may each invest
in obligations issued or guaranteed by United States and foreign banks
(Government Income Fund may only invest in U.S. dollar denominated securities).
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 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
generally permitted to engage in a wider variety of 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.
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<PAGE>
MUNICIPAL SECURITIES
Core, Municipal Income, High Yield and Short Duration Tax-Free Funds 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 or counsel selected by the Adviser,
excluded from gross income for federal income tax purposes. The Core, Municipal
Income, High Yield and Short Duration Tax-Free Funds 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 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
B-29
<PAGE>
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, Municipal
Income, High Yield and Core Funds. 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 may be readily marketable.
The obligations of the issuer to pay the principal of and interest on a
Municipal Security are subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Act, and laws, if any, that may be enacted by Congress or state
legislatures extending the time for payment of principal or interest or imposing
other constraints upon the enforcement of such obligations. There is also the
possibility that, as a result of litigation or other conditions, the power or
ability of the issuer to pay when due principal of or interest on a Municipal
Security may be materially affected.
Municipal Leases, Certificates of Participation and Other Participation
-----------------------------------------------------------------------
Interests. The Core, High Yield, 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
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<PAGE>
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 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, High Yield, 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
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<PAGE>
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 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
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<PAGE>
usually purchased at a price which represents a premium over their face value.
Private Activity Bonds. Short Duration Tax-Free, Municipal Income, High
----------------------
Yield, and Core Funds 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. A Tax Exempt Fund's distributions of its interest income from private
activity bonds may subject certain investors to the federal alternative minimum
tax whereas Core Fund's distributions of any tax-exempt interest it receives
from any source will be taxable for regular federal income tax purposes.
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
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 and the bond would not otherwise be readily
marketable. 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
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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, High Yield, 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 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 to 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
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premium and meeting the insurer's underwriting standards, the bond issuer is
able to obtain a high credit rating (usually, Aaa from Moody's or AAA from
Standard & Poor's) for the issued security. Such insurance is likely to
increase the purchase price and resale value of the security. New issue
insurance policies are non-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. The Municipal Securities
invested in by the High Yield Fund will not be subject to this requirement.
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 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
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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.
FOREIGN INVESTMENTS
Core, High Yield 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, High Yield and Global Income Funds may
temporarily hold funds in bank deposits in foreign currencies during completion
of investment programs, Core, High Yield and Global Income Funds 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
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<PAGE>
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, High Yield Fund or Global
Income Fund is uninvested and no return is earned thereon. The inability of
Core Fund, High Yield 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, High Yield Fund
or Global Income Fund due to subsequent declines in value of the portfolio
securities, or, if Core Fund, High Yield 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 adversely affect Core, High
Yield or Global Income Funds' 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.
INVESTING IN EMERGING COUNTRIES
Market Characteristics. Debt securities of most emerging markets issuers
----------------------
may be less liquid and are generally subject to greater price volatility than
securities of issuers in the U.S. and other developed countries. The markets
for securities of emerging markets may have substantially less volume than the
market for similar securities in the U.S. and may not be able to absorb, without
price disruptions, a significant increase in trading volume or trade size.
Additionally, market making and arbitrage activities are generally less
extensive in such markets, which may contribute to increased volatility and
reduced liquidity of such markets. The less liquid the market, the more
difficult it may be for the Fund to accurately price its portfolio securities or
to
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dispose of such securities at the times determined to be appropriate. The risks
associated with reduced liquidity may be particularly acute to the extent that a
Fund needs cash to meet redemption requests, to pay dividends and other
distributions or to pay its expenses.
Securities markets of emerging markets may also have less efficient
clearance and settlement procedures than U.S. markets, making it difficult to
conduct and complete transactions. Delays in the settlement could result in
temporary periods when a portion of a Fund's assets is uninvested and settlement
could result in temporary periods when a portion of the Fund's assets is
uninvested and no return is earned thereon. Inability to make intended security
purchases could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities could result either in losses to
the Fund due to subsequent declines in value of the portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability of the Fund to the purchaser.
Transaction costs, including brokerage commissions and dealer mark-ups, in
emerging markets may be higher than in the U.S. and other developed securities
markets. As legal systems in emerging markets develop, foreign investors may be
adversely affected by new or amended laws and regulations. In circumstances
where adequate laws exist, it may not be possible to obtain swift and equitable
enforcement of the law.
Economic, Political and Social Factors. Emerging markets may be subject to
--------------------------------------
a greater degree of economic, political and social instability than the U.S.,
Japan and most Western European countries. Such instability may result from,
among other things: (i) authoritarian governments or military involvement in
political and economic decision-making, including changes or attempted changes
in government through extra-constitutional means; (ii) popular unrest associated
with demands for improved economic, political and social conditions; (iii)
internal insurgencies; (iv) hostile relations with neighboring countries; and
(v) ethnic, religious and racial disaffection and conflict. Many emerging
markets have experienced in the past, and continue to experience, high rates of
inflation. In certain countries inflation has at times accelerated rapidly to
hyperinflationary levels, creating a negative interest rate environment and
sharply eroding the value of outstanding financial assets in those countries.
The economies of many emerging markets are heavily dependent upon international
trade and are accordingly affected by protective trade barriers and the economic
conditions of their trading partners. In addition, the economies of some
emerging markets may differ unfavorably from the U.S. economy in such respects
as growth of gross domestic product, rate of inflation, capital reinvestment,
resources, self-sufficiency and balance of payments position.
Restrictions on Investment and Repatriation. Certain emerging markets
-------------------------------------------
require governmental approval prior to investments by
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<PAGE>
foreign persons or limit investments by foreign persons to only a specified
percentage of an issuer's outstanding securities or a specific class of
securities which may have less advantageous terms (including price) than
securities of the issuer available for purchase by nationals. Repatriation of
investment income and capital from certain emerging markets is subject to
certain governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect the operation
of a Fund.
SOVEREIGN DEBT OBLIGATIONS
Investments in sovereign debt obligations involves special risks not
present in corporate debt obligations. The issuer of the sovereign debt or the
governmental authorities that control the repayment of the debt may be unable or
unwilling to repay principal or interest when due, and a Fund may have limited
recourse in the event of a default. During periods of economic uncertainty, the
market prices of sovereign debt, and a Fund's net asset value, may be more
volatile than prices of debt obligations of U.S. issuers. In the past, the
governments of certain emerging markets have encountered difficulties in
servicing their debt obligations, withheld payments of principal and interest
and declared moratoria on the payment of principal and interest on their
sovereign debts.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from foreign governments, multinational agencies and other
entities to reduce principal and interest arrearages on their debt. The failure
of a sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of the third parties' commitments to lend funds to the sovereign
debtor, which may further impair such debtor's ability or willingness to timely
service its debts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Core, High Yield and Global
Income Funds 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.
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<PAGE>
At the maturity of a forward contract, Global Income Fund, High Yield 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, High Yield or Core Funds may enter into forward foreign
currency exchange contracts in several circumstances. First, when Global
Income, High Yield or Core Funds enter into a contract for the purchase or sale
of a security quoted or denominated in a foreign currency, or when Global
Income, High Yield or Core Funds anticipate the receipt in a foreign currency of
a dividend or interest payment on such a security which it holds, Global Income,
High Yield or Core Funds 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, High Yield or Core Funds will
attempt to protect themselves 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 U.S. 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 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 U.S. dollar value of only a portion of a Fund's foreign
assets.
Global Income, High Yield and Core Funds 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
Advisers determine that there is a pattern of correlation between the two
currencies. The Global Income, High Yield and Core Funds may also purchase and
sell
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<PAGE>
forward contracts to seek to increase total return when the Advisers anticipate
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 a Fund's portfolio.
Global Income, High Yield and Core Funds' custodian will place cash or
liquid assets, 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 and forward contracts entered into to seek 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 accounts will be marked-to-
market on a daily basis. Although the contracts are not presently regulated by
the Commodity Trading Futures Commission ("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, Core and High Yield Funds will not enter into a forward contract
with a term of greater than one year.
While Global Income, Core and High Yield Funds 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, Core and
High Yield Funds 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 quoted or
denominated in a particular currency and forward contracts entered into by
Global Income, Core and High Yield Funds. 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.
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<PAGE>
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, Adjustable Rate, Government Income, Short Duration Government,
Global Income and High Yield Funds may enter into mortgage swaps and Core, High
Yield and Global Income Funds may also enter into currency swaps. Each Fund may
enter into swap transactions for hedging purposes or 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, cap, floor and collar positions.
A Fund will enter into interest rate and mortgage swaps only on a net
basis, which means that the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate and mortgage swaps do not involve the delivery of
securities, other underlying assets or principal. Accordingly, the risk of loss
with respect to interest rate and mortgage swaps is limited to the net amount of
payments that a Fund is contractually obligated to make. If the other party to
an interest rate swap defaults, a Fund's risk of loss consists of the net amount
of payments that such Fund is contractually entitled to receive, if any. In
contrast, currency swaps usually involve the delivery of the entire principal
amount of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. 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 assets, 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. Inasmuch as these
transactions are entered into
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<PAGE>
for hedging purposes or are offset by cash or liquid assets, as permitted by
applicable law, 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.
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 exchanges
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
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<PAGE>
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 assets, as
permitted by applicable law, either of which, in the case of Global Income Fund,
Core Fund or High Yield 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
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 assets, as permitted
by applicable law, 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 composed of
securities in which it may invest. A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
options it had purchased.
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<PAGE>
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 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, Global Income
----------------------------------------------------
and High Yield Funds may write covered put and call options and purchase put and
call options on foreign currencies in
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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, Core and High Yield Funds 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, Core and High Yield Funds
may purchase call options on currency to seek to increase total return when the
Advisers anticipate 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 included in the Fund's portfolios.
A call option written by Core, Global Income and High Yield Funds 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.
Core, Global Income and High Yield Funds would normally purchase call
options in anticipation of an increase in the U.S. 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, Global Income and High Yield Funds would normally purchase put
options in anticipation of a decline in the U.S. 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, Global Income and High Yield
Funds, 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 U.S. 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
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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,
Core, Global Income and High Yield Funds may use options on currency to seek to
increase total return. Global Income Fund, High Yield Fund and Core 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, High Yield and Core Funds may forego the opportunity to
profit from an increase in the market value of the underlying currency. Also,
when writing put options, Global Income, High Yield and Core Funds accept, 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, High Yield and Core Funds 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, High Yield and Core Funds 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, High Yield and Core Funds would
realize either no gain or a loss on the purchase of the call option. Put
options may be purchased by the Global Income, High Yield and Core Funds for
the purpose of benefiting from a decline in the value of currencies which it
does not own. Global Income, High Yield and Core Funds 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 Global Income, High Yield and Core Funds 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
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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 purposes (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 assets, as permitted by applicable law, 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 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
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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 to hedge against changes in interest
rates or securities prices or, in the case of Core, High Yield and Global Income
Funds, 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 various securities (such as U.S. Government
Securities), securities indices, foreign currencies in the case of Global
Income, Core and High Yield Funds and any other financial instruments and
indices. A Fund will engage in futures and related options transactions 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 traded 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).
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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, Global Income and High
Yield Funds 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 to seek to hedge
against an anticipated rise in interest rates or a decline in market prices or
foreign currency rates that would adversely affect the U.S. 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. Similarly,
Core Fund, High Yield 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 seek 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 Advisers, 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
Funds 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
a Fund enter into a greater or lesser number of futures contracts or by
attempting to achieve only a partial hedge against price changes affecting a
Fund's portfolio securities. When hedging of this character is successful, any
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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, a 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 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 financial
instrument. 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 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
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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
Internal Revenue Code of 1986, as amended (the "Code") for maintaining their
qualifications as regulated investment companies for federal income tax
purposes. See "Taxation."
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
establish with the custodian a segregated account consisting of cash or liquid
assets, as permitted by applicable law, 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 the
value of
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securities 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.
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 a Fund's portfolio are various futures on
U.S. Government Securities, securities indices and foreign currencies.
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 Fund. Each Fund will hold and
maintain in a segregated account until the settlement date cash or liquid
assets, as permitted by applicable law, 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, a Fund's
right to purchase or repurchase the mortgage-related securities subject to the
mortgage dollar roll may be restricted and the instrument which a Fund is
required to repurchase may be worth less than an instrument which a Fund
originally held. Successful use of mortgage dollar rolls will depend upon the
Adviser's ability to manage a Fund's interest rate and mortgage prepayments
exposure. For these reasons, there is no assurance that mortgage dollar rolls
can be successfully employed.
CONVERTIBLE SECURITIES
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Convertible securities include corporate notes or preferred stock but are
ordinarily 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 and High Yield Fund invest 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 a Fund would call the loan in anticipation of an important vote
to be taken among holders of the securities or the giving or withholding of
their consent on a material matter affecting the investment. As with other
extensions of credit there are risks of delay in recovering, or even loss of
rights in, the collateral should the borrower of 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.
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However, a Fund will not invest more than 15% of its net 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
1933 Act 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 the Funds' portfolio 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 the 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.
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,
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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 assets, 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 of 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 management fees payable
by the Fund to the Adviser will be reduced by an amount equal to the Fund's
proportionate share of the management fees paid by such money market fund to the
Adviser or any of its affiliates.
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 a Fund
or as being collateral for a loan by a 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
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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 management agreements with the Advisers or their affiliates, may transfer
uninvested cash balances into a single joint account, the daily aggregate
balance of which will be invested in one or more repurchase agreements.
INVESTMENT RESTRICTIONS
The Trust has adopted the following investment restrictions on behalf of
the Funds, none of which may be changed without the approval of the holders of a
majority of the outstanding voting securities of the affected 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
Municipal Securities, are considered by the Trust not to be fundamental and
accordingly may be changed without shareholder approval. See "INVESTMENT
OBJECTIVES 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 asset coverage
requirement with respect to borrowings), any limitation which involves a maximum
percentage shall not be considered
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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, A FUND MAY NOT:
(1) make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act of 1940, as
amended (the "Act"). This restriction does not, however, apply to
any Fund classified as a non-diversified company under the Act.
(2) invest more than 25% of its total assets in the securities of one or
more issuers conducting their principal business activities in the
same industry (excluding the U.S. government or its agencies or
instrumentalities). (For the purposes of this restriction, state and
municipal governments and their agencies, authorities and
instrumentalities are not deemed to be industries; telephone
companies are considered to be a separate industry from water, gas
or electric utilities; personal credit finance companies and
business credit finance companies are deemed to be separate
industries; and wholly-owned finance companies are considered to be
in the industry of their parents if their activities are primarily
related to financing the activities of their parents). This
restriction does not apply to investments in municipal securities
which have been pre-refunded by the use of obligations of the U.S.
government or any of its agencies or instrumentalities. Each of the
Municipal Income and Short Duration Tax-Free Funds 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. These municipal securities
include (a) municipal securities, the interest on which is paid
solely from revenues of similar projects such as hospitals, electric
utility systems, multi-family housing, nursing homes, commercial
facilities (including hotels), steel companies or life care
facilities, (b) municipal securities whose issuers are in the same
state and (c) industrial development obligations.
(3) borrow money, except (a) the Fund may borrow from banks (as defined
in the Act) or through reverse repurchase agreements in amounts up
to 33 1/3% or its total assets (including the amount borrowed), (b)
the Fund may, to
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<PAGE>
the extent permitted by applicable law borrow up to an additional 5%
of its total assets for temporary purposes, (c) the Fund may obtain
such short-term credits as may be necessary for the clearance of
purchases and sales of portfolio securities, (d) the Fund may
purchase securities on margin to the extent permitted by applicable
law and (e) the Fund may engage in transactions in mortgage dollar
rolls which are accounted for as financings.
(4) make loans, except through (a) the purchase of debt obligations 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 as permitted by
applicable law.
(5) underwrite securities issued by others, except to the extent that
the sale of portfolio securities by the Fund may be deemed to be an
underwriting.
(6)(a) for each Fund other than Core Fund, purchase, hold or deal in real
estate, although a Fund may purchase and sell securities that are
secured by real estate or interests therein, securities of real
estate investment trusts and mortgage-related securities and may
hold and sell real estate acquired by a Fund as a result of the
ownership of securities.
(6)(b) in the case of the Core Fund, 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.
(7) invest in commodities or commodity contracts, except that the Fund
may invest in currency and financial instruments and contracts that
are commodities or commodity contracts.
(8) issue senior securities to the extent such issuance would violate
applicable law.
Each Fund may, notwithstanding any other fundamental investment restriction
or policy, invest some or all of its assets in a single open-end investment
company or series thereof with substantially the same fundamental investment
objectives, restrictions and policies as the Fund.
In addition, as non-fundamental policies, a Fund may not:
B-59
<PAGE>
(1) Invest in companies for the purpose of exercising control or
management.
(2) Invest 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.
(3) Purchase additional securities if the Fund's borrowings exceed
(excluding covered mortgage dollar rolls) 5% of its net assets.
(4) Make short sales of securities, except short sales against the box.
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 and Officers
deemed to be "interested persons" of the Trust for purposes of the Act are
indicated by an asterisk.
Ashok N. Bakhru, Age 53, 1325 Avenue of the Americas, 34th Floor, New York, New
York 10019. Chairman and Trustee. Executive Vice President-Finance and
--------------------
Administration and Chief Financial Officer, Coty Inc. (since April 1996);
President, ABN Associates, Inc. (June 1994 through March 1996); Senior Vice
President, Scott Paper Company (until June 1994); Director, Arkwright Mutual
Insurance Company; Trustee, International House of Philadelphia; Member of
Cornell University Council; Trustee of Walnut Street Theater.
David B. Ford,* Age 51, One New York Plaza, New York, New York 10004. Trustee.
-------
Managing Director, Goldman Sachs (since 1996); General Partner, Goldman Sachs,
(1986-1996); Co-Head of GSAM since December 1994.
Douglas C. Grip,* Age 35, One New York Plaza, New York, New York 10004.
President and Trustee. Vice President, Goldman Sachs since May 1996; President,
- ---------------------
MFS Retirement Services Inc., of Massachusetts Financial Services prior thereto.
John P. McNulty,* Age 44, One New York Plaza, New York, New York 10004.
Trustee. Managing Director, Goldman Sachs since 1996; General Partner of
- -------
Goldman Sachs from 1990 to 1994 and 1995-1996; Co-Head of GSAM since November
1996; Limited Partner of Goldman Sachs from 1994 to November 1995.
B-60
<PAGE>
Mary P. McPherson, Age 60, Taylor Hall, Bryn Mawr College, Bryn Mawr, PA 19010.
Trustee. President of Bryn Mawr College since 1978; Director of Josiah Macy,
- -------
Jr. Foundation since 1977; Director of the Philadelphia Contributionship since
1985; Director of Amherst College since 1986; Director of Dayton Hudson
Corporation since 1988; Director of the Spencer Foundation since 1993; and
member of PNC Advisory Board since 1993.
Alan A. Shuch,* Age 48, One New York Plaza, New York, New York 10004. Trustee.
-------
Limited Partner, Goldman Sachs (since 1994); 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 66, One Northfield Plaza, #218, Northfield, Illinois
60093. Trustee. Chairman, Executive Committee, First Commonwealth, Inc. (a
-------
managed dental care company, since January 1996); Chairman and Chief Executive
Officer, MSP Communications Inc. (a company engaged in radio broadcasting) since
November 1988; Director, Federal Express Corporation since 1976; Evanston
Hospital Corporation (since 1980) and First Commonwealth,Inc. (since 1988) and
North American Private Equity Group (a venture capital fund).
William H. Springer, Age 67, 701 Morningside Drive, Lake Forest, Illinois 60045.
Trustee. Vice Chairman and Chief Financial and Administrative Officer,
- -------
Ameritech (a telecommunications holding company) from February 1987 to
retirement in June 1992; Director, Walgreen Co. (a retail drugstore business);
and Baker, Fentress & Co. (a closed-end non-diversified management investment
company) April 1992 to present.
Richard P. Strubel, Age 57, 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) from January 1984 to October
1994.
Pauline Taylor,* Age 50, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs since June 1992; Director of
- ---------
Shareholder Servicing since June 1992.
Nancy L. Mucker,* Age 47, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
John W. Mosior,* Age 58, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
Scott M. Gilman,* Age 37, One New York Plaza, New York, New York 10004.
Treasurer. Director, Mutual Funds Administration, GSAM since April 1994.
- ---------
Assistant Treasurer of Goldman Sachs Funds
B-61
<PAGE>
Management, Inc. since March 1993. Vice President, Goldman Sachs since March,
1990.
John M. Perlowski,* Age 32, One New York Plaza, New York, New York 10004.
Assistant Treasurer. Vice President, Goldman, Sachs & Co., since July 1995.
- -------------------
Director/Fund Accounting & Custody, Investors Bank & Trust Co., November 1993 to
July 1995. Formerly, Manager, Audit Division, Arthur Andersen, September 1986 to
November 1993.
Michael J. Richman,* Age 36, 85 Broad Street, New York, New York 10004.
Secretary. Associate General Counsel of GSAM since February 1994; Vice
- ---------
President and Assistant General Counsel of Goldman Sachs; Counsel to the Funds
Group, GSAM since June 1992; Partner, Hale and Dorr from September 1991 to June
1992.
Howard B. Surloff,* Age 31, 85 Broad Street, New York, New York 10004. Assistant
---------
Secretary. Vice President and Assistant General 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, LLP prior
thereto.
Valerie A. Zondorak,* Age 31, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Vice President, Goldman Sachs (since March 1997); Counsel
- --------------------
to the Funds Group, GSAM (since March 1997); Associate of Shereff, Friedman,
Hoffman & Goodman, LLP (prior thereto).
Steven E. Hartstein*, Age 33, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Legal Products Analyst, Goldman Sachs since June 1993;
- -------------------
Funds Compliance Officer, Citibank Global Asset Management from August 1991 to
June 1993); Legal Assistant, Brown & Wood prior thereto.
Deborah A. Farrell*, Age 25, 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 36, One New York Plaza, New York, New York 10004.
Assistant Secretary. Vice President and Senior Portfolio Manager, GSAM since
- -------------------
1988.
Elizabeth D. Anderson*, Age 27, One New York Plaza, New York, New York 10004.
Assistant Secretary. Portfolio Manager, GSAM since April 1996; Junior Portfolio
- -------------------
Manager, Goldman Sachs 1995-1996. Funds Trading Assistant, GSAM 1993-1995.
Compliance Analyst, Prudential Insurance, from 1991 to 1993.
The Trustees and officers of the Trust hold comparable positions with
certain other investment companies of which Goldman Sachs, GSAM or GSFM is the
investment adviser, administrator and/or distributor. As of _______, 1997, the
Trustees and officers as a
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<PAGE>
group owned less than 1% of the outstanding shares of beneficial interest of
each Fund.
B-63
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the one-year period ended October
31, 1996:
<TABLE>
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement from Goldman
Compensation Benefits Accrued Sachs Funds
from the as of Part of (including
Funds/1/ Trust's Expenses the Funds)/2/
------------ ---------------- --------------
<S> <C> <C> <C>
Name of Trustees
Ashok N. Bakhru $4,109 $0 $77,375
Marcia L. Beck/3/ $0 $0 $0
David B. Ford $0 $0 $0
Douglas C. Grip $0 $0 $0
Paul C. Nagel, Jr./4/ $2,525 $0 $50,500
Alan A. Shuch $0 $0 $0
Jackson W. Smart $3,169 $0 $65,750
William H. Springer $3,169 $0 $65,750
Richard P. Strubel $3,169 $0 $65,750
</TABLE>
/1/ Reflects amount paid by Goldman Sachs Trust, a Massachusetts business
trust, during fiscal year ended October 31, 1996.
/2/ The Goldman Sachs Funds consisted of 29 mutual funds, including the seven
series of the Trust, on October 31, 1996.
/3/ Resigned as of May 1, 1996.
/4/ Retired as of June 30, 1996.
B-64
<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, Short Duration Tax-Free Fund, High Yield Fund and
Core Fund pursuant to a management agreement. GSFM, 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 a management agreement. GSFM, a
Delaware limited partnership, is an affiliate of Goldman Sachs. GSAMI, 133
Peterborough Court, London EC4A 2BB, England, serves as investment adviser to
Global Income Fund pursuant to a management agreement. 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.
See "MANAGEMENT" in the Funds' Prospectuses for a description of the applicable
Adviser's duties as investment adviser.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
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, Brazil, Frankfurt, George Town, Hong Kong, London, Madrid, Mexico,
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. The Advisers manage money for
some of the world's largest institutional investors.
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
B-65
<PAGE>
surveys conducted in the U.S. and abroad. Goldman Sachs is also among the
leading investment firms using quantitative analytics (now used by a growing
number of investors) to structure and evaluate portfolios. For example, Goldman
Sachs' options evaluation model analyzes each security's term, coupon and call
option, providing an overall analysis of the security's value 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 within 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 1996, has assembled an experienced team of
professionals for selection of the Tax Exempt Funds' portfolio securities.
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, High Yield Fund and Core Fund, the applicable Adviser
expects to utilize Goldman Sachs' sophisticated option-adjusted analytics to
help make strategic asset allocations within the markets for U.S. government,
Mortgage-Backed and other securities and to employ this technology periodically
to re-evaluate the Funds' investments as market conditions change. Goldman
Sachs has also developed a prepayment model designed to estimate mortgage
prepayments and cash flows under different interest rate scenarios. Because a
Mortgage-Backed Security incorporates the borrower's right to prepay the
mortgage, the Advisers use a sophisticated option-adjusted spread (OAS) model to
measure expected returns. A security's OAS is a function of the level and shape
of the yield curve, volatility and the applicable Adviser's expectation of how a
change in interest rates will affect prepayment levels. Since the OAS model
assumes a relationship between prepayments and interest rates, the Advisers
consider it a better way to measure a security's expected return and absolute
and relative values than yield to maturity. In using OAS
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<PAGE>
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 customers. Use of these services by the Advisers
with respect to a Fund does not preclude Goldman Sachs from providing these
B-67
<PAGE>
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 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 Adviser 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
Adviser 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 management agreement, (the "Management Agreements"), was most
recently approved by the Trustees of the Trust, including a majority of the
Trustees of the Trust who are not parties to such agreements or "interested
persons" (as such term is defined in the Act) of any party thereto (the "non-
interested Trustees"), on April 23, 1997. The applicable Fund's
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<PAGE>
Management 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 sole initial shareholder of Short Duration Tax-Free Fund on
September 25, 1992, the sole initial shareholder of Core Fund on October 29,
1993, and the shareholders of each other Fund on April 21, 1997. Each
Management Agreement will remain in effect until June 30, 1998 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 Management Agreement will terminate automatically if assigned (as
defined in the Act). Each Management 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 on 60 days' written notice of the Trust.
The Management Agreements provide that GSAM, GSFM and GSAMI, in their
capacity as advisers may each render similar services to others so long as the
services under the Management Agreements are not impaired thereby. Pursuant to
the Management Agreements, the Advisers are entitled to receive the fee set
forth below and the Advisers are currently limiting the fee to the rate set
forth below:
<TABLE>
<CAPTION>
Contractual Current
Fund Rate* Rate
- ---- ---- ----
<S> <C> <C>
GSAM
Municipal Income .55% .55%
Government Income .65% .25%
Short Duration Tax-Free .55% .40%
Core Fixed Income .55% .40%
High Yield .70% .65%
GSFM
Short Duration Government .65% .40%
Adjustable Rate Government .55% .40%
GSAMI
Global Income .90% .59%
- ----------------------------
</TABLE>
* The Contractual Rate is identical to the aggregate advisory and
administration fee rates payable by each Fund under the previous separate
advisory (including subadvisory in the case of Global Income Fund) and
administration agreements. For the fiscal year ended October 31, 1996, the
annual rate expressed is the combined advisory and administration fees paid
(after fee waivers). Such reduction or limits, if any, are calculated
B-69
<PAGE>
monthly on a cumulative basis and may be discontinued or modified by the
applicable Adviser at its discretion at any time, although they have no
current intention to do so.
For the fiscal years ended October 31, 1996, 1995 and 1994, the amounts of
the investment advisory and administration fees incurred by each Fund then in
existence were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Adjustable Rate Fund $2,535,709 $2,947,492 $6,798,185
Short Duration Government 411,360 517,091 1,063,867
Fund/(1)/
Short Duration Tax-Free Fund 169,796 260,970 468,868
Core Fund/(2)/ 246,568 137,158 56,255
Global Income Fund/(3)(6)/ 1,117,226 706,460 1,518,814
Government Income Fund/(4)(6)/ 74,060 44,037 0
Municipal Income Fund/(5)(6)/ 211,283 154,707 35,494
</TABLE>
_________________________
/(1)/ Had expense limitations not been in effect, Short Duration Government Fund
would have paid advisory fees of $514,200, $646,364 and $1,329,834,
respectively, for such years.
/(2)/ Core Fund commenced operations January 5, 1994.
/(3)/ For the same periods, Global Income Fund paid GSAMI subadvisory fees of
$837,920, $1,412,921 and $3,037,627, respectively. If expense limitations
had not been in effect, Global Income Fund would have paid advisory and
subadvisory fees of $1,474,204 and $491,401, respectively, for the year
ended October 31, 1996 and $789,127 and $1,578,254, respectively, for the
year ended October 31, 1995.
/(4)/ Had expense limitations not been in effect, Government Income Fund would
have paid advisory fees of $148,120, $101,737 and $65,604, respectively,
for such years.
/(5)/ Had expense limitations not been in effect for the years ended October 31,
1995 and 1994, Municipal Income Fund would have paid advisory fees of
$200,207 and $174,161, respectively, for such years.
/(6)/ Reflects combined fees under separate investment advisory and
administration agreements which were combined in a Management Agreement
effective May 1, 1997.
The fees and services under the Investment Advisory and Administration
Agreements are identical to the fees and services under the Management
Agreement.
Each Adviser performs administrative services for the applicable Funds
under the Management Agreement. Such
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<PAGE>
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 the agreement with the Trust's custodian, transfer and
dividend disbursing agent or agreements with other institutions, with personnel
to perform such executive, administrative and clerical services as are
reasonably necessary to provide effective administration of the Funds, (c)
arranging, to the extent not provided pursuant to such agreements, for the
preparation, at the Funds' expense, of each Fund's tax returns, reports to
shareholders, periodic updating of the Funds' prospectuses and statements of
additional information, and reports filed with the SEC and other regulatory
authorities, (d) providing the Funds, to the extent not provided pursuant to
such agreements, with adequate office space and certain related office equipment
and services, and (e) maintaining all of the Funds' records other than those
maintained pursuant to such agreements.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED
-------------------------------------------------------------------------
BY GOLDMAN SACHS. The involvement of the Advisers and Goldman Sachs and their
- ----------------
affiliates, in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect to
the Funds or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Advisers and their advisory affiliates have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
objectives similar to those of the Funds and/or which engage in transactions in
the same types of securities, 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 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.
B-71
<PAGE>
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 the Funds, the Advisers may have
access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf of the Funds in
accordance with such analysis and models. In addition, neither Goldman Sachs
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Funds. The proprietary activities or portfolio strategies of Goldman Sachs and
its affiliates or the activities or strategies used for accounts managed by them
or other customer accounts could conflict with the transactions and strategies
employed by the Advisers in 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
B-72
<PAGE>
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, High Yield and Core Funds, 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. At times, these activities may cause
departments of the Firm to give advice to clients that may cause these clients
to take actions adverse to the interest of the client. To the extent affiliated
transactions are permitted, the Funds will deal with Goldman Sachs and its
affiliates on an arm's-length basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of a Fund in order to increase the assets
of the Fund. Increasing a Fund's assets may enhance investment flexibility and
diversification and may contribute to economies of scale that tend to reduce a
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 a 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.
B-73
<PAGE>
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. 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, Class B and Class C Shares of each of the Funds that
offer such classes of shares. Goldman Sachs receives 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 and Class C Shares, of such Fund shares. No Class B Shares were
outstanding during the fiscal years ended October 31, 1994 and 1995. No Class C
Shares were outstanding during the fiscal years ended October 31, 1994, 1995 and
1996. Goldman Sachs retained approximately the following combined commissions
on sales of Class A and B shares during the following periods:
<TABLE>
<CAPTION>
1996** 1995* 1994
------- -------- --------
<S> <C> <C> <C>
Adjustable Rate Fund* $79,000 $40,000 N/A
Municipal Income Fund $24,900 $48,000 $ 76,000
Government Income Fund $17,300 $22,000 $ 5,000
Global Income Fund $52,600 $15,000 $350,000
- ---------------------
</TABLE>
* Prior to May 15, 1995 Adjustable Rate Fund did not offer Class A Shares.
** Prior to May 1, 1997, the Municipal, Government Income and Global Income
Funds did not offer Class B 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
B-74
<PAGE>
assumption by Goldman Sachs of the expenses related thereto, Goldman Sachs
received fees for the fiscal years ended October 31, 1996, 1995 and 1994 by each
Fund then in existence as follows:
Fund 1996 1995 1994
- ---- ------- ------- -------
Adjustable Rate Fund 278,337 306,662 679,819
Short Duration Government Fund 0 0 0
Short Duration Tax-Free Fund 16,980 26,098 46,887
Core Fund/(1)/ 24,657 13,716 5,637
Global Income Fund 121,212 106,764 132,123
Municipal Income Fund 90,284 63,695 70,811
Government Income Fund 72,237 94,095 57,960
- ------------------------
/(1)/ Core Fund commenced operations on January 5, 1994.
The foregoing distribution and transfer agency agreements each provide
that Goldman Sachs may render similar services to others so long as the services
each provides thereunder to the Funds are not impaired thereby. Each such
agreement also provides that the Trust will indemnify Goldman Sachs against
certain liabilities.
EXPENSES
- --------
Except as set forth in the Prospectuses under "MANAGEMENT" 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, 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-75
<PAGE>
The Advisers voluntarily have agreed to reduce or otherwise limit certain
Other Expenses (excluding management fees, fees payable under administration,
distribution, service and authorized dealer service plans, taxes, interest,
brokerage fees and litigation, indemnification, transfer agency fees (in the
case of Global Income Fund and High Yield Fund) 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%
High Yield Fund 0.01%
Such reductions or limits are calculated monthly on a cumulative
basis. Although the Advisers have no current intention of modifying or
discontinuing such expense limitations or the limitations on the management
fees, described above under "Management -- Investment Advisers," each may do so
in the future at its discretion. For the fiscal year ended October 31, 1996,
October 31, 1995 and October 31, 1994, Other Expenses of each Fund were reduced
by the Advisers in the following amounts:
1996 1995 1994
------- ------- -------
Adjustable Rate Fund 386,863 551,405 442,880
Short Duration
Government Fund 169,069 219,994 115,389
Short Duration
Tax-Free Fund 238,097 213,139 192,696
Core Fund* 233,065 176,469 141,815
Municipal Income Fund 238,203 196,265 198,806
Government Income Fund 219,091 242,036 224,285
Global Income Fund** 337,079 70,195 0
- ----------------------
* Core Fund commenced operations on January 5, 1994.
** For the fiscal year ended October 31, 1994, there was no expense
limitation.
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
- ----------------------------
B-76
<PAGE>
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, Core Fund
and High Yield Fund may invest are traded on exchanges at fixed commission
rates. In connection with portfolio transactions, the Management Agreement
provides that the Advisers shall attempt to obtain the best net price and the
most favorable execution. The Management Agreement provides that, on occasions
when an Adviser deems 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 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. The Management Agreement permits each Adviser, in its
discretion, to purchase and sell portfolio securities to and from dealers who
provide the Trust with brokerage or research services in which dealers may
execute brokerage transactions at a higher cost to the Fund. Brokerage and
research services furnished by firms through which the Fund's effect their
securities transactions may be used by the Advisers in servicing other accounts
and not all of these services may be used by the Adviser in connection with the
specific Fund generating the brokerage credits. The fees received under the
Management Agreement
B-77
<PAGE>
are not reduced by reason of the Adviser receiving such brokerage and research
services. In addition, in selecting brokers and dealers, the Advisers may take
into account sales of shares of the Funds and other funds in the Goldman Sachs
Group of Funds by such brokers and dealers.
For the fiscal years ended October 31, 1995 and 1994, the Funds then in
existence paid no brokerage commissions.
B-78
<PAGE>
For the fiscal year ended October 31, 1996, the Funds then in existence paid
brokerage commissions as follows:
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons Paid/3/ Research
=========== ================= ======================= ==========
<S> <C> <C> <C> <C>
Fiscal Year Ended
October 31, 1996:
Adjustable Rate Fund $108,000 $108,000(100%)/1/ $2,121,317,579(100%)/2/ $N/A
Short Duration Government Fund 24,000 24,000(100%)/1/ 447,205,928(100%)/2/ N/A
Short Duration Tax-Free Fund 1,000 1,000(100%)/1/ 8,559,280(100%)/2/ N/A
Core Fixed Income Fund 4,000 4,000(100%)/1/ 43,548,299(100%)/2/ N/A
Government Income Fund 1,200 1,200(100%)/1/ 24,437,288(100%)/2/ N/A
Municipal Income Fund 2,750 2,750(100%)/1/ 51,101,625(100%)/2/ N/A
</TABLE>
_______________________________
1 Percentage of total commissions paid.
2 Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
3 Refers to Market Value of Futures Contracts.
B-79
<PAGE>
During the fiscal year ended October 31, 1996, the Funds acquired and
sold securities of their regular broker-dealers: Chase Securities, Inc., Lehman
Brothers, Inc., Salomon Brothers, Inc., Merrill Lynch, Robert W. Baird, Daiwa
Securities, J.P. Morgan & Co., Inc., Donaldson, Lufkin, Jenrette, Nomura
Securities and Morgan Stanley & Co.
At October 31, 1996, Short Duration Tax-Free Fund, Global Income Fund
and Municipal Income Fund held no securities of their regular broker-dealers.
As of the same date, Short Duration Government Fund, Adjustable Rate Fund,
Government Income Fund and Core Fund held the following amounts of securities of
their regular broker-dealers, as defined in Rule 10b-1 under the 1940 Act, or
their parents ($ in thousands): Short Duration Government Fund: Lehman
Brothers, Inc. ($370), Nomura Securities ($280) and Bear Stearns ($280);
Adjustable Rate Fund: Lehman Brothers, Inc. ($4,531), Bear Stearns ($3,430) and
Nomura Securities ($3,430); Government Income Fund: Lehman Brothers, Inc.
($2,774), Nomura Securities (2,774) and Bear Stearns ($2,100); Nomura Securities
(2,774); Core Fund: Lehman Brothers, Inc. ($4,808), Nomura Securities ($3,640)
and Bear Stearns ($3,640).
SHARES OF THE TRUST
The Funds were reorganized from series of a Massachusetts business
trust as part of Goldman Sachs Trust, a Delaware business trust, by a
Declaration of Trust dated January 28, 1997 on April 30, 1997.
The Act requires that where more than one class or series of shares
exists, each class or series must be preferred over all other classes or series
in respect of assets specifically allocated to such class or series. The
Trustees have authority to classify and reclassify any series of shares into one
or more classes of shares. As of the date of this Additional Statement, the
Trustees have authorized: (i) the issuance of six classes of shares of Short
Duration Government Fund, Short Duration Tax-Free Fund and Core Fund:
Institutional Shares, Administration Shares, Service Shares, Class A Shares,
Class B Shares and Class C Shares; (ii) the issuance of four classes of shares
of Adjustable Rate Fund: Institutional Shares, Administration Shares, Service
Shares and Class A Shares; and (iii) the issuance of five classes of shares of
Global Income Fund, Government Income Fund, Municipal Income Fund and High Yield
Fund: Institutional Shares, Service Shares, Class A Shares, Class B Shares and
Class C Shares. As of October 31, 1996, no Service Shares of the Adjustable
Rate Fund were outstanding; no Class A, Class B or Class C Shares of Short
Duration Government Fund, Short Duration Tax-Free Fund and Core Fund were
outstanding; no Class C Shares of Government Income Fund and Municipal Income
Fund were outstanding; and no shares of High Yield Fund were outstanding.
B-80
<PAGE>
Each Institutional Share, Administration Share, Service Share, Class A
Share, Class B Share and Class C Share of a Fund represents a proportionate
interest in the assets belonging to the applicable class of the Fund. All
expenses of a Fund are borne at the same rate by each class of shares, except
that fees under Administration and Service Plans are borne exclusively by
Administration and Service Shares, fees under Distribution and Authorized Dealer
Service Plans are borne exclusively by Class A, Class B or Class C Shares and
transfer agency fees are borne at different rates by Class A, Class B or Class C
Shares than Institutional, Administration and Service Shares. The Trustees may
determine in the future that it is appropriate to allocate other expenses
differently between classes of shares and may do so to the extent consistent
with the rules of the SEC and positions of the Internal Revenue Service. Each
class of shares may have different minimum investment requirements and be
entitled to different shareholder services. Currently, shares of a class may
only be exchanged for shares of the same or an equivalent class of another fund.
See "Exchange Privilege" in the Prospectus.
Institutional Shares may be purchased at net asset value without a
sales charge 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 at net asset value without a sales
charge for accounts held in the name of an institution that, directly or
indirectly, provides certain account administration and shareholder liaison
services to its customers, including maintenance of account records and
processing orders to purchase, redeem and exchange Service Shares. Service
Shares bear the cost of account administration fees at the annual rate of up to
0.50% of the average daily net assets of the Fund attributable to Service
Shares.
Class A Shares are sold, with an initial sales charge, 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.
B-81
<PAGE>
Class B Shares of the Funds are sold subject to a contingent deferred
sales charge 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.
Class C Shares of the Funds are sold subject to a contingent deferred
sales charge of up to 1.0% 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 C 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 C Shares. Class C
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 C Shares.
It is possible that an institution or its affiliate may offer
different classes of shares (i.e., Institutional, Administration, Service, Class
A, Class B and Class C Shares) to its customers and thus receive different
compensation with respect to different classes of shares of each Fund.
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 share, are freely transferable and have no preemptive, subscription or
conversion rights.
As of July 15, 1997, the following entities and persons beneficially
owned 5% or more of the outstanding shares of the following Funds: Adjustable
Rate Fund:
Short Duration Government Fund:
Short Duration Tax-Free Fund:
Government Income Fund:
Core Fund:
B-82
<PAGE>
Rule 18f-2 under the Act provides that any matter required to be
submitted by the provisions of the Act, applicable state law or otherwise to the
holders of the outstanding voting securities of an investment company (such as
the Trust) shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each class or
series affected by such matter. Rule 18f-2 further provides that a class or
series shall be deemed to be affected by a matter unless the interests of each
class or series in the matter are substantially identical or the matter does not
affect any interest of such class or series. However, Rule 18f-2 exempts the
selection of independent public accountants, the approval of principal
distribution contracts and the election of Trustees from the separate voting
requirements of Rule 18f-2.
The Trust is not required to hold annual meetings of shareholders and
does not intend to hold such meetings. In the event that a meeting of
shareholders is held, each share of the Trust will be entitled, as determined by
the Trustees, either to one vote for each share or to one vote for each dollar
of net asset value represented by such shares on all matters presented to
shareholders including the election of Trustees (this method of voting being
referred to at "dollar based voting"). However, to the extent required by the
Act or otherwise determined by the Trustees, series and classes of the Trust
will vote separately from each other. Shareholders of the Trust do not have
cumulative voting rights in the election of Trustees. Meetings of shareholders
of the Trust, or any series or class thereof, may be called by the Trustees,
certain officers or upon the written request of holders of 10% or more of the
shares entitled to vote at such meetings. The shareholders of the Trust will
have voting rights only with respect to the limited number of matters specified
in the Declaration of Trust and such other matters as the Trustees may determine
or may be required by law.
The Declaration of Trust provides for indemnification of Trustees,
officers and agents of the Trust unless the recipient is adjudicated (i) to be
liable by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such person's office or (ii)
not to have acted in good faith in the reasonable belief that such person's
actions were in the best interest of the Trust. The Declaration of Trust
provides that, if any shareholder or former shareholder of any series is held
personally liable solely by reason of being or having been a shareholder and not
because of the shareholder's acts or omissions or for some other reason, the
shareholder or former shareholder (or heirs, executors, administrators, legal
representatives or general successors) shall be held harmless from and
indemnified against all loss and expense arising from such liability. The
Trust, acting on behalf of any affected series, must, upon request by such
shareholder, assume the defense of any claim made against such shareholder for
any act or obligation of the series and satisfy any judgment thereon from the
assets of the series.
B-83
<PAGE>
The Declaration of Trust permits the termination of the Trust or of
any series or class of the Trust (i) by a majority of the affected shareholders
at a meeting of shareholders of the Trust, series or class; or (ii) by a
majority of the Trustees without shareholder approval if the Trustees determine
that such action is in the best interest of the Trust or its shareholders. The
factors and events that the Trustees may take into account in making such
determination include (i) the inability of the Trust or any successor series or
class to maintain its assets at an appropriate size; (ii) changes in laws or
regulations governing the Trust, series or class or affecting assets of the type
in which it invests; or (iii) economic developments or trends having a
significant adverse impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder
approval to cause the Trust, or any series thereof, to merge or consolidate with
any corporation, association, trust or other organization or sell or exchange
all or substantially all of the property belonging to the Trust or any series
thereof. In addition, the Trustees, without shareholder approval, may adopt a
master-feeder structure by investing all or a portion of the assets of a series
of the Trust in the securities of another open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration
of Trust without a shareholder vote. However, shareholders of the Trust have
the right to vote on any amendment (i) that would affect the voting rights of
shareholders; (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). Series
Trustees may, but are not required to, serve as Trustees of the Trust or any
other series or class of the Trust. The Series Trustees have, to the exclusion
of any other Trustees of the Delaware Trust, all the powers and authorities of
Trustees under the Trust Instrument with respect to any other series or class.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Delaware law, the shareholders of the Funds are not generally
subject to liability for the debts or obligations of the Trust. Similarly,
Delaware law provides that a series of the Trust will not be liable for the
debts or obligations of any other series of the Trust. However, no similar
statutory or other authority limiting business trust shareholder liability
exists in other states. As a result, to the extent that a Delaware business
trust or a shareholder is subject to the jurisdiction of courts of such other
states, the courts may not apply Delaware law and may thereby subject the
Delaware business trust shareholders to liability. To guard against this risk,
the Declaration of Trust contains an express disclaimer of shareholder liability
for acts or obligations
B-84
<PAGE>
of a Fund. Notice of such disclaimer will normally be given in each agreement,
obligation or instrument entered into or executed by a series or the Trustees.
The Declaration of Trust provides for indemnification by the relevant Fund for
all loss suffered by a shareholder as a result of a obligation of the series.
The Declaration of Trust also provides that a series shall, upon request, assume
the defense of any claim made against any shareholder for any act or obligation
of the series and satisfy any judgment thereon. In view of the above, the risk
of personal liability of shareholders is remote.
In addition to the requirement under Delaware law, the Declaration of
Trust provides that shareholders of a series may bring a derivative action on
behalf of the series only if the following conditions are met: (a) shareholders
eligible to bring such derivative action under Delaware law who hold at least
10% of the outstanding shares of the series, or 10% of the outstanding shares of
the series or class to which such action relates, shall join in the request for
the Trustees to commence such action; and (b) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and to
investigate the basis of other advisers in considering the merits of the request
and shall require an undertaking by the shareholders making such request to
reimburse the Fund for the expense of any such advisers in the event that the
Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not
be liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason or willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
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 are valued under valuation procedures established by the Trustees.
Portfolio securities, other than money market instruments and with the exception
of Global Income Fund, for which accurate market quotations are readily
available are valued as follows: (a) via electronic feeds to the custodian bank
containing dealer-supplied bid quotations or bid quotations
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from a nationally recognized pricing service; (b) securities for which the
custodian bank is unable to obtain an external price or with respect to which
the Adviser believes an external price does not reflect accurate market values,
will be valued by the Adviser in good faith based on valuation models that take
into account daily spread and yield changes on U.S. Treasury securities (i.e.,
matrix pricing); (c) overnight repurchase agreements will be valued by the
Adviser at cost; (d) term repurchase agreements (i.e., those whose maturity
exceeds seven days) and interest rate swaps, caps, collars and floors will be
valued at the average of the bid quotations obtained daily from at least two
dealers or, for term repurchase agreements, recognized counterparties; (e) debt
securities with a remaining maturity of 60 days or less are valued by the
Adviser at amortized cost, which the Trustees have determined to approximate
fair value; (f) spot and forward foreign currency exchange contracts will be
valued using a pricing service such as Reuters then calculating then mean
between the last bid and asked quotations supplied by certain independent
dealers in such contracts; (g) exchange-traded options and futures contracts
will be valued by the custodian bank at the last sale price on the exchange
where such contracts and options are principally traded; and (h) over-the-
counter options will be valued by an independent unaffiliated broker identified
by the portfolio manager/trader and contacted by the custodian bank.
Portfolio securities of the Global Income Fund for which accurate
market quotations are available are valued as follows: (a) securities listed on
any U.S. or foreign stock exchange or on the National Association of Securities
Dealers Automated Quotations System ("NASDAQ") will be valued at the last sale
price on the exchange or system in which they are principally traded, on the
valuation date. If there is no sale on the valuation day, securities traded
principally: (i) on a U.S. exchange or NASDAQ will be valued at the mean between
the closing bid and asked prices, and (ii) on a foreign exchange will be valued
at the official bid price. The last sale price and official bid price for
securities traded principally on a foreign exchange will be determined as of the
close of the London Foreign Exchange; (b) over-the-counter securities not quoted
on NASDAQ will be valued at the last sale price on the valuation day or, if no
sale occurs, at the mean between the last bid and asked prices; (c) options and
futures contracts will be valued at the last sale price in the market where such
contract is principally traded; and (d) forward foreign currency exchange
contracts will be valued at the mean between the last bid and asked quotations
supplied by a dealer in such contracts.
All other securities, including those for which a pricing service
supplies no exchange quotation or a quotation that is believed by the portfolio
manager/trader to be inaccurate; will be valued at fair value as stated in the
valuation procedures which were approved 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
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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, Core and High
Yield Funds calculate their net asset value. 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
may 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
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Each series of the Trust, including each Fund, is a separate taxable
entity. Each Fund has qualified and elected or intends to qualify and elect 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 gross
income (including tax-exempt interest) for its taxable year 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
gross income for its taxable year from the sale or other disposition of any of
the following which was held for less than three months: (i) stock or
securities,
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(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 stocks or securities (the "short-short
test"); and (c) a Fund diversify its holdings so that, at the close of each
quarter of its taxable year, (i) at least 50% of the market value of its total
(gross) assets is comprised of cash, cash items, United States Government
Securities, securities of other regulated investment companies and other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the value of the Fund's total assets and to not more than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total (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 a
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 and other 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, certain net realized foreign exchange gains, 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
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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,
that 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 that Fund against their U.S. federal income tax liabilities, if any,
and to claim refunds to the extent the credit exceeds such liabilities. For
U.S. federal income tax purposes, the tax basis of shares owned by a shareholder
of the Fund will be increased by an amount equal under current law to 65% of the
amount of undistributed net capital gain included in the shareholder's gross
income. Each Fund intends to distribute for each taxable year 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 or Core Fund and may therefore make it more
difficult for Global Income Fund or Core Fund to satisfy the distribution
requirements described above, as well as the excise tax distribution
requirements described below. However, Global Income Fund and Core Fund
generally expect 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 (if any) 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 capital gains, if any,
during the eight years following the year of the loss. At October 31, 1996, the
Funds had approximately the following amounts of capital loss carry forwards:
Years of
Amount Expiration
----------- ----------
Adjustable Rate Fund $47,923,000 2000-2003
Short Duration
Government Fund $13,272,000 2002-2003
Short Duration
Tax-Free Fund $ 4,271,000 2002-2003
Core Fixed Income Fund $ 77,000 2004
Global Income Fund $ 4,472,000 2002
Municipal Income Fund $ 1,535,000 2002
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These amounts are available to be carried forward to offset future capital
gains to the extent permitted by the Code and applicable tax 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
capital gains over its 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 capital gains over capital losses for the
prior year that were not distributed during such year and on which the Fund did
not pay federal income tax. The Funds anticipate that they will generally make
timely distributions of income and capital gains in compliance with these
requirements so that they will generally not be required to pay the excise tax.
For federal income tax purposes, dividends declared by a Fund in October,
November or December as of a record date in such a month which are actually paid
in January of the following year will be treated as if they were 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. Each of the Tax Exempt Funds intends to take
the position that it
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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 these
Funds, 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 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.
These provisions may require a Fund to recognize income or gains without a
concurrent receipt of cash. Any gain or loss recognized on actual or deemed
sales of these futures contracts, forward 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, that
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 and instruments 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
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(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,
High Yield 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 and Global Income, and High Yield Funds 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 in some cases. 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 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 by such shareholders, 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 the amounts they are
required to distribute.
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
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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 may not be able to
claim a credit for the full amount of their proportionate shares of the foreign
taxes paid by the 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, or Global Income or High Yield Funds acquire stock (including,
under proposed regulations, an option to acquire stock such as is inherent in a
convertible bond) in certain foreign corporations that receive at least 75% of
their annual gross income from passive sources (such as interest, dividends,
rents, royalties or capital gain) or hold at least 50% of their assets in
investments producing such passive income ("passive foreign investment
companies") Core, Global Income or High Yield Funds 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, Global Income or High Yield
Funds is timely distributed to its shareholders. Core, Global Income or High
Yield Funds would not be able to pass through to their 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, Global
Income or High Yield Funds to recognize taxable income or gain without the
concurrent receipt of cash. Core, Global Income or High Yield Funds may limit
and/or manage their 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 obtain cash to enable it 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.
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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 applicable 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 compliance with federal tax requirements.
Tax laws not only limit the purposes for which tax-exempt bonds may be issued
and the supply of such bonds, but also contain numerous and complex 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 a 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
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"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 such 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 a 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 a corporate shareholder's
liability, if any, for corporate alternative minimum tax, and will be taken into
account in determining the extent to which a shareholder's Social Security or
certain railroad retirement benefits are taxable.
ALL FUNDS. Distributions from 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 in limited instances, including
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
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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.
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 in
a transaction that is treated as a sale for tax purposes, 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, 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, subject to the rules
described below. Shareholders should consult their own tax advisers with
reference to their particular circumstances to determine whether a redemption
(including an exchange) or other disposition of Fund Shares is properly treated
as a sale for tax purposes, as is assumed in this discussion. 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
B-96
<PAGE>
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 Tax-Free or Municipal Income Funds 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, each of 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 such 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 Short Duration Tax-Free Fund or Municipal
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
B-97
<PAGE>
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 the
applicable Fund reasonably estimates that at least 95% of its distributions will
be exempt-interest dividends. A Fund may refuse to accept an application that
does not contain any required taxpayer identification number or certification
that the number provided is correct. If the backup withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in shares, will be reduced by the amounts required to be withheld.
Any amounts withheld may be credited against a shareholder's U.S. federal income
tax liability. Investors should consult their tax advisers about the
applicability of the backup withholding provisions.
NON-U.S. SHAREHOLDERS
The foregoing discussion relates solely to U.S. federal income tax law as
it applies to "U.S. persons" (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates) subject to tax under
such law. Dividends from investment company taxable income distributed by a
Fund to a shareholder who is not a U.S. person will be subject to U.S.
withholding tax at the rate of 30% (or a lower rate provided by an applicable
tax treaty) unless the dividends are effectively connected with a U.S. trade or
business of the shareholder, in which case the dividends will be subject to tax
on a net income basis at the graduated rates applicable to U.S. individuals or
domestic corporations. Distributions of net capital gain, including amounts
retained by a Fund which are designated as undistributed capital gains, to a
shareholder who is not a U.S. person will not be subject to U.S. federal 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 capital 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
B-98
<PAGE>
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 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.
B-99
<PAGE>
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 and Class C 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 each Fund is subject to different fees and expenses and
may have different returns for the same period. Any performance data for Class
A, Class B or Class C Shares which is based upon a Fund's net asset value per
share would be reduced if a sales charge were taken into account.
B-100
<PAGE>
YIELD
<TABLE>
<CAPTION>
Investment SEC 30-Day Pro-Forma
Fund Period Yield Yield/1/
- -------------------------------- ----------- ----------- ---------
<S> <C> <C> <C>
30-Days
ended
10/31/96
ADJUSTABLE RATE FUND
Institutional Shares 6.00% 5.94%
Administration Shares 5.75% 5.69%
Service Shares/2/
Class A Shares
- Assumes 1.5% sales charge 5.66% 5.35%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.43% 6.16%
Administration Shares 6.19% 5.93%
Service Shares 5.96% 5.71%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.34% 3.71%
Administration Shares 4.09% 3.42%
Service Shares 3.84% 3.22%
CORE FUND
Institutional Shares 6.60% 6.25%
Administration Shares 6.37% 6.03%
Service Shares 6.12% 5.78%
GLOBAL INCOME FUND
Institutional Shares 5.20% 4.76%
Service Shares/2/
Class A Shares
(Assumes 4.5% sales charge) 4.54% 4.08%
Class B Shares 4.23% 3.80%
MUNICIPAL INCOME FUND
Class A Shares 4.21% 3.56%
(assumes 4.5% sales charge)
Class B Shares 3.68% 3.25%
GOVERNMENT INCOME FUND
Class A Shares 6.04% 4.76%
(assumes 4.5% sales charge)
Class B Shares 5.57% 4.48%
</TABLE>
B-101
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION RATE
<S> <C> <C> <C>
30 Day Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate/1/
- -------------------------------- ------------------ ----------- ------------
30-Days
ended
10/31/96
ADJUSTABLE RATE FUND
Institutional Shares 5.87% 5.81%
Administration Shares 5.62% 5.56%
Service Shares/2/
Class A Shares
- Assumes no sales charge 5.62% 5.31%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.24% 5.97%
Administration Shares 6.00% 5.72%
Service Shares 5.78% 5.49%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.19% 3.56%
Administration Shares 3.94% 3.28%
Service Shares 3.69% 3.06%
MUNICIPAL INCOME FUND
Class A Shares 4.27% 3.59%
-assumes no sales charge
Class B Shares 3.53% 3.09%
GOVERNMENT INCOME FUND
Class A Shares 6.33% 5.00%
-assumes no sales charge
Class B Shares 5.58% 4.50%
CORE FUND
Institutional Shares 6.46% 6.12%
Administration Shares 6.23% 5.89%
Service Shares 5.98% 5.63%
GLOBAL INCOME FUND
Institutional Fund 5.95% 6.18%
Service Shares/2/
Class A Shares
- Assumes no sales charge 5.44% 4.96%
Class B Shares 5.02% 4.59%
</TABLE>
B-102
<PAGE>
TAX-EQUIVALENT YIELD/6/
<TABLE>
<CAPTION>
Pro-Forma
Investment Tax-Equivalent Tax-Equivalent
Fund Period Rate Yield/1/
- ---------------------------- --------------------- ------------- -----------------
<S> <C> <C> <C>
30-Days
ended
10/31/96
SHORT DURATION
TAX-FREE FUND/3/
Institutional Shares 6.94% 5.89%
Administration Shares 6.52% 5.43%
Service Shares 6.11% 5.07%
MUNICIPAL INCOME FUND/3/
Class A Shares 7.07% 5.94%
-assumes no sales charge
Class B Shares 5.84% 5.12%
_______________________________
</TABLE>
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 outstanding during the periods indicated.
3 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.
The above tables should not be considered a representation of future
performance.
B-103
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
-------------------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Expense Expense
Fund Date Investment Period Limitations Limitations
- -------------------------------- ---------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
ADJUSTABLE RATE FUND
Institutional Shares 7/17/91/1a/ ended 10/31/96 5.32% 5.19%
11/1/95 one year ended
10/31/96 6.86% 6.80%
11/1/91 five years ended
10/31/96 5.13% 5.05%
Administration Shares 4/15/93/1b/ ended 10/31/96 4.69% 4.64%
11/1/95 one year ended
10/31/96 6.60% 6.53%
Service Shares/1c/ N/A N/A
Class A Shares 5/12/95/1d/ ended 10/31/96
Assumes 1.5% Sales Charge 5.29% 4.96%
Assumes No Sales Charge 6.40% 6.07%
11/1/95 one year ended
Assumes 1.5% Sales Charge 10/31/96 4.99% 4.66%
Assumes No Sales Charge 6.60% 6.27%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 8/15/88/2a/ ended 10/31/96 7.24% 6.84%
11/1/95 one year ended
10/31/96 6.75% 6.47%
11/1/91 five years
ended 10/31/96 5.67% 5.44%
Administration Shares 2/28/96/2b/ ended 10/31/96 4.00% 3.82%
Service Shares 4/10/96/2b/ ended 10/31/96 4.35% 4.20%
</TABLE>
B-104
<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 10/31/96 4.21% 3.71%
11/1/95 one year ended
10/31/96 4.50% 3.92%
Administration Shares 5/20/93/3b/ ended 10/31/96 3.51% 3.15%
11/1/95 one year ended
10/31/96 4.24% 3.66%
Service Shares 9/20/94/3c/ ended 10/31/96 4.36% 3.92%
11/1/95 one year ended
10/31/96 3.98% 3.40%
CORE FUND
Institutional Shares 1/15/94/4a/ 10/31/96 6.34% 5.70%
11/1/95 one year ended
10/31/96 5.98% 5.58%
Administration Shares 2/28/96/4b/ ended
10/31/96 3.56% 3.29%
Service Shares 3/13/96/4b/ ended
10/31/96 4.90% 4.69%
</TABLE>
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>
GLOBAL INCOME FUND/5C/
Class A Shares 8/2/91/5a/ ended 10/31/96
Assumes 4.5% Sales Charge 7.08% 6.76%
Assumes No Sales Charge 8.02% 7.71%
Assumes 4.5% Sales Charge 11/1/95 one year 6.08% 5.57%
Assumes No Sales Charge ended 10/31/96 11.05% 10.53%
Assumes 4.5% Sales Charge 11/1/91 five years 7.02% 6.73%
Assumes No Sales Charge ended 10/31/96 8.01% 7.69%
Class B Shares/5b/ 5/1/96 ended 10/31/96/5d/ 6.24% 6.01%
Institutional Shares 8/1/95/5e/ ended 10/31/96 12.95% 12.45%
11/1/95 one year
ended 10/31/96 11.55% 11.05%
Service Shares/5f/
MUNICIPAL INCOME FUND
Class A Shares 7/20/93/6a/ ended 10/31/96
Assumes 4.5% Sales Charge 3.80% 2.78%
Assumes No Sales Charge 5.27% 4.23%
11/1/95 ended 10/31/96
Assumes 4.5% Sales Charge 1.35% 0.65%
Assumes No Sales Charge 6.13% 5.40%
Class B Shares/6b/ 5/1/96 ended 10/31/96 4.40% 4.07%
</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>
GOVERNMENT INCOME FUND
Class A Shares 2/10/93/7a/ ended 10/31/96
Assumes 4.5% Sales Charge 5.41% 2.92%
Assumes No Sales Charge 6.72% 4.21%
11/1/95 ended 10/31/96
Assumes 4.5% Sales Charge 1.06% -0.33%
Assumes No Sales Charge 5.80% 4.35%
Class B Shares/7b/ 5/1/96 ended 10/31/96 4.85% 4.17%
- ----------------
</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 of Adjustable Rate Fund commenced operations on May 12,
1995.
2a Institutional Shares of Short Duration Government Fund commenced
operations on August 15, 1988.
2b Administration Shares of Short Duration Government Fund commenced
operations on February 28, 1996. Service Shares of Short Duration
Government Fund commenced operations on April 10, 1996. An aggregate
total return (not annualized) is shown instead of an average annual
total return since Administration and Service Shares have not
completed a full 12 months of operation as of October 31, 1996.
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 Administration Shares of Core Fund commenced operations on February
28, 1996. Service Shares of Core Fund commenced operations on March
13, 1996. An aggregate total return (not annualized) is shown instead
of an average annual total return since Administration and Service
Shares have not completed a full 12 months of operation as of October
31, 1996.
5a Class A Shares of Global Income Fund commenced operations on August 2,
1991.
5b Class B Shares of Global Income Fund commenced operations on May 1,
1996.
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 Class B Shares have not completed a
full 12 months of operation as of October 31, 1996.
5e Institutional Shares of Global Income Fund commenced operations on
August 1, 1995.
5f No Service Shares of Global Income Fund were outstanding during the
periods indicated.
6a Class A shares of Municipal Income Fund commenced operations on July
20, 1993.
6b Class B Shares of Municipal Income Fund commenced operations on May 1,
1996. An aggregate total return (not annualized) is shown instead of
an average annual total return since Class B Shares have not completed
a full 12 months of operation as of October 31, 1996.
B-107
<PAGE>
7a Class A Shares of Government Income Fund commenced operations on
February 10, 1993.
7b Class B Shares of Government Income Fund commenced operations on May
1, 1996. An aggregate total return (not annualized) is shown instead
of an average annual total return since Class B Shares have not
completed a full 12 months of operation as of October 31, 1996.
The above table should not be considered a representation of future
performance.
B-108
<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, Government Income and Short Duration
Government Funds 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 and Municipal Income Funds may from time to
time advertise their 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, Global Income and High Yield Funds may each from time to time
advertise its performance relative to certain indices and benchmark investments,
including: (a) the Lipper Analytical Services, Inc. Mutual Fund Performance
Analysis, Fixed Income
B-109
<PAGE>
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 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.
The Trust 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;
B-110
<PAGE>
.. 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 Trust 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.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed by GSAM and/or its affiliates,
certain attributes or benefits to be derived from asset allocation strategies
and the Goldman Sachs mutual funds that may be offered as investment options for
the strategic asset allocations. Such advertisements and information may also
include GSAM's current economic outlook and domestic and international market
views to suggest periodic tactical modifications to current asset allocation
strategies. Such advertisements and information may include other material
which highlight or summarize the services provided in support of an asset
allocation program.
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
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
B-111
<PAGE>
asset value of each respective Fund at the time of redemption by a distribution
in kind of securities (instead of cash) from such Fund. The securities
distributed in kind would be readily marketable and would be valued for this
purpose using the same method employed in calculating each Fund's net asset
value per share. See "Net Asset Value." If a shareholder receives redemption
proceeds in kind, the shareholder should expect to incur transaction costs upon
the disposition of the securities received in the redemption.
The right of a shareholder to redeem shares and the date of payment by a
Fund may be suspended for more than seven days for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or when trading on such Exchange is restricted as determined by the
SEC; or during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for a Fund to dispose of securities owned by it or
fairly to determine the value of its net assets; or for such 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 1996 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 back cover of each Fund's Prospectus. Unaudited
financial statements for each Fund for the six months ended April 30, 1997 are
also attached hereto.
B-112
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We welcome the opportunity to review the performance and the investment
activity of the Goldman Sachs Fixed Income Funds for the 12-month period ended
October 31, 1996. To help put the portfolios' performance in perspective, we
will also provide a brief overview of the U.S. economy and the bond market
during the period.
We are pleased to report that the Goldman Sachs Fixed Income Funds fared
well relative to their peers during the period.
The Bond Market Sold Off Amid Rising Rates, Then Stabilized
The U.S. fixed income market began the 12-month period under review with
a robust rally, fueled by weak economic data and low inflation. However, in
February 1996, the bond market began to come under pressure when stronger than
expected economic and job growth as well as surging commodity prices aroused
fears of higher inflation on the horizon. Bond market conditions significantly
worsened during March and April, when a sharp rise in interest rates triggered a
sell-off and increased volatility. By early May, long-term bond yields had
climbed above the psychologically important 7.0% level for the first time in
nearly a year. At the end of May, interest rates began to stabilize and
Treasury prices remained in a narrow trading range throughout the summer and
fall. During September and October, however, interest rates retreated and the
bond market strengthened. The rebound was primarily due to evidence of a
slowing U.S. economy and strong demand for Treasury bonds from the central banks
of China, Japan and Germany, which accelerated their purchases dramatically
toward the end of the period. By the end of October, prices of 30-year
Treasuries broke out of the trading range that had persisted for over six
months.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Table of Contents
Market Overview 1 GS Core Fixed Income Fund 22
GS Adjustable Rate Government Fund 3 Financial Statements 30
GS Short Duration Government Fund 9 Notes to Financial Statements 34
GS Short Duration Tax-Free Fund 15 Financial Highlights 42
- ---------------------------------------------------------------------------------------------------------
</TABLE>
After a Weak Start, Economic Growth Rebounded, Then Moderated
In late 1995, the economy was anemic, with weak consumer and capital
spending contributing to a fourth-quarter real Gross Domestic Product (GDP)
growth of only 0.3% (annualized). During the first quarter of 1996, harsh winter
weather and the General Motors strike continued to restrain economic growth.
Despite these adverse conditions, the economy advanced faster than expected,
with first-quarter real GDP growth reported at 2.0% (annualized). Momentum
accelerated more dramatically during the second quarter, as industrial activity,
automobile sales and home sales all showed significant improvement. As a result,
second-quarter GDP rose a robust 4.7% (annualized), its highest rate in two
years.
The economy's torrid growth cooled markedly during the third quarter,
with annualized real GDP at a revised 2.0%, largely due to lackluster consumer
spending and a widening U.S. trade deficit. In October some evidence of a
slowdown continued, with housing starts falling to their lowest level in a year
and U.S. capacity utilization also down. However, consumer confidence remained
high against a backdrop of low unemployment and higher household income. These
indicators led some economists to interpret October's retail sales numbers (up a
scant 0.2%) as a "breather" they expected to be followed by stronger holiday
shopping, while others were concerned about a more prolonged period of
restrained spending. Despite investors' earlier fears of increased inflationary
pressures and the fact that in October the producer and consumer price indexes
were up 0.4% and 0.3%, respectively, inflation remained subdued throughout the
period.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
The Fed Remained Neutral After Easing in December and January
In response to generally poor year-end 1995 economic conditions, the U.S.
Federal Reserve cut the Federal funds rate by 25 basis points in December 1995
and an additional 25 basis points in January 1996. The Fed then remained neutral
from February through the end of the period, leaving the Federal funds rate at
5.25% as of October 31, 1996.
During the period under review, the yield curve shifted upward everywhere
but at the shortest end, where it steepened. The yield on six-month Treasury
bills fell from 5.55% on October 31, 1995 to approximately 5.26% on October 31,
1996. For the same time period, the yield on the 30-year U.S. Treasury bond rose
from 6.33% a year ago to 6.64%. For the 12-month period ended October 31, 1996,
the total returns of one-year and 30-year Tresuries were 5.84% and 0.72%,
respectively.
Historical Treasury Yield Curve
[GRAPH APPEARS HERE]
The yield curve steepened on the short end and shifted upward on the longer end.
Outlook: Moderate Economic Growth for the Near Term
The recent economic weakness and the tame third-quarter labor cost report
increase the likelihood that the Fed will defer any changes in monetary policy
until 1997. Although a more extended slowdown is possible, as of this writing,
Goldman Sachs' economists believe a resumption of growth is likely if consumer
spending rebounds by year-end and the trade deficit does not significiantly
widen. On the fiscal front, the bond market environment should benefit from the
recent election results with President Clinton balanced by a
Republican-controlled Congress, which points toward continued budgetary
restraint.
We appreciate your confidence in the Goldman Sachs Fixed Income Funds and
we look forward to continuing to serve your investment needs in the future.
Sincerely,
/s/ David B. Ford
David B. Ford
Co-Head,
Goldman Sachs Asset Management
/s/ John P. McNulty
John P. McNulty
Co-Head,
Goldman Sachs Asset Management
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
November 29, 1996
- --------------------------------------------------------------------------------
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Adjustable Rate Government 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). Under normal interest rate
conditions, the fund's duration is expected to be in a range approximately equal
to that of a six-month to one-year U.S. Treasury security.
The ARM Market Began Weak but Improved as Prepayments Slowed and Demand
Increased
The key factors affecting ARM performance during the 12 months under review
were the changing direction of interest rates and, consequently, the pace of
mortgage prepayments. From November 1995 through early February 1996, declining
interest rates spurred homeowners to switch from ARMs to fixed rate mortgages to
lock in attractive rates. The high level of refinancing activity depressed the
ARM market and caused yield spreads between ARMs and Treasuries to widen until
the end of January 1996, when long-term interest rates began to rise. Throughout
the spring, the ARM market strengthened as interest rates climbed sharply.
Spreads between ARMs and Treasuries continued to tighten even after rates
stabilized from the end of May through August, partly due to strong demand from
"crossover" investors from other short-duration fixed income sectors. Although
interest rates declined in September and October, mortgage prepayment fears
remained subdued as rates were still relatively high compared with their levels
a year earlier. Investor demand for seasoned one-year Constant Maturity Treasury
(CMT) ARMs, which our fund stresses, remained especially strong due to their
relative prepayment stability in a falling rate environment.
Performance Review
During the period under review, the fund's Institutional, Administration
and Class A shares all significantly outperformed both the six-month U.S.
Treasury bill and the one-year U.S. Treasury bill. (As of October 31, the fund's
duration was 0.7 years, in between that of the six-month and the one-year U.S.
Treasury bill.) The fund's positive performance can be attributed to the
incremental yield its ARM holdings delivered over similar-duration Treasuries
and tightening spreads between ARMs and Treasuries.
- ------------------------------------------------------------------------
Performance Summary: October 31, 1995 - October 31, 1996
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six-
Month One-Year
Institu- Adminis- Class Treasury Treasury
tional tration A Bill Bill
------ ------- - ---- ----
<S> <C> <C> <C> <C> <C>
Total Return (based 6.86% 6.60% 6.60% 5.48% 5.82%
on net asset value)
- ------------------------------------------------------------------------
Return From 6.25% 5.99% 5.99% NA NA
Monthly
Distributions
- ------------------------------------------------------------------------
Return From Price 0.61% 0.61% 0.61% NA NA
Appreciation
- ------------------------------------------------------------------------
NAV (10/31/96) $9.83 $9.83 $9.83 NA NA
- ------------------------------------------------------------------------
NAV Change +$0.06 +$0.06 +$0.06 NA NA
- ------------------------------------------------------------------------
</TABLE>
We are also pleased to note that the fund outperformed most of its peers.
For the 12 months ended October 31, 1996, the fund's Institutional shares ranked
fourth out of 53 adjustable rate mortgage funds based on total return, as
tracked by Lipper Analytical Services, Inc. (Lipper does not rank the fund's
Administration and Class A shares. Please note that Lipper rankings do not take
sales charges into account and that past performance is not a guarantee of
future results.) As of October 31, 1996, the
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund (continued)
- --------------------------------------------------------------------------------
fund's Institutional shares were ranked "four stars" by Morningstar, Inc., an
independent rating agency.\1\
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Repos/Cash Equivalents 3.4%
CMOs 3.5%
SBA Floaters 7.8%
ARMs 85.3%
</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.
- ---------------------------------------------
/1/ Source (C) 1996 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 10/31/96.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five- and ten-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Institutional shares received five
and four stars for the three- and five-year periods, respectively. The
Institutional shares were rated among 1,054 and 572 fixed income funds for the
three- and five-year periods, respectively. For the one-year period, the
Institutional shares were rated among 1,654 fixed income funds. 22.5% of the
funds receive the four-star rating. The Morningstar rating applies only to the
fund's Institutional shares; the fund's Class A and Administration shares have
not been rated. Class A and Administration shares are subject to additional fees
that may have the effect of lowering performance and may affect and future
Morningstar rating. Morningstar rates funds against their peers in the same
category. In all, there are five Morningstar categories (domestic equity,
international equity, fixed income, municipal and hybrid). Morningstar ratings
range from five stars (highest) to one star (lowest). Funds with five-star
ratings are in the top 10% of their category, four-star ratings in the next
22.5%, three stars the next 35%, two stars the next 22.5% and one star the
lowest 10% of their categories.
Portfolio Composition and Investment Strategies
During the period under review, the portfolio's sector allocation shifted
slightly, with reductions in collateralized mortgage obligations (CMOs) and
Small Business Administration (SBA) loans in favor of ARMs.
.. ARMs. As of October 31, 1996, ARMs accounted for 85.3% of the portfolio, up
from 80.2% a year ago. We emphasized seasoned, one-year CMT issues that offered
relative prepayment and duration stability as well as incremental yield over
Treasuries. The position significantly contributed to the fund's performance
during the period.
.. SBA Floaters. The portfolio held a 7.8% allocation in securities backed by
Small Business Administration loans, which traded at attractive spreads relative
to Treasuries. We trimmed the portfolio's holdings in the sector slightly from
8.9% a year ago to take profits after the position performed well.
.. CMOs. CMOs accounted for 3.5% of the portfolio as of October 31,
approximately half their weighting a year ago (7.7%). This position provided
relatively stable cash flows and a greater number of opportunities to take
advantage of potential mispricing than comparable fixed income sectors. During
December 1995 and January 1996, the sector became expensive versus
similar-duration Treasuries, and we subsequently sold part of the fund's
holdings at a profit. The fund's CMO position included 1.4% in floaters, which
added incremental yield, and 0.4% in sequential-pay CMOs. In addition, the fund
held CMO super floaters, discussed below.
.. Prudent Use of Derivatives. We used higher risk derivatives very sparingly to
enhance the fund's performance without taking on additional undue risk. As of
October 31, 1996, the fund held a 1.5% position in super floaters, which
contributed to its performance during the year. (Super floaters are floating
rate securities whose coupons reset higher and more quickly than regular
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund (continued)
- --------------------------------------------------------------------------------
ARMs in a rising interest rate environment.) The portfolio also included minor
positions in interest-only (IO) and inverse IO securities.
.. Duration. As of October 31, the duration of the fund was 0.7 years, unchanged
from a year earlier. Rather than attempting to make interest rate predictions,
we seek to provide excess returns over a similar-duration U.S. Treasury security
through sector weightings and security selection. During the period, we used
financial futures as a tool to help manage the portfolio's duration.
.. Credit Quality. The fund invests exclusively in securities issued by the U.S.
government and its agencies or instrumentalities, which are considered to be of
the highest credit quality.
ARM Outlook: Seasoned ARMs Are Expected to Perform Well Relative to Other
Sectors
Our outlook for the ARM sector is moderately constructive. Although spreads
have tightened over the course of the year, we expect them to remain stable for
the near term due to strong investor demand and limited supply. In addition, we
believe that our core holding of seasoned ARMs should fare well relative to less
seasoned issues if rates continue to decline and prepayments increase.
Distribution Policy
During the 12-month period ended October 31, 1996, the fund's Institutional,
Administration and Class A shares distributed $0.59, $0.57 and $0.57 per
share, respectively.
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 nor significantly affected its net asset value (NAV) per share.
In conclusion, we appreciate your investment in the GS Adjustable Rate
Government Fund and will continue to seek attractive fixed income investments in
the months ahead.
Sincerely,
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Peter D. Dion
Peter D. Dion
/s/ James P. McCarthy
James P. McCarthy
Portfolio Managers
GS Adjustable Rate Government Fund
November 29, 1996
- --------------------------------------------------------------------------------
5
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Adjustable Rate Government Fund based on a normal minimum
initial investment, for each class, 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
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Institutional Lehman Short (1-2) One Year Six Month
Shares Gov't Index T-Bill T-Bill
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8/1/91 50,000 50,000 50,000 50,000
- --------------------------------------------------------------------------------
10/31/91 51,047 51,581 51,179 50,870
- --------------------------------------------------------------------------------
10/31/92 54,176 55,506 54,161 53,376
- --------------------------------------------------------------------------------
10/31/93 56,414 58,368 56,198 55,197
- --------------------------------------------------------------------------------
10/31/94 57,475 59,511 57,744 57,257
- --------------------------------------------------------------------------------
10/31/95 61,355 64,343 61,766 60,819
- --------------------------------------------------------------------------------
10/31/96 65,576 68,197 65,373 64,158
- --------------------------------------------------------------------------------
</TABLE>
Administration Shares
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Administration Lehman Short (1-2) One Year Six Month
Shares Gov't Index T-Bill T-Bill
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5/1/93 50,000 50,000 50,000 50,000
- --------------------------------------------------------------------------------
10/31/93 50,917 50,931 50,785 50,780
- --------------------------------------------------------------------------------
10/31/94 51,747 51,931 52,182 52,675
- --------------------------------------------------------------------------------
10/31/95 55,100 56,148 55,835 55,951
- --------------------------------------------------------------------------------
10/31/96 58,742 59,511 59,096 59,023
- --------------------------------------------------------------------------------
</TABLE>
Class A Shares
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman Short (1-2) One Year Six Month
(no sales charge) (w/ sales charge) Gov't Index T-Bill 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 10,069 10,277 10,260 10,246
- ---------------------------------------------------------------------------------------------------
10/31/96 10,898 10,735 10,893 10,859 10,809
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------
Average Annual Total Return
--------------------------------------------------
One Year Five Year Since Inception/(b)/
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Institutional Shares 6.86% 5.13% 5.32%
- --------------------------------------------------------------------------------
Administration Shares 6.60% N/A 4.69%
- --------------------------------------------------------------------------------
Class A Shares
excluding sales charge 6.60% N/A 6.40%
- --------------------------------------------------------------------------------
Class A Shares
including sales charge 4.99% N/A 5.29%
- --------------------------------------------------------------------------------
</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.
- --------------------------------------------------------------------------------
6
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations--96.3%
Adjustable Rate Federal Home Loan Mortgage Corp.
(FHLMC)(d)--25.6%
<S> <C> <C> <C>
$ 409,475 7.33% 11/01/17 $ 422,849
1,443,341 7.54 12/01/18 1,482,297
2,695,805 7.40 07/01/18 2,793,527
1,799,007 7.69 01/01/19 1,857,314
10,670,041 7.38 05/01/19 11,021,833
20,341,589 7.58 11/01/19 21,218,921
5,280,731 7.70 05/01/20 5,464,395
19,004,192 7.42 06/01/20 19,698,985
37,238,927 7.73 02/01/22/(a)/ 38,845,042
4,072,603 7.39 08/01/22 4,215,145
2,234,941 7.56 08/01/22 2,331,334
6,804,200 7.53 09/01/22 7,067,182
17,808,242 7.61 11/01/22 18,565,092
10,195,026 7.63 06/01/24 10,506,892
3,045,972 7.31 12/01/24 3,122,121
3,495,056 7.20 02/01/28 3,604,835
4,584,605 7.09 07/01/29 4,671,987
1,815,464 7.62 07/01/30 1,892,059
2,055,859 7.39 05/01/31 2,110,462
- --------------------------------------------------------------------------------
$160,892,272
- --------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association
(FNMA)(d)--55.4%
$ 1,138,394 7.80% 11/01/14 $ 1,187,493
6,190,161 6.54 03/01/17 6,277,194
3,662,002 7.56 03/01/17 3,799,511
4,221,326 6.21 03/01/18 4,247,709
6,778,125 7.66 04/01/18 7,046,064
874,932 7.63 05/01/18 901,180
7,405,181 7.34 07/01/18 7,724,566
5,249,737 7.41 07/01/18 5,456,472
6,398,858 7.08 08/01/18 6,609,828
3,972,504 7.64 08/01/18 4,143,838
3,746,795 7.42 10/01/18 3,896,068
6,780,326 7.41 11/01/18 7,009,162
2,068,449 7.29 12/01/18 2,138,591
13,495,001 7.67 12/01/18/(a)/ 14,077,040
3,484,080 7.27 06/01/19 3,597,870
4,440,531 7.31 07/01/19 4,579,297
1,698,502 7.34 07/01/19 1,755,826
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations(continued)
Adjustable Rate Federal National Mortgage Association
(FNMA)(d)(continued)
<S> <C> <C> <C>
$ 2,849,462 7.46% 01/01/20 $ 2,942,526
3,037,915 7.70 03/01/20 3,168,940
8,771,533 7.40 07/01/20 9,055,204
4,563,057 7.48 09/01/20 4,746,994
4,953,382 7.53 02/01/21 5,167,022
5,289,644 7.28 04/01/21 5,464,044
74,489,219 7.51 09/01/21/(a)/ 77,678,102
4,088,820 7.95 11/01/21 4,210,095
22,090,964 7.56 02/01/22 23,043,747
14,611,569 7.68 06/01/22 15,112,892
6,682,461 7.47 08/01/22 6,893,894
759,290 7.48 08/01/22 776,511
38,116,807 7.56 09/01/22/(a)/ 39,760,785
1,934,079 7.53 02/01/23 1,968,235
277,701 6.22 12/01/23 276,574
18,079,861 7.48 09/01/25 18,856,752
2,565,500 7.33 10/01/27 2,653,702
1,177,401 7.04 07/01/29 1,205,729
3,288,252 7.59 04/01/30 3,376,640
8,565,310 7.58 01/01/31 8,934,732
28,276,177 6.09 02/01/31 28,161,376
- --------------------------------------------------------------------------------
$ 347,902,205
- --------------------------------------------------------------------------------
Adjustable Rate Government National Mortgage Association
(GNMA)(d) -- 2.2%
$ 1,527,707 6.50% 03/20/16 $ 1,551,096
1,806,135 7.12 08/20/17 1,839,711
1,026,294 7.12 08/20/18 1,046,984
8,886,125 6.00 11/20/25 9,040,211
- --------------------------------------------------------------------------------
$ 13,478,002
- --------------------------------------------------------------------------------
Adjustable Rate Small Business Administration (SBA)(d)--7.8%
$ 1,416,469 6.75% 10/25/14 $ 1,449,883
2,562,866 6.75 02/25/15 2,624,144
3,684,715 6.75 03/25/15 3,773,370
2,839,268 6.75 04/25/15 2,907,581
2,057,142 6.75 05/25/15 2,106,637
1,036,764 6.75 08/25/15 1,062,040
1,684,161 6.75 09/25/15 1,725,220
2,069,161 6.75 10/25/15 2,119,917
1,110,382 6.37 09/25/16 1,125,305
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations (continued)
Adjustable Rate Small Business Administration
(SBA)(d)(continued)
$ 4,125,881 6.37% 07/25/17 $ 4,181,333
9,019,837 6.37 08/25/17 9,141,062
4,040,857 6.37 09/25/17 4,095,166
3,577,478 6.37 10/25/17 3,625,559
8,937,943 6.37 02/25/18 9,058,069
- --------------------------------------------------------------------------------
$ 48,995,286
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations-5.3%
Adjustable Rate CMOs(d)-1.8%
FNMA Remic Trust 1990-145, Class A
$ 11,024,778 6.51% 12/25/20 $ 11,025,439
- --------------------------------------------------------------------------------
Inverse Floater(d)-0.0%
FNMA Remic Trust 1991-91, Class S
$ 164,490 17.66% 07/25/98 $ 174,261
- --------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only(d)-0.0%
FNMA Remic Trust 1992-157, Class SA
$2,002,645/(b)/ 14.10% 03/25/04 $ 168,743
- --------------------------------------------------------------------------------
Inverse IOette-0.1%
FHLMC Series 1164, Class O
$ 36,128/(b)/ 29.44% 11/15/06 $ 489,372
- --------------------------------------------------------------------------------
IOette-0.1%
FNMA Remic Trust 1990-145, Class B
$ 27,091/(b)/ 10.00% 12/25/20 $ 657,906
- --------------------------------------------------------------------------------
Regular Floater CMOs(d)-1.4%
FHLMC Series 1011, Class F
$ 8,872,813 6.34% 11/15/20 $ 9,069,612
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs-0.4%
FNMA Remic Trust 1990-65, Class U
$ 616,589 9.50% 11/25/06 $ 619,475
FNMA Remic Trust 1991-37, Class E
1,664,339 8.50% 04/25/05 1,679,418
- --------------------------------------------------------------------------------
$ 2,298,893
- --------------------------------------------------------------------------------
Super Floater CMOs(d)-1.5%
FNMA Remic Trust 1992-157, Class FA
$ 9,859,177(b) 1.22% 03/25/04 $ 9,631,134
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 33,515,360
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $605,544,961) $604,783,125
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Repurchase Agreement-2.1%
Joint Repurchase Agreement Account
$ 13,000,000 5.58% 11/01/96/(a)/$ 13,000,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $13,000,000) $ 13,000,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $618,544,961/(c)/) $617,783,125
================================================================================
Futures contracts open at October 31, 1996:
</TABLE>
<TABLE>
<CAPTION>
Number of
Contracts
Long Settlement Unrealized
Type (Short)(e) Month Gain (Loss)
- --------------------------------- ------------- ------------------- ----------------
<S> <C> <C> <C>
1-Month Libor 45 November 1996 $4,500
Euro Dollars 365 December 1996 309,500
Euro Dollars 280 March 1997 95,000
Euro Dollars 55 June 1997 28,000
5-Year U.S. Treasury Notes 67 December 1996 9,766
10-Year U.S. Treasury Notes (270) December 1996 (302,812)
----------------
$143,954
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
Federal Income Tax Information:
<S> <C>
Gross unrealized gain for investments in which value
exceeds cost $ 2,404,589
Gross unrealized loss for investments in which cost
exceeds value (3,318,600)
- --------------------------------------------------------------------------------------
Net unrealized gain $ (914,011)
======================================================================================
</TABLE>
(a) Portions of these securities are being segregated for futures margin
requirements.
(b) Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
(c) The aggregate costs for federal income tax purposes is $618,697,136.
(d) Variable rate security. Coupon rate disclosed is that which is in effect
at October 31, 1996.
(e) Each Euro Dollar contract represents $1,000,000 in notional par value.
Each Libor contract represents $3,000,000 in notional par value. Each
5-Year and 10-Year U.S. Treasury Note and U.S. Treasury Bond contract
represents $100,000 in notional par value. The total notional amount and
market value are $879,000,000 and $200,909,125, respectively. The
determination of notional amounts and market value 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 Duration Government Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Short Duration Government 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. Under normal interest rate
conditions, the fund's duration is expected to be within one-half year of its
benchmark, the two-year U.S. Treasury security.
Performance Review
During the period under review, the fund's Institutional, Administration
and Service shares all outperformed the two-year U.S. Treasury security,
primarily due to our emphasis on and the favorable performance of
mortgage-backed security investments, as well as our ability to identify
relative value within the sector. In addition, the portfolio's term structure,
which overweighted one- and three-year maturity securities, also contributed to
performance when the yield curve steepened.
During the period, the net asset values (NAVs) of the fund's Institutional
and Administration shares (which opened February 28, 1996) were nearly unchanged
while the NAV of the fund's Service shares (which opened April 10, 1996) rose
$0.10 as interest rates stabilized and subsequently declined.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Institutional Administration* Service*
(10/31/95- (2/28/96- (4/10/96-
10/31/96) 10/31/96) 10/31/96)
-------- -------- --------
<S> <C> <C> <C>
Total Return (based on net 6.75% 4.00% 4.35%
asset value
- --------------------------------------------------------------------------------
Return From Monthly 6.65% 4.10% 3.32%
Distributions
- --------------------------------------------------------------------------------
Return From Price 0.10% -0.10% 1.03%
Depreciation/
Appreciation
- --------------------------------------------------------------------------------
Total Return of Two-Year 5.64% 3.61% 3.71%
U.S. Treasury
- --------------------------------------------------------------------------------
NAV (10/31/96) $9.83 $9.85 $9.82
- --------------------------------------------------------------------------------
NAV Change +$0.01 -$0.01 +$0.10
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
The fund performed well compared with its peers. The Institutional shares
ranked in the top 10% of short-intermediate U.S. government funds (fifth out of
88) based on total return for the 12-month period ended October 31, 1996,
according to Lipper Analytical Services, Inc. (The Administration and Service
shares were not ranked for this period because they were in existence less than
12 months. 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
The fund significantly reduced its allocation in U.S. Treasuries in favor
of collateralized mortgage obligations (CMOs), which offered more attractive
return potential according to our analysis. This strategy proved successful as
mortgage-backed securities outperformed comparable-duration Treasuries.
Portfolio Composition as of October 31, 1996*
<TABLE>
<CAPTION>
[PIE CHART APPEARS HERE]
<S> <C>
Repos/Cash Equivalents 1.1%
Fixed Rate Mortgage
Pass-Throughs 7.2%
U.S. Treasuries 15.8%
ARMs 19.0%
CMOs 56.9%
</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.
- --------------------------------------------------------------------------------
9
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
- --------------------------------------------------------------------------------
.. CMOs. During the period, we more than doubled the portfolio's allocation in
collateralized mortgage obligations, with most of the increase occurring from
February through April. As of October 31, 56.9% of the portfolio was invested in
CMOs, of which 24.7% were sequential-pay CMOs (up from 10.4% last year) and
17.0% were planned amortization class (PAC) CMOs (up from 1.9% last year).
These sectors were favored for their relatively stable cash flows and
incremental yields over Treasuries, and they performed well during the period.
Though the CMO sector was fairly valued relative to equal-duration Treasuries
from January through the end of the period, our extensive research enabled us to
identify specific securities that presented attractive investment opportunities.
.. ARMs. Adjustable rate mortgage securities (ARMs) accounted for 19.0% of the
portfolio as of October 31, down from 23.7% last year. We focused on seasoned
securities indexed to the one-year Constant Maturity Treasury (CMT), which
offered attractive income stability and low relative prepayment risk. A high
level of mortgage refinancing adversely impacted the sector in November and
December of 1995 when rates had eased, but ARMs strengthened when rates started
to rise during the first quarter of 1996 and prepayment fears faded.
.. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. The portfolio's
position in U.S. Treasuries was cut to 15.8%, down from 37.1% a year ago, as we
identified securities in other sectors that offered higher incremental yield. In
addition, repurchase agreements/cash equivalents were reduced to 1.1% from 4.7%
a year ago.
.. Fixed Rate Mortgage Pass-Throughs. Fixed rate pass-throughs, a 7.2%
allocation, offered more attractive yield spreads than most of the other
high-credit quality fixed income sectors. During the period under review, the
technical balance of the pass-through market strengthened, with investor demand
improving as prepayments and supply slowed from the high levels experienced last
November. We continued to emphasize seasoned premium mortgages because they
typically have lower prepayment risk than recently issued mortgages.
.. Issuer Composition. The breakdown of the portfolio's mortgage-backed security
holdings by issuer was 37.8% in Federal National Mortgage Association (FNMA)
issues, 36.0% in Federal Home Loan Mortgage Corporation (FHLMC) issues and 9.2%
in Government National Mortgage Association (GNMA) issues.
.. Credit Quality. The fund invests exclusively in issues of the U.S. government
and its agencies or instrumentalities.
.. Prudent Use of Derivatives. Sequential-pay CMOs and PAC CMOs, which are
typically considered to be lower risk derivatives, represented 24.7% and 17.0%
of the portfolio, respectively, as noted earlier. Other derivative investments
included CMO floaters (10.0%), which are securities whose coupons reset upward
as interest rates rise, and inverse floaters (3.2%), which have coupons that
reset in the opposite direction from interest rates. When floaters are held
along with inverse floaters, they can produce a position with a similar risk
profile as a fixed rate pass-through but provide a higher yield. The fund also
held a small position (1.3%) in PAC interest-only securities (IOs). We invest in
such higher risk derivatives very sparingly in an effort to enhance returns
without taking undue risk. In addition, we used futures as a tool to help manage
the portfolio's duration.
Market Outlook
In general, we have a cautiously optimistic view of the mortgage-backed
securities market in the near term. In the ARM sector, we expect spreads to
remain stable due to strong investor demand and limited supply. Given the
environment of declining rates for the past few months, we will continue to
emphasize seasoned one-year CMT
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
- -------------------------------------------------------------------------------
ARMs due to the relative prepayment stability that these securities offer.
Though we have a neutral outlook for the CMO market, we continue to find areas
that offer attractive investment opportunities. In the mortgage pass-through
market, we believe the recent widening of yield spreads during September and
October has been somewhat overdone, but we will remain vigilant to an increase
in prepayments that may result from a further decline in interest rates. We will
continue to actively allocate the portfolio's assets among the various fixed
income sectors as their relative value changes throughout the coming year.
Distribution Policy
During the period under review, the fund's Institutional shares paid out
distributions of $0.63 per share. From their inceptions through October 31,
1996, the fund's Administration and Service shares distributed $0.39 per share
and $0.32 per share, respectively. (The Administration shares opened on February
28, 1996 and the Service shares opened on April 10, 1996.) The fund distributes
substantially all of its investment company taxable income, as required by tax
law.
We thank you for your support and look forward to continuing to meet your
investment needs in the future.
Sincerely,
/s/Jonathan A. Beinner
Jonathan A. Beinner
/s/James B. Clark
James B. Clark
Portfolio Managers
GS Short Duration Government Fund
November 29, 1996
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Short Duration Government Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Short-Term Government 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
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Institutional Shares(a)
Institutional Shares 2-Year\r T-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
9/1/88 50,000 50,000 50,000
10/31/88 51,283 51,057 51,091
10/21/89 55,940 55,412 55,919
10/31/90 60,543 59,876 60,861
10/31/91 67,161 66,615 67,699
10/31/92 71,365 72,161 73,208
10/31/93 75,326 76,335 77,446
10/31/94 76,072 77,058 78,339
10/31/95 82,895 84,009 85,256
10/31/96 88,507 88,756 90,346
</TABLE>
Administration Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Administration Shares 2-Year\rT-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
2/28/96 50,000 50,000 50,000
10/31/96 52,000 51,805 51,760
</TABLE>
Service Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Service Shares 2-Year\rT-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
4/10/96 50,000 50,000 50,000
10/31/96 52,175 51,855 52,110
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------
Average Annual Total Return
-----------------------------------------------------------
One Year Five Year Since Inception(b)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Institutional shares 6.75% 5.6% 7.24%
- --------------------------------------------------------------------------------
Administrative shares N/A N/A 4.00(c)
- --------------------------------------------------------------------------------
Service shares N/A N/A 4.35(c)
- --------------------------------------------------------------------------------
</TABLE>
/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, Administration and Service shares commenced operations
August 15, 1988, February 28, 1996 and April 10, 1996, respectively.
/c/ An aggregate total return (not annualized) is shown instead of an average
annual total return since the Administration and Service shares have not
completed a full twelve months of operations.
- --------------------------------------------------------------------------------
12
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Government Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations--82.4%
Adjustable Rate Federal Home Loan Mortgage Corp.
(FHLMC)(a)--14.2%
$ 1,208,677 6.00% 11/15/16 $ 1,198,196
1,941,838 7.54 12/01/18/(b)/ 1,994,248
8,544,958 7.73 02/01/22/(b)/ 8,913,502
2,234,941 7.56 08/01/22 2,331,334
- --------------------------------------------------------------------------------
$ 14,437,280
- --------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association
(FNMA)(a)--6.2%
$ 389,769 9.00% 12/01/97 $ 402,558
2,732,146 7.80 11/01/14/(b)/ 2,849,984
3,025,230 7.48 08/01/22/(b)/ 3,093,842
- --------------------------------------------------------------------------------
$ 6,346,384
- --------------------------------------------------------------------------------
Fixed Rate Federal National Mortgage Association (GNMA)--3.5%
$ 1,093,610 6.00% 06/01/09/(b)/ $ 1,065,244
2,058,384 6.00 10/01/09/(b)/ 2,004,994
540,970 6.00 10/01/08/(b)/ 526,938
- --------------------------------------------------------------------------------
$ 3,597,176
- --------------------------------------------------------------------------------
Fixed Rate Government National Mortgage Association--3.3%
$ 3,040,068 10.00% 12/15/17/(b)/ $ 3,338,359
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations (CMOs)--55.3%
Inverse Floater(a)--5.7%
FHLMC Series 1296, Class J
$ 890,613 11.93% 07/15/99/(b)/ $ 948,502
FHLMC Series 1325, Class B
2,416,565 6.06 07/15/97/(b)/ 2,421,833
FHLMC Series 1325, Class C
1,028,325 7.56 07/15/97/(b)/ 1,034,598
FNMA Remic Trust 1991-127, Class S
144,496 12.98 09/25/98 153,084
FNMA Remic Trust, Series 1992-62, Class S
1,212,115 10.00 05/25/99 1,241,097
- --------------------------------------------------------------------------------
$ 5,799,114
- --------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only(a)--0.3%
FHLMC Series 1684, Class JD
$ 2,801,277(c) 3.66% 08/15/20/(b)/ $ 199,759
FNMA Remic Trust 1993-110, Class SC
2,597,458(c) 3.46 04/25/19/(b)/ 126,990
- --------------------------------------------------------------------------------
$ 326,749
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
Mortgage Backed Obligations (continued)
Collateralized Mortgage Obligations (continued)
Planned Amortization Class (PAC CMOs)--11.1%
FHLMC Series 1584, Class E
$ 3,000,000 5.75% 10/15/16/(b)/ $ 2,954,040
FNMA Remic Trust 1992-138, Class C
2,350,000 6.00 12/25/18/(b)/ 2,325,020
GNMA Remic Trust 1996-6, Class PB
6,000,000 6.50 06/16/09 6,038,400
- --------------------------------------------------------------------------------
$ 11,317,460
- --------------------------------------------------------------------------------
Planned Amortization Class Interest-Only (PAC IO) CMOs--0.6%
FHLMC Series 1552, Class JE
$ 10,552,245/(c)/ 7.00% 02/15/14/(b)/ $ 590,926
- --------------------------------------------------------------------------------
Planned Amortization Class Ioette CMOs--0.5%
FNMA Remic Trust 1992-198, Class K
$ 42,908/(c)/ 16.00% 12/25/15 $ 547,555
- --------------------------------------------------------------------------------
Regular Floater (a)--9.9%
FHLMC Series 1684, Class F
$ 5,000,000 5.75% 08/15/20/(b)/ $ 4,818,750
FHLMC Series 1684, Class JC
2,801,277 5.34 08/15/20/(b)/ 2,737,352
FNMA Remic Trust 1993-110, Class FC
2,597,459 5.54 04/25/19/(b)/ 2,565,796
- --------------------------------------------------------------------------------
$ 10,121,898
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--27.1%
FHLMC Series 1033, Class G
$ 2,000,000 8.00% 01/15/06/(b)/ $ 2,095,620
FHLMC Series 1296, Class I
2,493,715 5.24 07/15/99/(b)/ 2,481,546
FHLMC Series 174, Class Z
3,757,885 10.00 08/15/21 4,189,703
FNMA Remic Trust 1988-12, Class A
4,076,171 10.00 02/25/18/(b)/ 4,350,090
FNMA Remic Trust 1988-12, Class B
3,218,030 4.47 02/25/18/(b)/ 3,081,585
FNMA Remic Trust 1989-12, Class X
1,955,861 10.00 12/25/14/(b)/ 2,021,246
FNMA Remic Trust 1989-18, Class B
1,312,493 9.50 01/25/04 1,359,730
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations(continued)
Collateralized Mortgage Obligations(continued)
Sequential Fixed Rate CMOs (continued)
$ 4,628,657 7.75% 10/25/18 (b) $ 4,699,707
FNMA Remic Trust 1992-44, Class CA
3,000,000 12.00 08/25/20/(b)/ 3,394,800
- --------------------------------------------------------------------------------
$ 27,674,027
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 56,377,729
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $83,545,715) $ 84,096,928
- --------------------------------------------------------------------------------
U.S. Treasury Obligations--15.7%
United States Treasury Notes
$ 5,150,000 5.88% 04/30/98 $ 5,166,068
10,900,000 5.13 06/30/98/(b)/ 10,804,620
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $15,894,705) $ 15,970,688
- --------------------------------------------------------------------------------
Repurchase Agreement--1.0%
Joint Repurchase Agreement Account
$ 1,000,000 5.58% 11/01/96/(b)/ $ 1,000,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $1,000,000) $ 1,000,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $100,440,420(d)) $ 101,067,616
================================================================================
Futures contracts open at October 31, 1996 are as follows:
Number of
Contracts
Long Settlement Unrealized
Type (Short)(e) Month Gain (Loss)
- ------------------------- -------------- ------------------ ----------------
Euro Dollars 40 December 1996 $28,000
Euro Dollars 29 March 1997 34,650
Euro Dollars 37 June 1997 38,950
Euro Dollars 47 September 1997 68,625
Euro Dollars 45 December 1997 80,375
Euro Dollars 35 March 1998 25,250
Euro Dollars 20 June 1998 9,000
2 Year U.S. Treasury Notes 71 December 1996 87,859
5 Year U.S. Treasury Notes (89) December 1996 (173,203)
10 Year U.S. Treasury Notes (44) December 1996 (131,781)
20 Year U.S. Treasury Notes (7) December 1996 (34,844)
--------------
$32,881
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 826,961
Gross unrealized loss for investments in which
cost exceeds value (213,881)
- --------------------------------------------------------------------------------
Net unrealized gain $ 613,080
================================================================================
/(a)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(b)/Portions of these securities are being segregated for futures margin
requirements.
/(c)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(d)/The aggregate cost for federal income tax purposes is $100,454,536.
/(e)/Each Euro Dollar contract represents $1,000,000 in notional par value. 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 20-
Year U.S. Treasury Note contract represents $100,000 in notional par value.
The total notional amount and market value are $253,200,000 and
$89,469,788, respectively. The determination of notional amounts and market
value 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.
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. Under normal
interest rate conditions, the fund's duration will be within one-half year of
its benchmark, the Lehman Brothers Three-Year Municipal Bond Index. The fund's
approximate interest rate sensitivity is comparable to that of a three-year
bond.
After a Weak Start, the Municipal Bond Market Strengthened
The municipal bond market outperformed Treasuries during the 12-month
period under review, though both markets came under pressure when rates rose
during the first half of 1996. The average price of a three-year municipal bond
(as calculated from data provided by Municipal Market Data, an independent
municipal market information provider) fell slightly (0.14%), while yields rose
from 4.10% on October 31, 1995 to 4.15% on October 31, 1996.
The municipal bond market began the period under review on a weak note.
Tax reform uncertainty impacted investor demand during November and December
1995, while municipal bond supply was high due to seasonably heavy year-end
issuance. The market environment improved during January and February 1996, when
fading tax reform concerns helped to revive investor interest in the sector and
issuance declined. From March through the end of the period, the market's
technical balance was generally healthy, though occasional spikes in supply
periodically overwhelmed demand and briefly impacted performance. The largest of
these surges occurred in June when supply rose to its highest level since late
1995, but subsequently both new issuance and secondary supply fell dramatically
from July through September.
On the demand side, interest in municipal bonds was generally stable until
late summer and early fall. Demand from individual investors (who control
approximately 65% of municipal bond ownership either through mutual funds or
direct investment) began to decline when interest rates declined and municipal
yields fell below the psychologically significant 6% level. In addition,
property/casualty companies (which control approximately 10% of municipal bond
ownership) also dropped out of the market because the sector had become somewhat
unattractive relative to Treasuries. The supply drought finally abated in
October when many issuers sought to take advantage of lower interest rates, and
a continued weakness in demand caused municipals to underperform taxable bonds
for the month.
Municipal Bond Yield Curve
[LINE GRAPH APPEARS HERE]
The yield curve steepened at the short end and shifted downward at the longer
end.
Performance Review
The performance of the fund's Institutional shares was in line with the
benchmark, the Lehman Brothers Three-Year Municipal Bond Index (the "Index"),
for the 12-month period ended October 31, 1996. The Administration and Service
shares also performed well, but slightly lagged the benchmark.
- --------------------------------------------------------------------------------
15
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1995 - October 31, 1996
- --------------------------------------------------------------------------------
Lehman Brothers
Institu- Adminis- 3-Year
tional tration Service Municipal Bond Index
-------- -------- ------- ---------------------
<S> <C> <C> <C> <C>
Total Return (based on net 4.50% 4.24% 3.98% 4.51%
asset value)
- --------------------------------------------------------------------------------
Return From 4.30% 4.04% 3.78% NA
Monthly
Distributions
- --------------------------------------------------------------------------------
Return From Price 0.20% 0.20% 0.20% NA
Appreciation
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $9.96 $9.96 $9.97 NA
- --------------------------------------------------------------------------------
NAV Change +$0.02 +$0.02 +$0.02 NA
- --------------------------------------------------------------------------------
</TABLE>
The fund's positive performance during the period was primarily due to our
emphasis on higher yielding revenue bonds, as well as successful selection of
specific securities and relative value trades. As always, we did not make any
bets on the direction of interest rates, but rather kept the fund's duration in
line with the Index, occasionally using Treasury futures to actively manage
sector allocation.
In our search for incremental yield, we focused on three types of bonds.
The first category was relatively generic, highly liquid securities; the second
included slightly less liquid issues such as insured hospital bonds and
letter-of-credit-backed debt; and the last area was "story" bonds, such as
uninsured hospital and electric utility issues and multifamily housing revenue
bonds, whose value is often unrecognized by the market because they are unique
or generally not well understood. We identified attractive investment
opportunities for the third category through our extensive credit analysis.
We are pleased to report that the fund's Institutional shares ranked first
out of 26 funds in Lipper Analytical Services, Inc.'s short-intermediate
municipal debt category for the 12-month period ended October 31, 1996 based on
total return. (Lipper did not rank the fund's Administration and Service shares.
Please note that Lipper rankings do not take sales charges into account and that
past performance is not a guarantee of future results.) In addition, as of
October 31, 1996, the fund's Institutional shares were rated "five stars" by
Morningstar, Inc., its highest rating./1/
Portfolio Composition and Investment Strategies:
Revenue Bonds Dramatically Increased
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
General Obligations 3.0%
Variable Rate Demand Notes 4.7%
Insured General Obligations 12.6%
Insured Revenue Bonds 24.2%
Revenue Bonds 55.5%
* 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.
- ----------------------------
1 Source: (C) 1996 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 10/31/96.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and ten-year average annual returns (where applicable) in excess of
90-day Treasury bill returns with appropriate fee and sales charge adjustments
and a risk factor that reflects fund performance below 90-day Treasury bill
returns. The one-year rating is calculated using the same methodology, but is
not a component of the overall rating. The fund's Institutional shares received
five stars and were rated among 1,038 municipal bond funds for the three-year
period. For the one-year period, the Institutional shares received five stars
and were rated among 1,728 municipal bond funds. 10% of the funds receive the
five-star rating. The Morningstar rating applies only to the fund's
Institutional shares; the fund's Administration and Service shares have not been
rated. Administration and Service shares are subject to additional fees that may
have the effect of lowering performance and may affect any future Morningstar
rating. Morningstar rates funds against their peers in the same category. In
all, there are five Morningstar categories (domestic equity, international
equity, fixed income, municipal and hybrid). Morningstar ratings range from five
stars (highest) to one star (lowest). Funds with five-star ratings are in the
top 10% of their category, four-star ratings in the next 22.5%, three stars the
next 35%, two stars the next 22.5% and one star the lowest 10% of their
categories.
- --------------------------------------------------------------------------------
16
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------
.. Revenue Bonds. As of October 31, the portfolio's combined position in
insured and uninsured revenue bonds was significantly overweighted compared with
the Index, 79.7% versus 35.8%. We substantially increased the portfolio's total
revenue bond allocation (from 29.2% a year ago) because our emphasis on credit
analysis enabled us to identify attractive revenue bonds that offered higher
incremental yield than was available from general obligation bonds. (Revenue
bonds pay interest and principal out of a specific revenue stream, such as sales
taxes, hospital charges, tolls, electric rates and airport fees.)
.. General Obligation (GO) Bonds. The fund's allocation in insured and
uninsured GO bonds was dramatically cut during the period to 15.6% of the
portfolio, down from 51.0% a year ago and significantly underweighted versus the
Index's 55.5%. GOs are backed by the general taxing power of a municipality and
are typically higher credit quality but lower yielding than revenue bonds.
.. Variable Rate Demand Notes (VRDNs). VRDNs are high-quality cash
equivalents that we used to manage the portfolio's excess liquidity. VRDNs
were a 4.7% position, down from 10.0% a year ago.
.. Pre-refunded Bonds. Over the course of the year, we trimmed the fund's
holdings in pre-refunded bonds (9.8% as of October 31, 1995). In October, we
sold the fund's remaining position in the sector in favor of revenue bonds that
offered more attractive yields.
.. Duration. As of October 31, the fund's duration was in line with that of
the Index at 2.7 years.
.. Credit Quality. During the year, the fund's credit quality allocations
shifted. We reduced the portfolio's allocation in triple-A-rated GOs in favor of
single-A-rated revenue bonds, which allowed us to maintain the fund's targeted
double-A-rated average credit quality and liquidity while achieving higher
overall yields. We structured the portfolio's credit-quality allocation like a
"barbell," emphasizing higher credit quality securities in the four- to five-
year maturity range and lower relative credit quality securities in the one- to
three-year maturity range. As of October 31, more than half of the portfolio was
invested in triple-A-rated bonds (52.7%), while double-A- and single-A-rated
securities accounted for 20.1% and 27.2%, respectively.
Market Outlook
We have a bullish long-term outlook for municipal bond supply, since new
money issuance (bonds issued for purposes other than refunding older debt) tends
to be stable and grows at the same rate as GDP. In addition, we do not
anticipate a significant increase in refunding unless interest rates drop
substantially. On the demand side, investor interest is likely to remain
healthy, as we believe that two to four more years of divided government (a
Democratic president and a Republican-controlled Congress) should avert any
significant tax reform that would threaten municipal bonds' tax-exempt status.
Distribution Policy
Dividends are declared daily and paid on a monthly basis. During the
12-month period ended October 31, 1996, the fund's Institutional, Administration
and Service shares paid out monthly distributions totaling approximately $0.42,
$0.39 and $0.37 per share, respectively. The fund intends to distribute
substantially all of its investment company tax-exempt income, as required by
tax law.
- --------------------------------------------------------------------------------
17
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
We value your continued confidence in the GS Short Duration Tax-Free Fund
and look forward to reporting on the fund's progress in the coming year.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Elisabeth Schupf Lonsdale
Elisabeth Schupf Lonsdale
Portfolio Managers
GS Short Duration Tax-Free Fund
November 29, 1996
- --------------------------------------------------------------------------------
18
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. 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.
HYPOTHETICAL $50,000 INVESTMENT/(a)/
[GRAPH APPEARS HERE]
Institutional Shares
<TABLE>
<CAPTION>
Institutional Shares 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
10/1/92 50000 50000
- --------------------------------------------------------------------------------
10/31/92 49830 49805
- --------------------------------------------------------------------------------
10/31/93 53333 53102
- --------------------------------------------------------------------------------
10/31/94 53424 53825
- --------------------------------------------------------------------------------
10/31/95 56618 58023
- --------------------------------------------------------------------------------
10/31/96 59172 60646
- --------------------------------------------------------------------------------
</TABLE>
[GRAPH APPEARS HERE]
Administration Shares
<TABLE>
<CAPTION>
Admin 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
6/1/93 50000 50000
- --------------------------------------------------------------------------------
10/31/93 51088 51144
- --------------------------------------------------------------------------------
10/31/94 51031 51840
- --------------------------------------------------------------------------------
10/31/95 53971 55884
- --------------------------------------------------------------------------------
10/31/96 56265 58410
- --------------------------------------------------------------------------------
</TABLE>
[GRAPH APPEARS HERE]
Service Shares
<TABLE>
<CAPTION>
Service 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
10/1/94 50000 50000
- --------------------------------------------------------------------------------
10/31/94 49810 49880
- --------------------------------------------------------------------------------
10/31/95 52594 53771
- --------------------------------------------------------------------------------
10/31/96 54693 56201
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------
Average Annual Total Return
------------------------------------
One Year Since Inception/(b)/
-----------------------------------------------------------
<S> <C> <C>
Institutional Shares 4.50% 4.21%
-----------------------------------------------------------
Administration Shares 4.24% 3.51%
-----------------------------------------------------------
Service Shares 3.98% 4.36%
-----------------------------------------------------------
</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.
- --------------------------------------------------------------------------------
19
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligation--98.2%
Alabama--2.8%
Selma, AL IDA for International Paper Co. PCRB (A-/A3)
$1,000,000 4.15% 07/15/08 $1,000,000
- --------------------------------------------------------------------------------
Arkansas--3.8%
West Memphis, AR Public Utility System RB (MBIA) (NR/Aaa)
$1,310,000 5.25%(e) 12/01/00 $1,344,388
- --------------------------------------------------------------------------------
Colorado--4.2%
Municipal Sub District of Northern Colorado Water Conservation Co.
RB(AMBAC)(AAA/Aaa)
$1,435,000 5.75% 12/01/01 $1,508,845
- --------------------------------------------------------------------------------
Connecticut--4.3%
Connecticut State Resource Recovery Authority Series A RB (AA-/NR)
$1,500,000 5.60% 11/15/99 $1,546,185
- --------------------------------------------------------------------------------
Illinois--4.4%
Chicago, IL GO (MBIA) (AA/Aaa)
$1,500,000 5.40% 10/31/00 $1,547,670
- --------------------------------------------------------------------------------
Kentucky--7.5%
Jefferson County, KY Trust Certificates (A+/NR)RB
$1,145,000 5.25% 03/01/99 $1,163,904
Pendleton County, KY LOC (Self Insurance)(NR/VMIG1)
1,500,000 4.25 07/01/01 1,503,045
- --------------------------------------------------------------------------------
$2,666,949
- --------------------------------------------------------------------------------
Louisiana--7.4%
Louisiana Offshore Deepwater Part Authority Term B RB (A/Baa1)
$1,000,000 5.85% 09/01/00 $1,040,080
Louisiana State Refunding RB, Series A GO (FGIC) (AAA/Aaa)
1,500,000 6.00 08/01/01 1,583,970
- --------------------------------------------------------------------------------
$2,624,050
- --------------------------------------------------------------------------------
New Jersey--4.0%
West Windsor/Plainsboro, NJ Regional School District (FGIC)
(AAA/Aaa)
$1,400,000 5.25% 12/01/99 $1,436,750
- --------------------------------------------------------------------------------
New York--6.8%
Municipal Assistance Corp. Refunding RB (AMBAC) (AAA/Aaa)
$1,000,000 6.00% 07/01/00 $1,051,690
Syracuse, NY IDA RB (AA/NR)
$1,365,000 4.60% 10/15/98 $1,369,491
- --------------------------------------------------------------------------------
$2,421,181
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Oklahoma--13.5%
Enid, OK Hospital Authority RB (Societe Generale LOC) (NR/Aa2)
$2,700,000 6.63%(a) 10/01/15 $2,747,115
Southern Oklahoma Memorial Hospital RB(b) (A/A)
2,000,000 5.60 02/01/00 2,043,680
- -------------------------------------------------------------------------------
$4,790,795
- -------------------------------------------------------------------------------
Oregon--4.2%
Klamath Falls, OR Salt Caves Hydroelectic RB (SP1+/NR)
$1,500,000 4.50% 05/01/23 $1,507,980
- -------------------------------------------------------------------------------
Pennsylvania--9.7%
Pennsylvania Intergovernmental Cooperative Authority Special Tax RB
(FGIC) (AAA/Aaa)
$1,500,000 5.75% 06/15/00 $1,559,730
Philadelphia, PA Gas Works COPS (FSA) (AAA/Aaa)
1,800,000 5.95 04/01/00 1,879,146
- --------------------------------------------------------------------------------
$3,438,876
- --------------------------------------------------------------------------------
Texas--11.4%
Bexar County, TX MFH Finance Corp. RB (CFMG) (NR/A3)
$1,500,000 4.88% 11/01/04 $1,502,220
Houston, TX Water & Sewer RB Series B (A/A)
1,430,000 5.25 12/01/99 1,460,802
Port Neches, TX Independent School District GO (AAA/Aaa)
1,000,000 7.00 02/15/01 1,092,480
- -------------------------------------------------------------------------------
$4,055,502
- -------------------------------------------------------------------------------
Virginia--5.0%
Petersburg, VA Hospital Authority RB (NR/A)
$1,760,000 5.50% 07/01/99 $1,798,157
- -------------------------------------------------------------------------------
Washington--4.6%
Washington State Public Power Supply System RB, Series B (AA-/Aa1)
$1,500,000 7.20% 07/01/02 $1,623,044
- -------------------------------------------------------------------------------
Wyoming--4.6%
Uinta County, WY School District GO, Series A (FSA) (AAA/Aaa)
$1,500,000 6.88% 06/01/00 $1,620,390
- -------------------------------------------------------------------------------
Total Debt Obligations
(Cost $34,727,338) $34,930,762
===============================================================================
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Short-Term Obligations--4.5%
Illinois--0.6%
Illinois Development Finance Authority RB (AA+/A-1)/(c)/
$200,000 3.55% 01/1/96 $200,000
Louisiana--3.9%
East Baton Rouge Parish PCRB (AAA/Aaa)/(c)/
$1,400,000 3.60% 11/1/96 $1,400,000
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $1,600,000) $ 1,600,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $36,328,338)/(d)/ $36,530,762
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 204,715
Gross unrealized loss for investments in which
cost exceeds value (2,291)
- --------------------------------------------------------------------------------
Net unrealized gain $ 202,424
================================================================================
</TABLE>
/(a)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(b)/Portions of these securities are being segregated for when-issued
securities.
/(c)/Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next reset interest dates.
/(d)/The amount stated also represents aggregate cost for federal income tax
purposes.
/(e)/When-issued securities.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
================================================================================
Investment Abbreviations:
AMBAC --Insured by American Municipal Bond Assurance Corp.
CFMG --Credit Lyonnais Line of Credit
COPS --Certificates of Participation
FGIC --Insured by Financial Guaranty Insurance Co.
FSA --Financial Security Assurance Co.
GO --General Obligation
IDA --Industrial Development Authority
LOC --Letter of Credit
MBIA --Insured by Municipal Bond Investors Assurance
NR --Not Rated
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Core Fixed Income Fund seeks to achieve a total return consisting of
capital appreciation and income that exceeds the total return of its benchmark,
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 non-dollar-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. The fund's
approximate interest rate sensitivity is expected to be comparable to that of a
five-year bond.
Performance Review
During the period under review, the fund's Institutional shares outperformed
the Index. The strong performance was primarily due to its investments in
corporate bonds and emerging market debt. In addition, the fund also benefited
from its mortgage-backed and asset-backed holdings when both sectors
strengthened during the period.
The fund fared well relative to its peers. For the 12-month period ended
October 31, 1996, the fund's Institutional shares ranked in the top quartile
(24th out of 96 funds) in Lipper Analytical Services, Inc.'s "corporate debt -
BBB-rated" category based on total return. (Lipper did not rank the fund's
Administration and Service shares for the period because they were in existence
less than 12 months. Please note that Lipper rankings do not take sales charges
into account and that past performance is not a guarantee of future results.)
The fund's Administration and Service shares, which began operations on
February 28, 1996 and March 13, 1996, respectively, achieved positive returns
since their inceptions.
During the period, the net asset value (NAV) of the fund's Institutional
shares fell $0.15 due to the sharp rise in interest rates during the first half
of 1996. Reflecting the fact that rates had already risen significantly, the NAV
of the fund's Administration shares (which opened in February) also declined but
not as significantly, while the NAV of the fund's Service shares (which opened
in March) rose $0.09.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Performance Summary
- -------------------------------------------------------------------------------
Institutional Administration* Service*
(10/31/95- (2/28/96- (3/13/96-
10/31/96) 10/31/96) 10/31/96)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Return (based on 5.98% 3.56% 4.90%
net asset value)
- -------------------------------------------------------------------------------
Return From Monthly 7.48% 4.27% 3.98%
Distributions
- -------------------------------------------------------------------------------
Return From Price -1.50% -0.71% 0.92%
Depreciation/
Appreciation
- -------------------------------------------------------------------------------
Total Return of Lehman 5.83% 3.74% 4.94%
Brothers Aggregate
Bond Index
- -------------------------------------------------------------------------------
NAV (as of 10/31/96) $9.85 $9.84 $9.86
- -------------------------------------------------------------------------------
NAV Change -$0.15 -$0.07 +$0.09
- -------------------------------------------------------------------------------
</TABLE>
*New share class opened during the period.
Portfolio Composition and Investment Strategies
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
Corporate Bonds 26.6%
Fixed Rate Mortgage Pass-Throughs 23.9%
U.S. Treasuries 19.5%
ABSs 12.5%
CMOs 9.8%
Emerging Market Debt 4.5%
Repos/Cash Equivalents 1.7%
Agency Debentures 1.5%
* 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.
- --------------------------------------------------------------------------------
22
<PAGE>
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
.. Corporate Bonds. As of October 31, the fund's largest allocation was in
corporate bonds, overweighted relative to the Index (26.6% versus 17.6%),
which significantly benefited performance. Though corporate bonds began the
period on a weak note due to the economic slowdown during November and December,
the sector improved dramatically when companies reported positive earnings
growth from January 1996 through the end of the period. Within the sector, we
stressed industrial and financial issues. Industrials performed well due to the
strengthening economy, while financials benefited from the relatively steep
yield curve, which enabled issuers to borrow at lower, short-term rates and lend
at higher, long-term rates.
.. Fixed Rate Mortgage Pass-Throughs. Fixed rate mortgage pass-throughs, a
23.9% position as of October 31, were underweighted compared with the Index
(29.7%), with the remainder of the fund's mortgage-backed security allocation
invested in collateralized mortgage obligations (CMOs). We emphasized seasoned
premium mortgages, which have lower prepayment risk than recently issued
mortgages. The sector suffered from high prepayments during November and
December 1995, but conditions improved when interest rates rose sharply during
the first half of 1996 and prepayments declined. Over the course of the year,
these securities positively contributed to the fund's performance.
During the period, we occasionally used mortgage dollar rolls to benefit from
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 -- 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.
.. CMOs. During the period, we increased the portfolio's CMO allocation to
9.8%, up from 2.0% a year earlier. Within the sector, we initiated a
position in sequential-pay/support CMOs (5.1% as of October 31) and increased
the portfolio's position in planned amortization class (PAC) CMOs to 3.5% from
0.9%. These securities were favored for their relative stability and attractive
spreads compared with Treasuries, and they benefited performance during the
period. The remaining CMO positions were inverse floaters, discussed below.
.. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. The fund's
allocation in U.S. Treasuries was reduced to 19.5% from 24.7% a year ago. We
significantly underweighted Treasuries relative to the benchmark (45.2%) to
focus on other sectors that offered more attractive relative value. In addition,
repurchase agreements/cash equivalents accounted for 1.7% of the portfolio, up
from 0.4% a year ago.
.. Asset-Backed Securities (ABSs). We increased the fund's allocation in ABSs to
12.5%, up from 9.9% a year ago. The ABS position consisted of short-term,
high-credit-quality issues primarily backed by credit card loans, as well as
smaller positions in automobile loan debt and other receivables, that offered
incremental yield over similar-duration Treasuries. When the period under review
began, the ABS market was weak due to uncertainty regarding credit card
delinquencies, but those concerns waned and the sector strengthened from January
through October. The supply of ABSs was robust during the period, with a wide
variety of innovative new issues across a range of maturities, collateral types
and structures. Despite the increased issuance, the technical balance of the ABS
market remained favorable due to heavy investor demand from foreign banks,
insurance companies and an increasing number of corporate "crossover" accounts.
- --------------------------------------------------------------------------------
23
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
.. Emerging Market Debt. The portfolio's investments in emerging market debt
(4.5%) performed extremely well during the period. We carefully managed the
fund's exposure in the sector by stressing higher credit-quality, short-duration
bonds. Geographically, we emphasized Latin American countries because we believe
this region has the best risk/reward characteristics. During the period, we
focused on bonds from Chile, Colombia and the Andean region development bank. We
also initiated a new position in investment-grade Mexican bonds.
.. Agency Debentures. Agency debentures, a small position (1.5%), added to the
portfolio's diversification and contributed incremental yield. However, we
underweighted the sector relative to the Index (6.5%) because our analysis
indicated that it did not adequately compensate us given its level of risk.
.. Duration. As of October 31, the fund's duration matched that of the Index at
4.7 years. Rather than attempting to predict the direction of interest rates, we
manage the fund's duration to approximate that of the Index, partly through the
use of financial futures. We seek to add incremental return over the Index
through sector weighting and individual security selection.
.. Credit Quality. More than half of the portfolio was invested in government
and agency securities (51 .1%), with another 12.6% invested in triple-A-rated
securities. The remainder of the portfolio was made up of double-A-rated
securities (2.7%), single-A-rated securities (12.5%), triple-B-rated
securities (19.4%) and cash equivalents
(1.7%).
.. Prudent Use of Derivatives. As noted, the portfolio held positions in asset-
backed securities (12.5%), sequential-pay/support CMOs (5.1%) and PAC CMOs
(3.5%), which are all typically considered to be lower risk derivatives. In
addition, we held a 1.2% position in inverse floaters, which are securities
whose coupons reset in the opposite direction from interest rate movements.
These securities performed well during the period, offering incremental yield
over Treasuries.
Market Outlook
We are somewhat cautious on the corporate bond sector as it has become
expensive relative to Treasuries, but expect the sector to continue to benefit
from strong technical and fundamental factors. We intend to continue to
overweight industrial and financial issues and underweight utilities due to
their regulatory and competitive pressures. In the mortgage pass-through market,
certain segments are attractively valued, and we believe that our current
seasoned holdings should fare well relative to other sectors if interest rates
were to continue to fall and increase the level of prepayments. We are
cautiously optimistic on the ABS market, where we expect the sector's
significant spread premiums relative to comparably rated corporate securities to
continue to buoy investor demand. In addition, Fed surveys indicate that banks
have been tightening their underwriting standards over the last three quarters,
which should help to allay lingering investor concerns surrounding consumer
credit card delinquencies. Finally, we remain optimistic on the prospects for
the relative performance of emerging market debt, which continues to offer good
value compared with other asset classes. Overall, the economic trends in
emerging markets appear to be headed in the right direction and the
globalization of financial markets is likely to increase investor interest in
the sector. During the coming year, we will continue to actively allocate the
portfolio's assets among the various fixed income sectors as their relative
value changes.
Distribution Policy
During the 12-month period under review, the fund's Institutional shares
distributed $0.72 per share. From their inceptions through October 31, the
fund's Administration and Service shares paid out $0.41 and $0.38 per share,
respectively. (The Administration shares' inception date was on February 28,
1996, and the Service shares' inception date was on March 13, 1996.) Dividends
are
- --------------------------------------------------------------------------------
24
<PAGE>
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
declared daily and paid on a monthly basis. As required by tax law, the fund
distributes substantially all of its investment company taxable income.
In closing, we appreciate your investment and look forward to serving you in
the future.
Sincerely,
/s/ Jonathan A Beinner
Jonathan A Beinner
/s/ Richard H. Buckholz
Richard H. Buckholz
/s/ C. Richard Lucy
C. Richard Lucy
/s/ Stephen R. Warren
Stephen R. Warren
Portfolio Managers
GS Core Fixed Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
25
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund
- --------------------------------------------------------------------------------
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. 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
[GRAPH APPEARS HERE] [GRAPH APPEARS HERE] [GRAPH APPEARS HERE]
Institutional Shares/(a)/ Administration Shares Service Shares
1/5/94 50000 2/28/96 50000 3/13/96 50000
10/31/94 48500 10/31/96 51780 10/31/96 52450
10/31/95 56124
10/31/96 59492
Lehman Aggregate Index Lehman Aggregate Index Lehman Aggregate Index
1/5/94 50000 2/28/96 50000 3/13/96 50000
10/31/94 46980 10/31/96 51870 10/31/96 52470
10/31/95 54332
10/31/96 57505
<TABLE>
<CAPTION>
------------------------ -----------------------------------------------------
Average Annual Total Return
------------------------ -----------------------------------------------------
One Year Since Inception/(a)/
<S> <C> <C>
------------------------ ---------------------------- ------------------------
Institutional Shares 5.98% 6.34%
------------------------ ---------------------------- ------------------------
Administration Shares N/A 3.56/(b)/
------------------------ ---------------------------- ------------------------
Service Shares N/A 4.90/(b)/
------------------------ ---------------------------- ------------------------
</TABLE>
(a) The Institutional, Administration and Service shares commenced operations
January 5, 1994, February 28, 1996 and March 13, 1996, respectively
(b) An aggregate total return (not annualized) is shown instead of an average
annual total return since the Administration and Service shares have not
completed a full twelve months of operations.
- --------------------------------------------------------------------------------
26
<PAGE>
Statement of Investments
- ---------------------------------------------------------------------
GS Core Fixed Income Fund
October 31, 1996
- ---------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
=====================================================================
Corporate Bonds--26.8%
Finance Bonds--12.6%
BankAmerica Corp.
$ 20,000 6.03% 05/17/99 $ 201,724
Bear Stearns Mortgage Securities, Inc.
2,045,784 6.50 03/28/09 1,903,048
Capital One Bank
600,000 8.63 01/15/97 603,000
500,000 8.13 02/27/98 511,610
Comdisco Inc.
950,000 9.75 01/15/97 956,717
200,000 7.33 03/06/97 201,112
Conseco Inc.
340,000 10.50 12/15/04 402,688
Continental Bank N.A.
525,000 11.25 07/01/01 565,971
Countrywide Funding Corp.
125,000 6.08 07/14/99 124,166
250,000 8.43 11/16/99 263,653
250,000 7.75 08/10/01 259,800
Ford Capital Corp.
200,000 9.38 01/01/98 207,584
300,000 9.50 07/01/01 333,960
General Motors Acceptance Corp.
275,000 7.63 03/09/98 281,064
200,000 7.13 05/10/00 204,238
375,000 9.63 12/15/01 422,483
Meditrust, Inc.
240,000 7.82 09/10/26 258,144
Security Pacific Corp.
995,000 11.50 11/15/00 1,268,429
Signet Banking Corp.
240,000 9.63 06/01/99 257,527
Washington Real Estate Corp.
120,000 7.13 08/13/03 120,307
- ---------------------------------------------------------------------
$ 9,247,225
- ---------------------------------------------------------------------
Industrial Bonds--13.7%
360 Communications Co.
$ 525,000 7.13% 03/01/03 $ 520,312
Auburn Hills Trust
210,000 12.00 05/01/20 316,730
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
=====================================================================
Corporate Bonds (continued)
Industrial Bonds (continued)
Cablevision Industries Corp.
$ 150,000 10.75% 01/30/02 $ 162,534
Continental Airlines, Inc.
349,679 7.75 07/02/14 364,513
569,776 8.56 07/02/14 620,880
Ford Holdings, Inc.
300,000 9.25 03/01/00 325,581
Mitchell Energy & Development Corp.
400,000 8.00 07/15/99 410,020
News America Holdings, Inc.
350,000 9.13 10/15/99 375,340
150,000 7.50 03/01/00 154,083
Northwest Airlines Corp.
167,795 8.26 03/10/06 179,500
575,000 8.97 01/02/15 605,573
RJR Nabisco Inc.
175,000 8.00 07/15/01 175,334
450,000 8.63 12/01/02 456,467
Tele-Communications, Inc.
50,000 6.46 03/06/00 49,465
300,000 8.25 01/15/03 296,652
1,135,000 6.27 09/15/03 1,132,764
Tenneco Inc.
1,175,000 10.00 08/01/98 1,249,178
Time Warner, Inc.
1,650,000 7.95 02/01/00 1,708,410
400,000 7.98 08/15/04 409,452
U.S. Air Inc.
560,072 6.76 04/15/08 547,711
- ---------------------------------------------------------------------
$10,060,499
- ---------------------------------------------------------------------
Utility Bonds--0.5%
Central Maine Power Co.
$ 330,000 7.45% 08/30/99 $ 329,248
- ---------------------------------------------------------------------
$ 329,248
- ---------------------------------------------------------------------
Total Corporate Bonds
(Cost $19,435,482) $19,636,972
- ---------------------------------------------------------------------
Asset-Backed Securities--12.2%
Airplanes Pass Through Trust Series 1, Class C
$ 155,000 8.15% 03/15/19 $ 159,816
- ---------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
27
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C> <C>
Asset-Backed Securities (continued)
Chevy Chase Auto Receivables Trust Series 1995-2, Class A
$ 232,121 5.80% 06/15/02 $ 231,466
Discover Card Master Trust, Series 1996-4, Class A
1,910,000 5.76 10/16/13 1,926,101
Discover Card Master Trust, Series 1996-4, Class B
1,100,000 5.93 10/16/13 1,100,000
General Motors Acceptance Corp. Series 1995, Class A
99,367 7.15 03/15/00 100,546
Navistar Financial Corp. Owner Trust, Series 1995-A, Class A2
291,994 6.55 11/20/01 293,725
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
314,669 6.85 06/15/01 318,757
Premier Auto Trust Series 1995-1, Class A4
360,000 7.85 09/04/98 362,023
Premier Auto Trust Series 1995-1, Class A5
80,000 7.90 05/04/99 81,150
Sears Credit Account Master Trust, Series 1996-1, Class A
680,000 6.20 02/16/06 675,750
Sears Credit Account Master Trust, Series 1995-2, Class A
550,000 8.10 06/15/04 577,500
Sears Credit Card Master Trust, Series 1995-3, Class A
300,000 7.00 10/15/04 306,561
Standard Credit Card Trust, Series 1990-3, Class A
1,120,000 9.50 07/10/98 1,140,294
Standard Credit Card Trust, Series 1990-6, Class B
900,000 9.63 09/10/98 924,183
Standard Credit Card Trust, Series 1994-4, Class A
680,000 8.25 11/07/03 726,111
- --------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $8,987,847) $8,923,983
- --------------------------------------------------------------------------------
Emerging Market Debt--3.9%
Bancoldex
$ 160,000 8.63% 06/02/00 $ 164,731
Corp. Andina de Fomento
200,000 7.25 04/30/98 202,294
40,000 8.38 07/29/01 40,698
Empresa Col Petroleos
900,000 7.25 07/08/98 904,563
Financiera Energy Nacional
530,000 6.63 12/13/96 534,400
160,000 9.38 06/15/06 165,234
- --------------------------------------------------------------------------------
Emerging Market Debt (continued)
Instituto de Fomento Industrial
$ 80,000 8.38% 07/29/01 $ 81,397
Korea Electric Power
266,952 7.40 04/01/16 269,197
YPF Sociedad Anonima
456,886 7.50 10/26/02 463,036
- --------------------------------------------------------------------------------
Total Emerging Market Debt
(Cost $2,799,425) $2,825,550
- --------------------------------------------------------------------------------
Government Bonds--0.9%
Province of Quebec
$ 520,000 13.25% 09/15/14 $ 630,058
- --------------------------------------------------------------------------------
Total Government Bonds
(Cost $653,628) $ 630,058
- --------------------------------------------------------------------------------
Mortgage Backed Obligations--31.1%
Federal Home Loan Mortgage Corp. (FHLMC((b)
$4,500,000 7.50% TBA-30 Yr(b) $4,515,435
1,208,677 6.00 TBA-30 Yr(b) 1,198,196
Federal National Mortgage Association (FNMA)
1,000,000 7.00 TBA-30 Yr(b) 980,930
1,000,000 8.00 11/15/16 1,020,000
126,229 8.50 06/01/06 131,790
125,861 8.50 09/01/06 131,406
720,814 8.50 03/01/10 752,213
500,000 6.25 07/25/18 492,810
989,360 7.00 02/01/26 970,493
1,000,001 8.50 07/01/26 1,034,681
FNMA Remic Trust, Series 1993-201G
1,000,000 3.50 05/25/19 871,560
GE Capital Mortgage Services, Inc. Series 1994-17, Class A10
2,000,000 7.00 05/25/24 1,842,500
Government National Mortgage Association (GNMA)
1,000,000 7.00 TBA-30 Yr(b) 980,620
1,000,000 7.50 TBA-30 Yr(b) 1,003,120
3,000,000 8.00 TBA-30 Yr(b) 3,067,500
1,000,000 8.50 TBA-30 Yr(b) 1,038,120
342,966 8.00 02/15/17 356,042
850,876 7.50 03/15/23 857,785
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
- ----------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
======================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations(continued)
Government National Mortgage Association (GNMA)--(continued)
$ 512,583 7.00% 08/15/23 $ 505,699
124,369 7.50 08/15/23 125,379
Prudential Home Mortgage Securities Corp., Series 1992-39 A8
1,000,000 7.74 12/25/07 892,270
- ----------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $22,482,170) $22,768,549
- ----------------------------------------------------------------------
Sovereign Credit--1.3%
United Mexican States
$ 650,000 7.69% 08/06/01 $ 658,769
State of Israel
300,000 6.38 12/15/05 286,611
- ----------------------------------------------------------------------
Total Sovereign Credit
(Cost $926,260) $ 945,380
- ----------------------------------------------------------------------
U.S. Government Agency Obligations--1.5%
Federal Home Loan Mortgage Corp. (FHLMC)
$ 300,000 8.20% 01/16/98 $ 301,734
250,000 6.83 09/18/02 249,023
Resolution Funding Corp. Principal-Only Stripped Securities/(c)/
1,790,000 7.08 10/15/20 335,392
1,140,000 7.08 01/15/21 210,136
- ----------------------------------------------------------------------
Total U.S. Government Agency Obligations
(Cost $1,058,170) $ 1,096,285
- ----------------------------------------------------------------------
U.S. Treasury Obligations--19.3%
United States Treasury Bonds
$ 3,900,000 8.75% 05/15/17 $ 4,772,625
30,000 8.88 08/15/17 37,153
150,000 8.75 08/15/20 185,180
120,000 7.88 02/15/21 135,900
United States Treasury Interest-Only Stripped Securities/(d)/
2,250,000 6.69 08/15/09 968,063
350,000 6.75 11/15/10 137,736
United States Treasury Notes
1,200,000 5.88 04/30/98 1,203,744
3,250,000 6.88 08/31/99 3,331,250
100,000 6.13 07/31/00 100,375
2,090,000 7.88 11/15/04 2,293,775
United States Treasury Principal-Only Stripped Securities/(c)/
40,000 5.54 11/15/97 37,792
590,000 6.41 11/15/04 354,885
2,920,000 6.95 05/15/20 581,460
- ----------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $13,792,338) $14,139,938
- ----------------------------------------------------------------------
Repurchase Agreements--19.0%
Joint Repurchase Agreement Account/(a)/
$ 13,900,000 5.58% 11/01/96 $13,900,000
- ----------------------------------------------------------------------
Total Repurchase Agreements
(Cost $13,900,000) $13,900,000
- ----------------------------------------------------------------------
Total Investments
(Cost $84,035,320/(e)/) $84,866,715
======================================================================
</TABLE>
Futures contracts open at October 31, 1996 are as follows:
<TABLE>
<CAPTION>
Number of
Contracts Settlement Unrealized
Type Long (f) Month Gain
- ------------------------- ------------ --------------- ------------
<S> <C> <C> <C>
Euro Dollars 5 December 1996 $5,125
Euro Dollars 5 March 1997 6,875
Euro Dollars 3 September 1997 825
Euro Dollars 5 June 1997 7,500
Euro Dollars 5 June 1998 3,625
5-Year U.S. Treasury
Notes 7 December 1996 8,641
10-Year U.S. Treasury
Notes 18 December 1996 65,625
=====================================================================
$98,216
-----------
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 993,383
Gross unrealized loss for investments in
which cost exceeds value (243,229)
=====================================================================
Net unrealized gain $ 750,154
- ---------------------------------------------------------------------
</TABLE>
/(a)/Portions of these securities are being segregated for open TBA purchases,
mortgage dollar rolls and futures.
/(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 securities represents effective
yields to maturity.
/(d)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(e)/The aggregate cost for federal income tax purposes is $84,116,561.
/(f)/Each Euro Dollar contract represents $1,000,000 in notional par value. Each
5-Year U.S. Treasury Note and, 10-Year U.S. Treasury Note contract
represents $100,000 in notional par value. The total notional amount and
market value are $25,500,000 and $8,144,325, respectively. The
determination of notional amounts and market value 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.
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
==============================================================
<S> <C> <C> <C> <C>
Assets:
Investments in securities, at value (cost $618,544,961, $100,440,420,
$36,328,338 and $84,035,320, respectively) $617,783,125 $1O1,067,616 $36,530,762 $84,866,715
Receivables:
Investment securities sold 9,023,710 -- 2,639,947 4,512,122
Interest 6,238,391 962,570 560,207 981,011
Fund shares sold 93,534 9,761 48,407
Variation margin -- -- -- 5,475
Cash 23,482 85,863 133,870 70,206
Deferred organization expenses, net -- -- 20,748 53,352
Other assets 186,057 127,499 66,001 66,089
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 633,348,299 102,253,309 39,999,942 90,554,970
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Dividends 1,479,757 109,402 20,960 23,483
Investment securities purchased 3,134,490 -- 4,336,434 17,313,687
Fund shares repurchased 732,405 55,958 20,916 6,846
Variation margin 20,125 256 -- --
Investment adviser fees 210,539 34,534 11,033 22,677
Transfer agent fees 46,181 -- 5,254 3,058
Authorized dealer service fees 1,675 -- -- --
Accrued expenses and other liabilities 54,249 35,598 48,693 40,800
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 5,679,421 235,748 4,443,290 17,410,551
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 680,810,713 115,128,671 39,403,964 72,421,889
Accumulated undistributed (distributions in excess of) net
investment income (3,441,783) 770,624 90,133 33,551
Accumulated net realized loss on investment and futures
transactions (49,082,170) (14,541,811) (4,139,869) (240,632)
Net unrealized gain (loss) on investments and futures (617,882) 660,077 202,424 929,611
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets $627,668,878 $102,017,561 $35,556,652 $73,144,419
===================================================================================================================================
Net asset value, offering and redemption price per share
Institutional shares $9.83 $9.83 $9.96 $9.85
Administration shares $9.83 $9.85 $9.96 $9.84
Service shares -- $9.82 $9.97 $9.86
Class A shares(a) $9.83 -- -- --
===================================================================================================================================
Shares Outstanding:
Institutional shares 62,407,407 10,168,881 3,494,408 7,312,322
Administration shares 385,738 25,537 4,845 71,240
Service shares -- 185,492 69,696 38,782
Class A shares 1,091,335 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest outstanding, $.001 par value
(unlimited number of shares authorized) 63,884,480 10,379,910 3,568,949 7,422,344
===================================================================================================================================
</TABLE>
(a) Maximum public offering price per share (NAV per share x 1.0152) for Class A
shares of GS Adjustable Rate Government Fund is $9.97
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Operations
October 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
==========================================================
<S> <C> <C> <C> <C>
Investment income:
Interest, net (a) $39,925,070 $7,068,555 $1,979,825 $4,292,039
- ------------------------------------------------------------------------------------------------------------------------------------
Total income 39,925,070 7,068,555 1,979,825 4,292,039
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 2,535,709 514,200 169,796 246,568
Distribution fees 30,905 -- -- --
Authorized dealer service fees 30,905 -- -- --
Administration share fees 9,833 107 129 751
Service share fees -- 1,222 2,322 422
Transfer agent fees 278,337 -- 16,980 24,657
Custodian fees 136,975 66,180 53,929 81,841
Professional fees 86,751 56,020 54,712 53,340
Registration fees 72,001 37,210 44,701 48,435
Amortization of deferred organization expenses 20,848 -- 22,735 24,562
Trustees' fees 1,899 1,287 760 915
Other 106,857 59,952 65,554 30,136
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 3,311,020 736,178 431,618 511,627
Less--Expenses reimbursable and fees waived by Goldman Sachs (417,768) (272,069) (238,097) (233,065)
- ------------------------------------------------------------------------------------------------------------------------------------
Net expenses 2,893,252 464,109 193,521 278,562
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 37,031,818 6,604,446 1,786,304 4,013,477
- ------------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment and
futures transactions:
Net realized gain (loss) from:
Investment transactions (310,326) (222,458) 367,144 (108,070)
Futures transactions (2,192,298) (345,361) (35,506) (145,350)
Net change in unrealized gain (loss) on:
Investments 6,892,986 661,003 (396,071) (192,910)
Futures 818,120 (41,385) -- 117,560
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment and futures
transactions 5,208,482 51,799 (64,433) (328,770)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $42,240,300 $ 6,656,245 $ 1,721,871 $3,684,707
====================================================================================================================================
(a) Net of $1,314 in foreign withholding tax for the Core Fixed Income Fund.
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
October 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
----------------------------------------------------------
<S> <C> <C> <C> <C>
From Operations:
Net investment income $ 37,031,818 $6,604,446 $1,786,304 $4,013,477
Net realized gain (loss) from investment and futures transactions (2,502,624) (567,819) 331,638 (253,420)
Net change in unrealized gain (loss) on investments and futures 7,711,106 619,618 (396,071) (75,350)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 42,240,300 6,656,245 1,721,871 3,684,707
- ------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (36,233,589) (6,561,519) (1,766,892) (4,019,797)
Administration shares (220,450) (2,548) (2,032) (19,144)
Service shares -- (14,792) (17,380) (5,349)
Class A shares (577,779) -- -- --
In excess of net investment income
Institutional shares (1,304,006) -- -- --
Administration shares (7,930) -- -- --
Class A shares (20,794) -- -- --
Net realized gain (loss) on investment, and future transactions
Institutional shares -- -- -- (450,016)
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (38,364,548) (6,578,859) (1,786,304) (4,494,306)
- ------------------------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 406,586,374 42,019,441 22,248,684 21,976,567
Reinvestment of dividends and distributions 18,181,648 4,153,816 1,401,492 4,315,748
Cost of shares repurchased (477,107,914) (47,993,112) (46,918,400) (7,840,575)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from shares transactions (52,339,892) (1,819,855) (23,268,224) 18,451,740
- ------------------------------------------------------------------------------------------------------------------------------
Total (decrease) increase (48,464,140) (1,742,469) (23,332,657) 17,642,141
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------
Beginning of year $676,133,018 $103,760,030 $58,889,309 $55,502,278
- ------------------------------------------------------------------------------------------------------------------------------
End of year $627,668,878 $102,017,561 $35,556,652 $73,144,419
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated (distributions in excess of) undistributed
net investment income $ (3,441,783) $ 770,624 $ 90,133 $ 33,551
- ------------------------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 41,534,978 4,293,467 2,233,482 2,244,430
Reinvestment of dividends and distributions 1,856,783 424,274 140,950 439,299
Shares repurchased (48,741,470) (4,905,357) (4,727,959) (811,075)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding (5,349,709) (187,616) (2,353,527) 1,872,654
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
32
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GS Adjustable GS Short-Term
Rate Government
Government Agency
Agency Fund Fund
==================================
<S> <C> <C>
From Operations:
Net investment income $ 42,586,453 $ 8,885,667
Net realized gain (loss) from investment and futures transactions (12,000,479) (4,030,174)
Net change in unrealized gain on investments and futures 16,138,367 5,735,691
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 46,724,341 10,591,184
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (42,629,917) (8,684,213)
Administration shares (278,448) (11,164)
Service shares -- --
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)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 456,762,969 49,034,023
Proceeds from reorganizations 37,593,780 --
Reinvestment of dividends and distributions 21,273,685 4,993,443
Cost of shares repurchased (790,211,526) (145,988,674)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from share
transactions (274,581,092) (91,961,208)
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (273,350,262) (90,065,401)
Net Assets:
Beginning of year 949,483,280 193,825,431
- ----------------------------------------------------------------------------------------------------------------
End of year $676,133,018 $103,760,030
================================================================================================================
Accumulated (distributions in excess of) undistributed net investment
income $ (2,129,902) $ 708,450
================================================================================================================
Summary of Share Transactions:
Shares sold 46,809,171 5,072,030
Shares exchanged in reorganizations 3,843,169 --
Reinvestment of dividends and distributions 2,181,117 516,178
Shares repurchased (81,125,615) (15,135,663)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding (28,292,158) (9,547,455)
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
GS Short GS Core
Duration Fixed
Tax-Free Income
Fund Fund
============================
<S> <C> <C>
From Operations:
Net investment income $ 2,814,454 $2,248,195
Net realized gain (loss) from investment and futures transactions (472,312) 921,130
Net change in unrealized gain on investments and futures 1,270,197 1,663,176
- ---------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 3,612,339 4,832,501
- ---------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (2,771,793) (2,253,625)
Administration shares (20,584) --
Service shares (22,077) --
Class A shares -- --
In excess of net investment income
Institutional shares -- --
Administration shares -- --
Class A shares -- --
- ---------------------------------------------------------------------------------------------------------
Total distributions to shareholders (2,814,454) (2,253,625)
- ---------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 36,468,900 30,256,879
Proceeds from reorganizations -- --
Reinvestment of dividends and distributions 1,873,154 2,232,160
Cost of shares repurchased (67,865,169) (4,073,379)
- ---------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from share
transactions (29,523,115) 28,415,660
- ---------------------------------------------------------------------------------------------------------
Total (decrease) increase (28,725,230) 30,994,536
Net Assets:
Beginning of year 87,614,539 24,507,742
- ---------------------------------------------------------------------------------------------------------
End of year $58,889,309 $55,502,278
=========================================================================================================
Accumulated (distributions in excess of) undistributed net investment
income $ 67,398 $ 40,202
=========================================================================================================
Summary of Share Transactions:
Shares sold 3,733,382 3,077,397
Shares exchanged in reorganizations -- --
Reinvestment of dividends and distributions 190,942 230,595
Shares repurchased (6,950,294) (411,156)
- ---------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding (3,025,970) 2,896,836
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial
statements.
33
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
October 31, 1996
- --------------------------------------------------------------------------------
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 Fund, GS Short Duration
Government 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 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. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts.
A. Investment Valuation
-------------------------
Investments in mortgage backed, asset backed and U.S. Treasury obligations
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. Other securities are valued based on yield equivalents, a
pricing matrix or other sources, under valuation procedures established by the
Trust's Board of Trustees. Portfolio securities for which accurate market
quotations are not readily available are valued based on yield equivalents,
pricing matrix or other sources, under valuation procedures established by the
Trust's Board of Trustees. 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 ("OID") 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. OID amortization on
mortgage backed REMIC securities is initially recorded based on estimates of
principal paydowns using the most recent OID factors available from the issuer.
Recorded amortization amounts are adjusted when actual OID factors are received.
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,
34
<PAGE>
coupon and maturity) but not identical securities on a specified future date.
The Fund loses the right to receive principal and interest paid on the
securities sold. However, the Fund benefits to the extent of any price received
for the securities sold and the lower forward price for the future purchase
(often referred to as the "drop") or fee income plus the interest earned on the
cash proceeds of the securities sold until the settlement date of the forward
purchase. The Fund will hold and maintain in a segregated account, until the
settlement date, cash or liquid, high-grade debt securities in an amount equal
to the forward purchase price. For financial reporting and tax 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 in order to hedge against
changes in interest rates, securities prices, currency exchange rates in the
case of GS Core Fixed Income Fund or to seek to increase total return. A Fund
will engage in futures transactions only for bona fide hedging purposes as
defined in regulations of the CFTC or to seek to increase total return to the
extent permitted by such regulations. 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.
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
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.
35
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
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.
At October 31, 1996, 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 Fund $47,923,000 2000-2003
GS Short Duration Government
Fund $13,272,000 2002-2003
GS Short Duration Tax-Free
Fund $4,271,000 2002-2003
GS Core Fixed Income
Fund $77,000 2004
</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 and GS Short Duration Government 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,
GS Short Duration Tax-Free and GS Core Fixed Income Funds and .50% of average
daily net assets of GS Short Duration Government Fund. Until further notice,
GSFM has voluntarily agreed not to impose .10% of its investment advisory fee
for the GS Short Duration Government Fund. For the year ended October 31, 1996,
investment advisory fees of approximately $103,000 were waived for the GS Short
Duration Government Fund.
The adviser has voluntarily agreed to limit certain of the Funds' expenses
(excluding investment advisory fees, taxes, interest, brokerage, litigation,
administrative and service share fees, indemnification and other extraordinary
expenses and with respect to GS Adjustable Rate Government 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, 1996, the amount of reimbursed expenses for the GS
Adjustable Rate Government, GS Short Duration Government, GS Short Duration
Tax-Free and GS Core Fixed Income Funds were approximately $387,000, $169,000,
$238,000 and $233,000, respectively. The amounts reimbursable to the GS
Adjustable Rate Government, GS Short Duration Government, GS Short Duration
Tax-Free and the GS Core Fixed Income Funds at October 31, 1996 were
approximately $29,000, $12,000, $31,000 and $19,000, 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 Fund Class A shares. At October 31,
1996, Goldman Sachs retained approximately $79,000 of sales load related to
Class A shares. Goldman Sachs also serves as Transfer Agent of the Funds for a
fee.
- --------------------------------------------------------------------------------
36
<PAGE>
- --------------------------------------------------------------------------------
The Trust, on behalf of the GS Adjustable Rate Government 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
approximately $31,000.
The Trust, on behalf of the GS Adjustable Rate Government 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 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 year ended October 31, 1996, GS Adjustable Rate Government Fund,
GS Short Duration Government Fund, GS Short Duration Tax-Free Fund and GS Core
Fixed Income Fund incurred commission expenses of approximately $108,000,
$24,000, $1,000 and $4,000, respectively, in connection with futures contracts
entered into with Goldman Sachs. At October 31, 1996, GS Adjustable Rate
Government Fund had approximately $20,000, payable to Goldman Sachs related to
variation margin on futures contracts. Approximately $5,000 relating to
variation margin was due to the GS Core Fixed Income Fund from 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 the year ended
October 31, 1996, 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, 1996, were as follows:
================================================================================
GS GS GS
Adjustable Short Short GS
Rate Duration Duration Core Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
- --------------------------------------------------------------------------------
Purchases of U.S.
Government and
agency obligations $319,204,368 $117,205,724 -- $227,149,602
- --------------------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) -- -- $101,504,852 41,015,852
- --------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 370,448,093 113,784,637 -- 251,512,185
- --------------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and
agency obligations) -- -- 128,041,004 19,684,141
- --------------------------------------------------------------------------------
6. Summary of Share Transactions
Share activity for the year ended October 31, 1996 is as follows:
Fund Dollars Shares
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
Institutional Shares:
Shares sold $391,363,204 39,981,299
Reinvestment of dividends and
distributions 17,432,484 1,780,288
Shares repurchased (456,776,795) (46,666,343)
----------------------------------------
(47,981,107) (4,904,756)
----------------------------------------
Administration Shares:
Shares sold 1,457,872 148,981
Reinvestment of dividends and
distributions 94,420 9,641
Shares repurchased (1,356,764) (138,609)
----------------------------------------
195,528 20,013
----------------------------------------
37
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund: Dollars Shares
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares:
Shares sold $ 13,765,298 1,404,698
Reinvestment of dividends and distributions 654,744 66,854
Shares repurchased (18,974,355) (1,936,518)
-------------------------------------
(4,554,313) (464,966)
-------------------------------------
Total $ (52,339,892) (5,349,709)
=====================================
GS Short Duration Government Fund
Institutional Shares:
Shares sold $ 39,855,638 4,072,082
Reinvestment of dividends and distributions 4,137,041 422,559
Shares repurchased (47,875,174) (4,893,286)
-------------------------------------
(3,882,495) (398,645)
-------------------------------------
Administration Shares:
Shares sold 326,101 33,251
Reinvestment of dividends and distributions 2,032 207
Shares repurchased (77,312) (7,921)
-------------------------------------
250,821 25,537
-------------------------------------
Service Shares:
Shares sold 1,837,702 188,134
Reinvestment of dividends and distributions 14,743 1,508
Shares repurchased (40,626) (4,150)
-------------------------------------
1,811,819 185,492
-------------------------------------
Total $ (1,819,855) (187,616)
=====================================
GS Short Duration Tax-Free Fund
Institutional Shares:
Shares sold $ 20,777,050 2,085,253
Reinvestment of dividends and distributions 1,383,351 139,126
Shares repurchased (45,664,878) (4,601,865)
-------------------------------------
(23,504,477) (2,377,486)
-------------------------------------
Administration Shares:
Shares sold 105,302 10,672
Reinvestment of dividends and distributions 2,017 203
Shares repurchased (105,478) (10,644)
-------------------------------------
1,841 231
-------------------------------------
Service Shares:
Shares sold $ 1,366,332 137,557
Reinvestment of dividends and distributions 16,124 1,621
Shares repurchased (1,148,044) (115,450)
-------------------------------------
234,412 23,728
-------------------------------------
Total $ (23,268,224) (2,353,527)
=====================================
GS Core Fixed Income Fund
Institutional Shares:
Shares sold $ 20,524,422 2,094,833
Reinvestment of dividends and distributions 4,292,533 436,903
Shares repurchased (7,431,360) (769,104)
-------------------------------------
17,385,595 1,762,632
-------------------------------------
Administration Shares:
Shares sold 1,029,912 106,074
Reinvestment of dividends and distributions 17,883 1,847
Shares repurchased (358,284) (36,681)
-------------------------------------
689,511 71,240
-------------------------------------
Service Shares:
Shares sold 422,233 43,525
Reinvestment of dividends and distributions 5,332 549
Shares repurchased (50,931) (5,292)
-------------------------------------
376,634 38,782
-------------------------------------
Total $ 18,451,740 1,872,654
=====================================
</TABLE>
- --------------------------------------------------------------------------------
Share activity for the year ended October 31, 1995 is as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund Dollars Shares
- --------------------------------------------------------------------------------------------
<S> <C> <C>
GS Adjustable Rate Government 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)
-------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund Dollars Shares
============================================================================================
<S> <C> <C>
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
-------------------------------------
Total $(274,581,092) (28,292,158)
=====================================
GS Short Duration Government 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)
-------------------------------------
Total $ (91,961,208) (9,547,455)
=====================================
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
-------------------------------------
Total $(29,523,115) (3,025,970)
=====================================
</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 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, 1996, the GS Adjustable Rate Government, GS Short Duration
Government and GS Core Fixed Income Funds had an .49%, .04% and .52%,
respectively, undivided interest in the repurchase agreements in the following
joint account which equaled $13,000,000, $1,000,000 and $13,900,000,
respectively, in principal amount.
- --------------------------------------------------------------------------------
39
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
As of October 31, 1996, 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:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
Bear Stearns & Co., dated 10/31/96, repurchase price $700,108,500 (FNMA:
$555,290,445, 5.5%--8.50%, 2.1.09-6/1/26; FHLMC: $165,859,789, 5.50%--8.50%,
9/1/98--8/1/26)
$700,000,000 5.58% 11/01/96 $700,000,000
Lehman Brothers, Inc. dated 10/31/96, repurchase price $924,843,329 (U.S. Treasury
Notes: $942,903,967, 4.38%--8.50%, 11/15/96--8/15/03)
924,700,000 5.58 11/01/96 924,700,000
Nomura Securities International, Inc. dated 10/31/96, repurchase price
$700,108,500 (FNMA: $256,600,142, 5.50%--8.00%, 2/1/02-10/1/26; FHLMC:
$464,523,981, 6.00%--9.00%, 9/1/1-10/1/26)
700,000,000 5.58 11/01/96 700,000,000
Smith Barney, Inc. dated 10/31/96, repurchase price $170,026,161 (U.S. Treasury
Interest Only Stripped Securities: $11,653,277, 2/15/98--5/15/02; U.S. Treasury
Notes: $85,997,728, 5.25%--7.75%, 5/15/97-10/15/06; U.S. Treasury Principal
Only Stripped Securities: $33,993,571, 5/15/97--5/15/05; U.S. Treasury Bills:
$41,756,285, 12/12/96--3/20/97)
170,000,000 5.54 11/01/96 170,000,000
Union Bank of Switzerland, Inc. dated 10/31/96, repurchase price
$175,026,979
(Treasury Notes: $178,528,739, 6.88%--7.75%, 8/31/99-1/31/00)
175,000,000 5.55 11/01/96 175,000,000
- --------------------------------------------------------------------------------
Total Joint Repurchase Agreement $2,669,700,000
================================================================================
</TABLE>
9. Administration and Service Plans
The Funds have adopted Administration and Service Plans. These plans allow
for Administration shares and Service shares, respectively, to compensate
service organizations for providing varying levels of account administration and
shareholder liaison services to their customers who are beneficial owners of
such shares. The Administration and Service Plans provide for compensation to
the service organizations in an amount up to .25% and .50% (on an annualized
basis), respectively, of the average daily net asset value of the respective
shares.
10. Other Matters
On April 28, 1995, the GS Adjustable Rate Government 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 Fund and
(ii) the assumption by GS Adjustable Rate Government 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 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
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:
================================================================================
GS Government
Agency
Portfolio
(For Financial GS Adjustable GS Adjustable
Institutions Rate Government Rate Government
(Pre- Fund (Pre- Fund (Post-
Reorganization) Reorganization) Reorganization)
--------------- --------------- ---------------
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
================================================================================
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
- --------------------------------------------------------------------------------
40
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Adjustable Rate Government Fund. GS Adjustable Rate Mortgage Fund's assets were
acquired by GS Adjustable Rate Government Fund in exchange solely for (i) the
issuance of Class A shares of beneficial interest of GS Adjustable Rate
Government Fund and (ii) the assumption by GS Adjustable Rate Government Fund of
the liabilities of GS Adjustable Rate Mortgage Fund. Following this transfer, GS
Adjustable Rate Mortgage Fund was liquidated and GS Adjustable Rate Government
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 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
Rate Mortgage GS Adjustable GS Adjustable
Fund Rate Government Rate Government
(Pre- Fund (Pre- Fund (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
Institutions 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 Fund due to these reorganization was
approximately $3,154,000.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
As of October 31, 1996, the Goldman, Sachs & Co. Employees Profit Sharing
and Retirement Income Plan was beneficial owner of approximately 29% of the
outstanding shares of the GS Short Duration Government Fund.
11. Certain Reclassifications
In accordance with Statement of Position 93-2, the GS Adjustable Rate
Government Fund, GS Short Duration Tax-Free Fund, and GS Core Fixed Income Fund
have reclassified $20,849, $36,587, $22,735, and $24,162, 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 Fund's capital accounts on a tax basis.
- --------------------------------------------------------------------------------
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 ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ $9.77 $0.5759(a) $0.0772(a) -- $0.6531 $ (0.5725) -- $ (0.0206)
1996-Administration
Shares............ 9.77 0.5489(a) 0.0797(a) -- 0.6286 (0.5489) -- (0.0198)
1996-Class A
Shares............ 9.77 0.5481(a) 0.0806(a) -- 0.6287 (0.5489) -- (0.0198)
1995-Institutional
Shares............ 9.74 0.5630(a) 0.0717(a) -- 0.6347 (0.5759) -- (0.0287)
1995-Administration
Shares............ 9.74 0.5366(a) 0.0737(a) -- 0.6103 (0.5528) -- (0.0275)
1995-Class A
Shares(c)......... 9.79 0.2721(a) (0.0090)(a) -- 0.2631 (0.2697) -- (0.0134)
1994-Institutional
Shares............ 10.00 0.4341(a) (0.2455)(a) -- 0.1886 (0.4486) -- --
1994-Administration
Shares............ 10.00 0.4211(a) (0.2572)(a) -- 0.1639 (0.4239) -- --
1993-Institutional
Shares............ 10.04 0.4397 (0.0376)(d) -- 0.4021 (0.4397) -- (0.0024)
1993-Administration
Shares(e)......... 10.02 0.2146 (0.0173)(d) -- 0.1973 (0.2146) -- (0.0027)
1992-Institutional
Shares............ 10.03 0.5599 (0.0029)(d) -- 0.5570 (0.5470) -- --
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ 10.00 0.1531 0.0322(d) -- 0.1853 (0.1553) -- --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
=========================================
In excess of
net realized Net
gain on increase Ratio of
investment, From Total (decrease) Net asset net
option and paid distributions in net value at expenses
futures in to asset end of Total to average
transactions capital shareholders value period return(k) net assets
==============================================================================================================
GS ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ -- -- $(0.5931) $0.0600 $9.83 6.86% 0.45%
1996-Administration
Shares............ -- -- (0.5687) 0.0600 9.83 6.60 0.70
1996-Class A
Shares............ -- -- (0.5687) 0.0600 9.83 6.60 0.70
1995-Institutional
Shares............ -- -- (0.6046) 0.0301 9.77 6.75 0.46
1995-Administration
Shares............ -- -- (0.5803) 0.0300 9.77 6.48 0.71
1995-Class A
Shares(c)......... -- -- (0.2831) (0.0200) 9.77 2.74(f) 0.69(b)
1994-Institutional
Shares............ -- -- (0.4486) (0.2600) 9.74 1.88 0.46
1994-Administration
Shares............ -- -- (0.4239) (0.2600) 9.74 1.63 0.71
1993-Institutional
Shares............ -- -- (0.4421) (0.0400) 10.00 4.13 0.45
1993-Administration
Shares(e)......... -- -- (0.2173) (0.0200) 10.00 2.01(f) 0.70(b)
1992-Institutional
Shares............ -- -- (0.5470) 0.0100 10.04 6.12 0.42
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ -- -- (0.1553) 0.0300 10.03 2.14(f) 0.20(b)
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
=============================
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate(d) (in 000s) net assets net assets
========================================================================
GS ADJUSTABLE RATE GOVERNMENT FUND
------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ 5.85% 52.36% $613,149 0.51% 5.79%
1996-Administration
Shares............ 5.59 52.36 3,792 0.76 5.53
1996-Class A
Shares............ 5.59 52.36 10,728 1.01 5.28
1995-Institutional
Shares............ 5.77 24.12 657,358 0.53 5.70
1995-Administration
Shares............ 5.50 24.12 3,572 0.78 5.43
1995-Class A
Shares(c)......... 5.87(b) 24.12 15,203 1.01(b) 5.55(b)
1994-Institutional
Shares............ 4.38 37.81 942,523 0.49 4.35
1994-Administration
Shares............ 4.27 37.81 6,960 0.74 4.24
1993-Institutional
Shares............ 4.36 103.74 2,760,871 0.48 4.33
1993-Administration
Shares(e)......... 3.81(b) 103.74 5,326 0.73(b) 3.78(b)
1992-Institutional
Shares............ 5.61 286.40 2,145,064 0.55 5.48
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ 7.31(b) 145.67(b) 239,642 1.02(b) 6.49(b)
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
42
<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,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-------------------------------------------------------------------------------------------------------------------
GS SHORT DURATION GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31,
- -------------------------------------------------------
1996-Institutional
Shares ........... $9.82 $0.6290/(a)/ $0.0136/(a)/ -- $0.6426 $(0.6326) --
1996-Administration
Shares/(h)/ ...... 9.86 0.3837/(a)/ 0.0003/(a)/ -- 0.3840 (0.3940) --
1996-Service
Shares/(i)/ ...... 9.72 0.3134/(a)/ 0.1018/(a)/ -- 0.4152 (0.3152) --
1995-Institutional
Shares ........... 9.64 0.6652/(a)/ 0.1666/(a)/ -- 0.8318 (0.6518) --
1995-Administration
Shares ........... 9.64 0.2384/(a)/ (0.0433)/(a)/ -- 0.1951 (0.2051) --
1994-Institutional
Shares ........... 10.14 0.5628/(a)/ (0.4592)/(a)/ -- 0.1036 (0.5598) (0.0438)
1994-Administration
Shares ........... 10.14 0.5329/(a)/ (0.4539)/(a)/ -- 0.0790 (0.5352) (0.0438)
1993-Institutional
Shares ........... 10.16 0.5627 (0.0135)/(d)/ -- 0.5492 (0.5627) --
1993-Administration
Shares/(e)/ ...... 10.23 0.2725 (0.0900)/(d)/ -- 0.1825 (0.2725) --
1992-Institutional
Shares ........... 10.22 0.6703 (0.0600)/(d) -- 0.6103 (0.6703) --
1991-Institutional
Shares ........... 10.00 0.8020 0.2200/(d)/ -- 1.0220 (0.8020) --
1990-Institutional
Shares ........... 10.07 0.8300 (0.0700)/(d) -- 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/(d)/ -- 0.2800 (0.1800) --
<CAPTION>
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of
income transactions capital shareholders value period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31,
1996-Institutional
Shares ............ -- -- -- $(0.6326) $0.0100 $9.83
1996-Administration
Shares/(h)/ ....... -- -- -- (0.3940) (0.0100) 9.85
1996-Service
Shares/(i)/ ....... -- -- -- (0.3152) 0.1000 9.82
1995-Institutional
Shares ............ -- -- -- (0.6518) 0.1800 9.82
1995-Administration
Shares ............ -- -- -- (0.2051) (0.0100) 9.63/(h)/
1994-Institutional
Shares ............ -- -- -- (0.6036) (0.5000) 9.64
1994-Administration
Shares ............ -- -- -- (0.5790) (0.5000) 9.64
1993-Institutional
Shares ............ (0.0065) -- -- (0.5692) (0.0200) 10.14
1993-Administration
Shares/(e)/ ....... -- -- -- (0.2725) (0.9000) 10.14
1992-Institutional
Shares ............ -- -- -- (0.6703) (0.0600) 10.16
1991-Institutional
Shares ............ -- -- -- (0.8020) 0.2200 10.22
1990-Institutional
Shares ............ -- -- -- (0.8300) (0.0700) 10.00
1989-Institutional
Shares ............ -- -- (0.0300) (0.9100) (0.0300) 10.07
For the Period August 15, 1988/(g)/ through October 31,
- -------------------------------------------------------
1988-Institutional
Shares ............ -- -- -- (0.1800) 0.1000 10.10
<CAPTION>
Ratios assuming
not voluntary waiver
of fees or
expense limitations
--------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
Total to average to average turnover period to average to average
return/(k)/ net assets net assets rate/(d)/ (in 000s) net assets net assets
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
1996-Institutional
Shares ............ 6.75% 0.45% 6.44% 115.45% $99,944 0.71% 6.18%
1996-Administration
Shares/(h)/ ....... 4.00/(f)/ 0.70%/(b)/ 5.97/(b)/ 115.45 252 0.96/(b)/ 5.71/(b)/
1996-Service
Shares/(i)/ ....... 4.35/(f)/ 0.95/(b)/ 6.05/(b) 115.45 1,822 1.21/(b)/ 5.79/(b)/
1995-Institutional
Shares ............ 8.97 0.45 6.87 292.56 103,760 0.72 6.60
1995-Administration
Shares ............ 2.10 0.70/(b)/ 7.91/(b)/ 292.56 -- 0.90/(b)/ 7.71/(b)/
1994-Institutional
Shares ............ 0.99 0.45 5.69 289.79 193,095 0.59 5.55
1994-Administration
Shares ............ 0.73 0.70 5.38 289.79 730 0.84 5.24
1993-Institutional
Shares ............ 5.55 0.45 5.46 411.66 359,708 0.64 5.31
1993-Administration
Shares/(e)/ ....... 1.74 0.70/(b)/ 4.84/(b)/ 411.66 16,490 0.80/(b)/ 4.74/(b)/
1992-Institutional
Shares ............ 6.24 0.45 6.60 216.07 277,927 0.69 6.36
1991-Institutional
Shares ............ 10.93 0.45 8.25 155.44 158,948 0.79 7.91
1990-Institutional
Shares ............ 8.23 0.45 8.62 173.21 68,995 0.95 8.12
1989-Institutional
Shares ............ 9.03 0.46 8.71 137.37 31,015 1.39 7.78
For the Period August 15, 1988/(g)/ through October 31,
- -------------------------------------------------------
1988-Institutional
Shares ............ 3.30/(f)/ 0.55/(b)/ 8.55/(b)/ 167.00/(b)/ 39,052 1.42/(b)/ 7.68/(b)/
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<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,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
===============================================================================================
GS SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... $9.94 $0.4192/(a)/ $0.0200/(a)/ -- $0.4392 $(0.4192) --
1996-Administration Shares.......... 9.94 0.3944/(a)/ 0.0200/(a)/ -- 0.4144 (0.3944) --
1996-Service Shares................. 9.95 0.3697/(a)/ 0.0200/(a)/ -- 0.3897 (0.3697) --
1995-Institutional Shares........... 9.79 0.4235/(a)/ 0.1500/(a)/ -- 0.5735 (0.4235) --
1995-Administration Shares.......... 9.79 0.3989/(a)/ 0.1500/(a)/ -- 0.5489 (0.3989) --
1995-Service Shares................. 9.79 0.3744/(a)/ 0.1600/(a)/ -- 0.5344 (0.3744) --
1994-Institutional Shares........... 10.23 0.3787/(a)/ (0.3575)/(a)/ -- 0.0212 (0.3787) (0.0825)
1994-Administration Shares.......... 10.23 0.3537/(a)/ (0.3575)/(a)/ -- (0.0038) (0.3537) (0.0825)
1994-Service Shares/(j)/............ 9.86 0.0475/(a)/ (0.0700)/(a)/ -- (0.0225) (0.0475) --
1993-Institutional Shares........... 9.93 0.3834 0.3000/(d)/ -- 0.6834 (0.3834) --
1993-Administration Shares/(j)/..... 10.16 0.1555 0.0720/(d)/ -- 0.2275 (0.1555) --
For the Period October 1, 1992/(g)/ through October 31,
- ----------------------------------------------------
1992-Institutional Shares........... 10.00 0.0341 (0.0700)/(d)/ -- (0.0359) (0.0341) --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
==================================
In excess of
net realized Net
gain on increase Ratio of
In excess investment, From Total (decrease) Net asset net
of net option and paid distributions in net value at expenses
investment futures in to asset end of Total to average
income transactions capital shareholders value period return/(k)/ net assets
==================================================================================================
GS SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
====================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... -- -- -- $(0.4192) $0.0300 $9.96 4.50% 0.45%
1996-Administration Shares.......... -- -- -- (0.3944) 0.0300 9.96 4.24 0.70
1996-Service Shares................. -- -- -- (0.3697) 0.0200 9.97 3.98 0.95
1995-Institutional Shares........... -- -- -- (0.4235) 0.1500 9.94 5.98 0.45
1995-Administration Shares.......... -- -- -- (0.3989) 0.1500 9.94 5.76 0.70
1995-Service Shares................. -- -- -- (0.3744) 0.1600 9.95 5.59 0.95
1994-Institutional Shares........... -- -- -- (0.4612) (0.4400) 9.79 0.17 0.45
1994-Administration Shares.......... -- -- -- (0.4362) (0.4400) 9.79 (0.11) 0.70
1994-Service Shares/(j)/............ -- -- -- (0.0475) (0.0700) 9.79 (0.32)/(f)/ 0.95/(b)/
1993-Institutional Shares........... -- -- -- (0.3834) 0.3000 10.23 7.03 0.41
1993-Administration Shares/(j)/..... -- -- -- (0.1555) 0.0720 10.23 2.28/(f)/ 0.70/(b)/
For the Period October 1, 1992/(g)/ through October 31,
- -----------------------------------------------------
1992-Institutional Shares........... -- -- -- (0.0341) (0.0700) 9.93 (0.34)/(f)/ 0.05/(b)/
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
==================================
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate/(d)/ (in 000s) net assets net assets
==========================================================
GS SHORT DURATION TAX-FREE FUND
- --------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ---------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996-Institutional Shares........... 4.21% 231.65% $34,814 1.01% 3.65%
1996-Administration Shares.......... 3.96 231.65 48 1.26 3.40
1996-Service Shares................. 3.74 231.65 695 1.51 3.18
1995-Institutional Shares........... 4.31 259.52 58,389 0.77 3.99
1995-Administration Shares.......... 4.14 259.52 46 1.02 3.82
1995-Service Shares................. 3.87 259.52 454 1.27 3.55
1994-Institutional Shares........... 3.74 354.00 83,704 0.61 3.58
1994-Administration Shares.......... 3.51 354.00 3,866 0.86 3.35
1994-Service Shares/(j)/............ 4.30/(b)/ 354.00 440 1.11/(b)/ 4.14/(b)/
1993-Institutional Shares........... 3.70 404.60 115,803 1.06 3.05
1993-Administration Shares/(j)/..... 3.32/(b)/ 404.60 911 1.07/(b)/ 2.95/(b)/
For the Period October 1, 1992/(g)/ through October 31,
- -----------------------------------------------------
1992-Institutional Shares........... 4.58/(b)/ 31.19/(f)/ 14,601 2.68/(b)/ 1.95/(b)/
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
44
<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 From net
and unrealized unrealized Total realized gain
gain (loss) gain (loss) income on
Net asset on investment, on foreign (loss) investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-----------------------------------------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... $10.00 $0.6448 $(0.0704) -- $0.5744 $(0.6438) $(0.0806)
1996-Administrative Shares(l)....... 9.91 0.4083 (0.0703) -- 0.3380 (0.4080) --
1996-Service Shares(l).............. 9.77 0.3756 0.0898 -- 0.4654 (0.3754) --
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) --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
---------------------------------------------------
In excess of
net realized Net
gain on increase Ratio of
In excess investment, From Total (decrease) Net asset net
of net option and paid distributions in net value at expenses
investment futures in to asset end of Total to average
income transactions capital shareholders value period return(k) net assets
--------------------------------------------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... -- -- -- $(0.7244) $(0.1500) $9.85 5.98% 0.45%
1996-Administrative Shares(l)....... -- -- -- (0.4080) (0.0700) 9.84 3.56(f) 0.70(b)
1996-Service Shares(l).............. -- -- -- (0.3754) 0.0900 9.86 4.90(f) 0.95(b)
1995-Institutional Shares........... -- -- -- (0.6433) 0.7600 10.00 15.72 0.45
For the Period January 5, 1994(g)through October 31,
- ----------------------------------------------------
1994-Institutional Shares........... -- -- -- (0.4648) (0.7617) 9.24 (3.00) 0.45(b)
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
-------------------------
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate(d) (in 000s) net assets net assets
------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ---------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996-Institutional Shares........... 6.51% 414.20% $72,061 0.83% 6.13%
1996-Administrative Shares(l)....... 6.41(b) 414.20 702 1.08(b) 6.03(b)
1996-Service Shares(l).............. 6.37(b) 414.20 381 1.33(b) 5.99(b)
1995-Institutional Shares........... 6.56 383.26 55,502 0.96 6.05
For the Period January 5, 1994(g)through October 31,
- ----------------------------------------------------
1994-Institutional Shares........... 6.48(b) 288.25 24,508 1.46(b) 5.47(b)
</TABLE>
- ------------------
(a)Calculated based on the average shares outstanding methodology.
(b)Annualized.
(c)Class A share activity commenced on May 15, 1995.
(d)Includes the effect of mortgage dollar roll transactions.
(e)Administration share activity commenced on April 15, 1993.
(f)Not annualized.
(g)Commencement of operations.
(h)GS Short Duration Government Fund Administration shares were redeemed in
full on February 23, 1995 and re-commenced on February 28, 1996 at $9.86.
(i)Service share activity commenced on April 10, 1996.
(j)Administration and service share activity commenced on May 20, 1993 and
September 20, 1994 respectively.
(k)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 not sales
charges. For Class A shares only, total return would be reduced if a sales
charge were taken into account.
(l)Administration and Service share activity commenced on February 28, 1996 and
March 13, 1996 respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
45
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the GS Adjustable Rate Government
Fund, GS Short Duration Government 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 Fund, GS Short Duration Government 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, 1996, 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, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of the GS Adjustable Rate Government Fund, GS Short Duration Government
Fund, GS Short Duration Tax-Free Fund and GS Core Fixed Income Fund as of
October 31, 1996, 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 12, 1996
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
-------------------------------------------------------------------
Annual Report
October 31, 1996
GS Adjustable Rate Government Fund
GS Short Duration Government Fund
GS Short Duration Tax-Free Fund
GS Core Fixed Income Fund
Goldman
Sachs
GST/AR/1096(INST)
- --------------------------------------------------------------------------------
================================================================================
<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 each Fund's objectives and policies, management, expenses and
other information.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We welcome the opportunity to review the performance and the investment
activity of the Goldman Sachs Fixed Income Funds for the 12-month period ended
October 31, 1996. To help put the portfolios' performance in perspective, we
will also provide a brief overview of the U.S. economy and the bond market
during the period.
We are pleased to report that the Goldman Sachs Fixed Income Funds fared
well relative to their peers during the period.
The Bond Market Sold Off Amid Rising Rates, Then Stabilized
The U.S. fixed income market began the 12-month period under review with a
robust rally, fueled by weak economic data and low inflation. However, in
February 1996, the bond market began to come under pressure when stronger than
expected economic and job growth as well as surging commodity prices aroused
fears of higher inflation on the horizon. Bond market conditions significantly
worsened during March and April, when a sharp rise in interest rates triggered a
sell-off and increased volatility. By early May, long-term bond yields had
climbed above the psychologically important 7.0% level for the first time in
nearly a year. At the end of May, interest rates began to stabilize and Treasury
prices remained in a narrow trading range throughout the summer and fall. During
September and October, however, interest rates retreated and the bond market
strengthened. The rebound was primarily due to evidence of a slowing U.S.
economy and strong demand for Treasury bonds from the central banks of China,
Japan and Germany, which accelerated their purchases dramatically toward the end
of the period. By the end of October, prices of 30-year Treasuries broke out of
the trading range that had persisted for over six months.
After a Weak Start, Economic Growth Rebounded, Then Moderated
In late 1995, the economy was anemic, with weak consumer and capital
spending contributing to a fourth-quarter real Gross Domestic Product (GDP)
growth of only 0.3% (annualized). During the first quarter of 1996, harsh winter
weather and the General Motors strike continued to restrain economic growth.
Despite these adverse conditions, the economy advanced faster than expected,
with first-quarter real GDP growth reported at 2.0% (annualized). Momentum
accelerated more dramatically during the second quarter, as industrial activity,
automobile sales and home sales all showed significant improvement. As a result,
second-quarter GDP rose a robust 4.7% (annualized), its highest rate in two
years.
The economy's torrid growth cooled markedly during the third quarter, with
annualized real GDP at a revised 2.0%, largely due to lackluster consumer
spending and a widening U.S. trade deficit. In October some evidence of a
slowdown continued, with housing starts falling to their lowest level in a year
and U.S. capacity utilization also down. However, consumer confidence remained
high against a backdrop of low unemployment and higher household income. These
indicators led some economists to interpret October's retail sales numbers (up a
scant 0.2%) as a "breather" they expected to be followed by stronger holiday
shopping, while others were concerned about a more prolonged period of
restrained spending. Despite investors' earlier fears of increased inflationary
<TABLE>
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Table of Contents
Market Overview 1 Financial Statements 24
Goldman Sachs Government Income Fund 4 Notes to Financial Statements 28
Goldman Sachs Global Income Fund 11 Financial Highlights 36
Goldman Sachs Municipal Income Fund 17
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
pressures and the fact that in October the producer and consumer price indexes
were up 0.4% and 0.3%, respectively, inflation remained subdued throughout the
period.
The Fed Remained Neutral After Easing in December and January
In response to generally poor year-end 1995 economic conditions, the U.S.
Federal Reserve cut the Federal funds rate by 25 basis points in December 1995
and an additional 25 basis points in January 1996. The Fed then remained neutral
from February through the end of the period, leaving the Federal funds rate at
5.25% as of October 31, 1996.
During the period under review, the yield curve shifted upward everywhere
but at the shortest end, where it steepened. The yield on six-month Treasury
bills fell from 5.55% on October 31, 1995 to approximately 5.26% on October 31,
1996. For the same time period, the yield on the 30-year U.S. Treasury bond rose
from 6.33% a year ago to 6.64%. For the 12-month period ended October 31, 1996,
the total returns of one-year and 30-year Treasuries were 5.84% and 0.72%,
respectively.
Historical Treasury Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Retail Treasury Bar Chart
<S> <C> <C>
10/31/95 10/31/96
3-Month 5.49% 5.13
6-Month 5.55 5.26
1 5.54 5.4
2 5.61 5.73
3 5.68 5.86
5 5.81 6.07
10 6.02 6.34
30 6.33 6.64
</TABLE>
Source: Bloomberg, L.P.
The yield curve steepened on the short end and shifted upward on the longer
end.
The Dollar's Climb Versus the Mark and the Yen
Continued
During the period under review, the U.S. dollar appreciated against both the
Deutsche mark and Japanese yen, rising more against the yen. The dollar
strengthened relative to the mark as the Bundesbank progressively edged rates
lower during the period to stimulate the sluggish German economy, reaching a 15-
month high against the mark in May. By October, the dollar had retreated
slightly as further Bundesbank cuts became less likely. In contrast, the
dollar's climb against the yen continued through the end of October, when it
reached a three-and-a-half-year high. The yen's weakness was primarily due to
the softness in Japan's economic recovery. However, in November the yen rose
against the dollar as Japanese officials made it clear that they believed the
yen had weakened enough.
Outlook: Moderate Economic Growth for the Near Term
The recent economic weakness and the tame third-quarter labor cost report
increase the likelihood that the Fed will defer any changes in monetary policy
until 1997. Although a more extended slowdown is possible, as of this writing,
Goldman Sachs' economists believe a resumption of growth is likely if consumer
spending rebounds by year-end and the trade deficit does not significantly
widen. On the fiscal front, the bond market environment should benefit from the
recent election results with President Clinton balanced by a Republican-
controlled Congress, which points toward continued budgetary restraint.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
We appreciate your confidence in the Goldman Sachs Fixed Income Funds and we
look forward to continuing to serve your investment needs in the future.
Sincerely,
/s/ David B. Ford
David B. Ford
Co-Head, Goldman Sach Asset Management
/s/ John P. McNulty
John P. McNulty
Co-Head, Goldman Sachs Asset Management
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
November 29, 1996
- --------------------------------------------------------------------------------
3
<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 such
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. The fund's interest rate
sensitivity is expected to be comparable to that of a five-year bond.
Mortgage-Backed Securities Strengthened Amid Slowing Prepayments
During the 12-month period under review, the performance of mortgage-backed
securities (MBSs) was closely linked to the changing direction of interest
rates. From November 1995 through February 1996, declining interest rates
spurred homeowners to switch to long-term, fixed rate mortgages, resulting in a
high level of refinancing activity and widening spreads between MBSs and
Treasuries. Long-term interest rates began to rise at the end of January and
prepayments peaked in February. Throughout the spring, the mortgage-backed
securities market strengthened due to declining prepayment fears, and adjustable
rate mortgages (ARMs) and fixed rate mortgage pass-throughs continued to do well
when rates stabilized during the summer. However, the direction of interest
rates reversed course beginning in September, and by the end of October, rates
on 30-year mortgages had slipped below 8%. The decline increased some
homeowners' incentive to refinance, but rates continued to be significantly
above their levels of a year earlier and "seasoned" mortgage-backed securities
(securities backed by older mortgages that typically have lower prepayment risk)
continued to do well. In addition, the market's technical balance remained
strong, with prices supported by healthy investor demand coupled with no
significant new issuance.
Performance Review: Fund Performed Well Due to Mortgage-and Asset-Backed
Securities
During the 12-month period ended October 31, the fund's Class A shares
outperformed the benchmark, the Lehman Brothers Government/Mortgage Index (the
"Index") due to favorable results from the fund's positions in collateralized
mortgage obligations (CMOs) and asset-backed securities (ABSs). The fund's Class
B shares, which opened on May 1, 1996 when interest rates were still rising,
also achieved positive returns.
The fund performed well compared with its peers. The fund's Class A shares
ranked eighth out of 124 intermediate U.S. government income funds based on
total return for the 12 months ended October 31, 1996, according to Lipper
Analytical Services, Inc. (Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results. Class B shares were not ranked for this period because they were in
existence less than 12 months.)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Class A Class B*
(10/31/95- (5/1/96-
10/31/96) 10/31/96)
--------- ---------
<S> <C> <C>
Total Return (based on net asset value) 5.80% 4.85%
- --------------------------------------------------------------------------------
Return From Monthly Distributions 6.56% 3.01%
- --------------------------------------------------------------------------------
Return From Price Depreciation/ -0.76% 1.84%
Appreciation
- --------------------------------------------------------------------------------
Total Return of Lehman Brothers
Government/Mortgage Index 5.74% 5.12%
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.36 $14.37
- --------------------------------------------------------------------------------
NAV Change -$0.11 +$0.26
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
Portfolio Composition and Investment Strategies
During the period under review, we significantly reduced the portfolio's
holdings of U.S. Treasuries in favor of mortgage-backed and asset-backed
securities.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
Agency Debentures 0.4%
Repos/Cash Equivalents 1.1%
U.S. Treasuries 16.2%
Asset-Backed Securities 19.9%
CMOs 22.0%
Fixed Rate Mortgage Pass-Throughs 40.4%
* 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's single largest position as of
October 31, 1996 was in fixed rate mortgage pass-throughs at 40.4% (nearly
unchanged from a year ago), which was overweighted relative to the Index
allocation of 36.4%. Overall, the fund benefited from the sector's incremental
yield compared with similar-duration Treasury securities. Although pass-throughs
suffered from a high rate of mortgage prepayments when the period began, the
sector improved when interest rates began to rise at the end of January.
During the period, we occasionally used mortgage dollar rolls, which helped
the portfolio to benefit from 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 -- 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.
.. CMOs. As of October 31, the fund's allocation in CMOs was 22.0%, up from
7.7% a year ago. These securities included sequential-pay/support CMOs (13.0%),
a position we initiated in February, which offered relative stability and
attractive spreads compared with Treasuries. We cut the portfolio's allocation
in planned amortization class (PAC) CMOs to 5.5% from 6.3% a year ago in favor
of other sectors that offered greater relative value. We also held very small
positions in inverse floaters, interest-only (IO) and principal-only (PO)
securities, discussed below.
.. Asset-Backed Securities. The portfolio's ABS holdings, which were primarily
issues backed by credit card and automobile debt, represented 19.9% of the
portfolio, up from 14.3% a year ago. This position consisted of short-term,
triple-A-rated issues that offered attractive incremental yield over similar-
duration Treasuries. The ABS market began the period on a weak note, as concerns
surrounding credit card delinquencies impacted the sector during November and
December 1995. From January through the end of the period, these uncertainties
faded and the sector strengthened. Spreads between ABSs and Treasuries
tightened, as the ABS market benefited from strong investor demand from a
variety of sources: foreign banks, insurance companies and an increasing number
of corporate and CMO "crossover" accounts. ABS supply was robust as well, with a
wide variety of innovative new issues across a range of maturities, collateral
types and structures, but demand kept pace.
.. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. We reduced the
fund's allocation in U.S. Treasuries and repurchase agreements/cash equivalents
to take advantage of securities in other sectors that offered better relative
value. As of October 31, Treasuries accounted for 16.2% of the portfolio,
significantly
- --------------------------------------------------------------------------------
5
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
underweighted relative to the Index (55.4%), while cash equivalents were a 1.1%
position.
.. Agency Debentures. During the period, we reduced the fund's holdings in
agency debentures (bonds issued by agencies of the U.S. government) to a scant
0.4% because we determined that the sector's tight spreads compared with
Treasuries did not offer attractive return potential.
.. Issuer Composition. The breakdown of the portfolio's mortgage-backed
security holdings by issuer was 23.3% in Federal National Mortgage Association
(FNMA) issues, 14.0% in Government National Mortgage Association (GNMA) issues,
9.8% in Federal Home Loan Mortgage Corporation (FHLMC) issues and 15.3% in
private issues.
.. Credit Quality. As of October 31, U.S. government and agency securities
accounted for 66.6% of the portfolio, triple-A-rated securities were 32.3% of
the portfolio and cash equivalents were 1.1% of the portfolio.
.. Prudent Use of Derivatives. As noted, sequential-pay/ support and PAC CMOs,
which are generally considered to be lower risk derivative instruments,
accounted for 13.0% and 5.5% of the portfolio, respectively. The portfolio also
held inverse floaters (1.3%) for their potential to add incremental yield, as
well as a "combo" consisting of minor positions in interest-only and principal-
only CMOs. When IOs are held along with POs, they can produce a position with a
similar risk profile as a fixed rate mortgage pass-through but with a higher
yield. In addition, we used futures as a tool to help manage the portfolio's
duration.
.. Duration. The fund's duration as of October 31 was 4.5 years, in line with
the Index. We carefully manage the fund's duration to approximate that of the
Index rather than attempting to make interest rate predictions. Instead, we seek
excess return over the Index through our sector weightings and specific security
selection.
Fund Outlook
We have a cautiously optimistic view of the mortgage pass-through market in
general. Certain segments continue to be attractively valued, and we believe
that our current seasoned holdings should fare well relative to other sectors if
interest rates continue to fall and prepayments increase. We have a neutral
outlook for the CMO sector in general, which we believe does not offer
significant value over mortgage pass-throughs. However, we continue to identify
specific CMO securities that present attractive investment opportunities. In the
ABS market, significant spread premiums relative to comparably rated corporate
securities are expected to continue to buoy investor demand. In addition, Fed
surveys indicate that banks have been tightening their underwriting standards
over the last three quarters, which should help to allay lingering investor
concerns surrounding consumer credit card delinquencies. During the coming year,
we will continue to actively allocate the portfolio's assets among the various
fixed income sectors as their relative value changes.
Distribution Policy
The fund's Class A shares paid out monthly distributions of approximately
$0.92 per share during the 12-month period ended October 31, 1996. From their
inception on May 1, 1996 through October 31, 1996, the fund's Class B shares
paid out approximately $0.41 per share. Dividends are declared daily and paid on
a monthly basis. The fund distributes substantially all of its taxable income,
as is required for all investment companies.
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
We thank you for your support and look forward to continuing to serve your
investment needs in the future.
Sincerely,
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Erica Adelberg
Erica Adelberg
/s/ James B. Clark
James B. Clark
Portfolio Managers
Goldman Sachs Government Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
7
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Government Income Fund (assuming both the
maximum sales charge of 4.5% and no sales charge for Class A shares and the
maximum redemption fee of 5% and no redemption fee for the Class B shares), 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
Class A/(a)/
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman Lehman
(no sales (w/sales Gov't/MBS U.S. Gov't
Date charge) charge) Index Index
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
10/31/96 12,392 11,834 12,500 12,395
</TABLE>
Class B
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class B Shares Class B Shares Lehman Lehman
(no redemption (w/redemption Gov't/MBS U.S. Gov't
Date charge) charge) Index Index
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000 $10,000
10/31/96 10,485 9,985 10,512 10,508
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------
Average Annual Total Return
----------------------------------------
One Year Since Inception/(b)/
- -----------------------------------------------------------------------------
<S> <C> <C>
Class A, excluding sales 5.80% 6.72%
charge
- -----------------------------------------------------------------------------
Class A, including sales 1.06% 5.41%
charge
- -----------------------------------------------------------------------------
Class B, excluding
redemption charge N/A 4.85%/(c)/
- -----------------------------------------------------------------------------
Class B, including
redemption charge N/A (0.15%)/(c)/
- -----------------------------------------------------------------------------
</TABLE>
/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/ Class A and Class B shares commenced operations February 10, 1993 and May 1,
1996, respectively.
/c/ An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve months
of operations.
- --------------------------------------------------------------------------------
8
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations--55.5%
Federal Home Loan Mortgage Corp.(FHLMC)--10.3%
$ 3,000,000 7.50% TBA 30-Yr/(a)/ $ 3,010,290
- --------------------------------------------------------------------------------
Federal National Mortgage Association (FNMA)--16.5%
$ 989,360 7.00 02/01/26 $ 970,493
831,317 8.50 07/01/26 860,147
168,683 8.50 09/01/26 174,533
1,000,000 7.00 TBA 30-Yr/(a)/ 1,034,680
2,000,000 8.00 TBA 30-Yr/(a)/ 2,040,000
- --------------------------------------------------------------------------------
$ 5,079,853
- --------------------------------------------------------------------------------
Government National Mortgage Association
(GNMA)--14.1%
$ 939,735 7.00% 08/15/23 $ 927,115
353,966 9.00 TBA 30-Yr/(a)/ 377,748
1,363,733 7.50 TBA 30-Yr/(a)/ 995,228
2,000,000 8.00 TBA 30-Yr/(a)/ 2,045,000
- --------------------------------------------------------------------------------
$ 4,345,091
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations--26.4%
Interest Only--0.7%
FNMA Interest-Only Stripped Security, Series 151, Class 2
$ 712,363/(b)/ 9.50% 07/25/22 $ 225,926
- --------------------------------------------------------------------------------
Inverse Floater--1.3%
FNMA Remic Trust, Series 1992-62, Class S
404,038 10.00%/(c)/ 05/25/99 413,699
- --------------------------------------------------------------------------------
Planned Amortization Class (PAC)--5.4%
FNMA Remic Trust, Series 1993-160, Class PG
1,000,000 6.30% 09/25/18 987,500
GE Capital Mortgage Services, Inc. Series 1994-11, Class A1
693,546 6.50 03/25/24 694,191
- --------------------------------------------------------------------------------
$ 1,681,691
- --------------------------------------------------------------------------------
Principal Only--1.4%
FNMA Remic Trust, Series G-35, Class N
575,000/(e)/ 5.28% 10/25/21 415,369
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--2.9%
Citicorp Mortgage Securities Series 1993-11, Class A6
907,177 6.25% 09/25/08 880,207
- --------------------------------------------------------------------------------
Support--13.2%
Bear Stearns Mortgage Securities, Inc., Series 1996-7, Class AD
$ 988,793 6.50% 11/27/23 900,395
GE Capital Mortgage Services, Inc. Series 1994-10, Class A22
996,703 6.50 03/25/24 874,966
Housing Securities, Inc. Series 1994-1, Class A13
1,455,585 6.50 03/25/09 1,370,928
Prudential Securities Series 1995-2, Class A
916,596 5.76 11/15/15 918,243
- --------------------------------------------------------------------------------
$ 4,064,532
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 7,681,424
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $16,959,996) $17,106,368
- --------------------------------------------------------------------------------
Asset-Backed Securities--16.6%
Chemical Bank Master Credit Card Trust, Series 1995-2, Class A
$ 720,000 6.23% 06/15/03 $ 717,746
Fingerhut Master Trust, Series 1996-1, Class A
590,000 6.45 02/20/02 593,870
Ford Credit Auto Loan Master Trust, Series 1996-1, Class A
650,000 5.50 02/15/03 629,077
MBNA Master Credit Card Trust, Series 1991-1, Class A
245,000 7.75 10/15/98 245,688
Navistar Financial Corp. Owner Trust, Series 1995-A, Class A2
304,971 6.55 11/20/01 306,780
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
540,182 6.85 06/15/01 544,666
Premier Auto Trust, Series 1993-6, Class A2
403,341 4.65 11/02/99 398,675
Premier Auto Trust, Series 1994-1, Class A3
310,533 4.75 02/02/00 308,592
Sears Credit Account Master Trust, Series 1995-2, Class A
460,000 8.10 06/15/04 483,000
Standard Credit Card Trust, Series 1990-3, Class A
860,000 9.50 07/10/98 875,583
- --------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $5,174,476) $ 5,103,677
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
===============================================================================
<S> <C> <C> <C>
U.S. Government Agency Obligations--0.4%
Federal Home Loan Mortgage Corp. (FHLMC)
$ 110,000 8.20% 01/16/98 $ 110,636
- -------------------------------------------------------------------------------
Total Government Agency Obligations
(Cost $113,163) $ 110,636
- -------------------------------------------------------------------------------
U.S. Treasury Obligations--15.9%
United States Treasury Bonds/(d)/
$ 360,000 8.75% 05/15/17 $ 440,550
280,000 8.75 08/15/20 345,668
United States Treasury Notes/(d)/
2,210,000 7.38 11/15/97 2,249,360
700,000 5.88 04/30/98 702,184
700,000 6.88 08/31/99 717,500
United States Treasury Principal-Only Stripped Securities/(e)/
230,000 6.41 11/15/04 138,344
1,550,000 6.95 05/15/20 307,570
- -------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $4,910,644) $ 4,901,176
- -------------------------------------------------------------------------------
Repurchase Agreement--27.0%
Joint Repurchase Agreement Account/(d)/
$8,400,000 5.58% 11/01/96 $ 8,400,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $8,400,000) $ 8,400,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $38,555,545/(f)/) $38,632,147
===============================================================================
Futures contracts open at October 31, 1996 are as follows:
Number of
Contracts Settlement Unrealized
Type Long(/g/) Month Gain
- -------------------------- ------------- ----------------- -----------
Euro Dollars 3 September 1997 $2,850
5 Year U.S. Treasury Notes 4 December 1996 3,000
10 Year U.S. Treasury Notes 2 December 1996 8,313
U.S. Long Term Bond 14 December 1996 60,437
------------
$74,600
===============================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 260,565
Gross unrealized loss for investments in which cost exceeds
value (195,408)
- -------------------------------------------------------------------------------
Net unrealized gain $ 65,157
===============================================================================
</TABLE>
/(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)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(c)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(d)/Portions of these securities are being segregated for open TBA purchases,
open futures contracts and futures margin requirements.
/(e)/The interest rate disclosed for these securities represents effective
yields to maturity.
/(f)/The aggregate cost for federal income tax purposes is $38,566,990.
/(g)/Each 10-Year U.S. Treasury Note, 5-Year 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 notional
amount and market value are $5,000,000 and $2,936,825, respectively. The
determination of notional amounts and market value as presented here are
indicative only of volume of activity and not a measure of market risk.
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.
10
<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
government and other high-quality (double-A or better) fixed income securities
issued in the United States and in foreign markets. The fund has the additional
flexibility to invest in sovereign (government) debt rated single-A (or better)
or deemed to be of comparable quality. The maximum duration of the fund is 7.5
years and its approximate interest rate sensitivity is comparable to that of a
six-year bond. 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 to seek to enhance returns.
European Bond Markets Achieved the Strongest Performance While Treasuries Lagged
During the 12 months ended October 31, 1996, global bonds generally
performed well, particularly during the second half of the period, with a number
of markets achieving extremely strong returns. Most international bond markets
have outperformed the United States, thus illustrating the benefits of
diversification.
The European higher yielding bonds (Italy, Spain and Sweden) were the best
performers of all the major bond markets during the period, while most of the
other European bond markets achieved good, albeit more modest, returns (hedged
into U.S. dollars). In general, European bond markets benefited from an
accommodative environment of sluggish economic growth and low inflation.
European bonds were also buoyed by tighter fiscal policies, as several European
countries attempted to reduce their deficits enough to qualify for European
monetary union. To counter less government spending, several countries (notably
Germany) attempted to stimulate economic growth by lowering their interest
rates.
The total return of Japanese Government Bonds (JGBs) during the period
under review was lower than those of most European bond markets but still
favorable (hedged into U.S. dollars). After lackluster performance during the
first half of the period amid fears of accelerating growth, JGBs experienced a
volatile, halting recovery when Japan's economy showed signs of weakening during
the summer and fall of 1996.
U.S. Treasuries underperformed all of the major bond markets. Though
Treasuries performed well in November and December 1995, accelerating economic
growth triggered a sharp correction from January through May 1996. The U.S. bond
market partially recovered when it rallied during September and October, but it
continued to lag. Within the dollar bloc, Canadian bonds did particularly well
during the period, reflecting a continuing easing of monetary policy by the Bank
of Canada, a strong currency and a relatively weak economy.
Performance Review: Favorable Country Allocations Benefited Fund Performance
During the period under review, the Goldman Sachs Global Income Fund's
Class A and Institutional shares outperformed the fund's benchmark, the J.P.
Morgan Global Government Bond Index (hedged into U.S. dollars) (the "Index").
The Index covers 14 major bond markets and reflects their currency exposures.
That favorable performance relative to the benchmark was primarily due to the
fact that during most of the period the fund was overweighted in European bonds
and moderately underweighted in U.S. Treasuries.
The fund's Class B shares, which began operations on May 1, 1996 while U.S.
interest rates were still rising, underperformed the benchmark.
- --------------------------------------------------------------------------------
11
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Class A Class B* Institutional
(10/31/95- (5/1/96- (10/31/95-
10/31/96) 10/31/96) 10/31/96)
-------- -------- --------
<S> <C> <C> <C>
Total Return (based on net asset 11.05% 6.24% 11.55%
value)
- --------------------------------------------------------------------------------
Return From Monthly 10.50% 2.68% 11.07%
Distributions
- --------------------------------------------------------------------------------
Return From Price Appreciation 0.55% 3.56% 0.48%
- --------------------------------------------------------------------------------
Total Return of J.P. Morgan 10.06% 6.53% 10.06%
Global Government Bond Index
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.53 $14.53 $14.52
- --------------------------------------------------------------------------------
NAV Change +$0.08 +$0.50 +$0.07
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
Though the portfolio is typically fully hedged into U.S. dollars, we
occasionally employed currency strategies during the period. These included the
initiation of a long position in the U.S. dollar against the yen and European
currencies, which helped the fund's performance when the dollar strengthened
during the period.
Portfolio Composition and Investment Strategies
Portfolio Composition as of October 31, 1996*
<TABLE>
<CAPTION>
[PIE CHART APPEARS HERE]
<S> <C>
Sweden 1.9%
Denmark 2.5%
Spain 2.6%
Netherlands 2.6%
Ireland 2.7%
Italy 5.7%
U.K. 6.3%
Japan 9.0%
Germany 15.0%
Cash 15.4%
U.S. 36.3%
</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.
.. Dollar Bloc. As of October 31, 1996, U.S. Treasuries were the fund's sole
allocation in the dollar bloc countries. However, during the period, we
intermittently held positions in Canadian and Australian bonds.
U.S. During most of the period, the portfolio was underweighted in U.S.
Treasuries relative to the benchmark, which worked to its advantage when the
U.S. market was impacted by rising interest rates. In September and October, we
raised the fund's Treasury allocation, and the shift helped performance when the
Treasury market rallied during those months. As of October 31, the portfolio
held a 36.3% Treasury allocation, in line with the benchmark.
Other Dollar Bloc. The fund began the period overweighted in Canada (7.7%
as of October 31, 1995). However, we reduced the position in January and
liquidated the remainder in May on the expectation that Canada's current round
of interest rate easing had run its course, which proved not to be the case. In
July, we reestablished an overweighting in Canada, then sold the position the
following month after the market rallied. During September and October, the
Canadian bond market rose again on weaker economic news, but the fund did not
participate. Though the fund was not invested in Australia as of October 31, it
held an overweighted position at times during the period, which contributed to
performance when the market strengthened in anticipation of easing monetary
policy.
.. Europe. The fund benefited from being overweighted in Europe during much of
the period. After we sold part of the allocation in the region at a profit, the
fund was slightly underweighted in European bonds relative to the Index, 39.3%
versus 43.9%, as of October 31.
Germany. Germany's economic growth was anemic during the first half of the
period, with real GDP declining during the fourth quarter of 1995 and the first
quarter of 1996. To help stimulate growth amid a tight fiscal policy, the
Bundesbank aggressively cut interest rates, which proved only modestly
successful as high unemployment and weak manufacturing activity continued to
persist. To
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
participate in Germany's favorable bond market environment, we significantly
overweighted our holdings at 15.0% (versus 9.6% for the Index), preferring
Germany over France in the core European markets.
Italy, Spain and Sweden. During the period, we increased the fund's
allocation in the higher yielding European markets, then trimmed its exposure
after these markets became less favorably valued. In January, we initiated a
position in Italy, which was attractive due to its tight fiscal policy, expected
interest rate cuts and better than anticipated inflation data. As of October 31,
Italy was overweighted relative to the benchmark, 5.7% versus 5.2%, and it
significantly benefited the fund as it proved to be the best performing bond
market during the period. Spain, another top-performing bond market, was cut to
a 2.6% position as of October 31 after we determined the market fully reflected
expectations that Spain would meet the criteria for European monetary union. We
also benefited by establishing and maintaining an overweighted position in
Sweden during most of the period, then subsequently reduced the position to
1.9%, nearly in line with the benchmark.
U.K. The U.K.'s economy was sluggish during much of the period, but by
September economic activity began to rebound, particularly in the consumer
sector. In anticipation of renewed inflationary pressures, as well as political
uncertainty related to the forthcoming general election, we sold approximately
half of the portfolio's U.K. position during the period. As of October 31, the
portfolio's 6.3% U.K. weighting was in line with the benchmark.
Ireland, the Netherlands and Denmark. Small, new positions added during the
period included Ireland (2.7%), the Netherlands (2.6%) and Denmark (2.5%). Like
the rest of Europe, these countries had attractive bond market environments, and
they contributed to the fund's performance. We believe Ireland is particularly
attractive as it has an exemption on its debt level, enabling it to join
European monetary union (EMU) on the first round.
France. Over the course of the year we reduced the fund's position in
France, finally liquidating our remaining holdings in July, in favor of German
bonds that we believed were more attractively valued. Unfortunately, this
strategy was not successful when France subsequently outperformed Germany.
Belgium. Belgium, a 3.5% allocation last year, performed well and we
trimmed the position over the course of the year. In October, we sold the fund's
remaining holdings in Belgium in favor of the Netherlands, which our analysis
determined offered greater total return potential.
.. Japan. JGBs accounted for 9.0% of the portfolio, significantly
underweighted compared with the benchmark (15.1%), which benefited the fund when
JGBs were weak during the first half of the period, but did not work in its
favor when JGBs rebounded in the second half of the year. However, the fund
partially participated in the Japanese bond rally through a call option on JGBs,
as well as its direct investments.
.. Cash Equivalents. The fund's allocation in cash equivalents was 15.4%,
approximately the same as a year ago (16.4%). We anticipate reducing the
position as we identify attractive investment opportunities.
.. Credit Quality. The portfolio was 100% invested in triple-A-rated
securities as of the end of the period.
.. Duration. As of October 31, the fund's duration of 4.4 years was
approximately a half year lower than that of the benchmark. (Duration is a
measurement of the fund's sensitivity to interest rate movements; the shorter
the duration, the less the fund's net asset value [NAV] should move in relation
to interest rate fluctuations.) The duration difference was primarily due to the
portfolio's cash equivalent position and its underweighting in Japan.
- --------------------------------------------------------------------------------
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
Fund Outlook
Going forward, we expect European bonds to continue to outperform U.S.
Treasuries, in terms of both capital gains and yields. In general, European
economies are weaker than that of the United States, with slow growth, high
unemployment and tight fiscal policies. Germany's economic recovery appears
intact, which makes us somewhat more cautious on German bonds at current low
yield levels. Nevertheless, German bonds still offer excess returns over cash,
provided German monetary policy remains on hold. Longer term, we favor the U.K.
gilt, as we believe the market has overreacted to the U.K.'s lack of
participation in European monetary union and its recent political uncertainty.
We also have a positive longer term view of the higher yielding markets of Italy
and Spain, though they have not offered investors a sufficient risk premium in
recent months. As of this writing, we are neutral on U.S. Treasuries, but we
will be watching for signs that the U.S. Federal Reserve expects to preempt any
potential inflationary pressure with tighter monetary policy in the near future.
Our analysis indicates that after their spectacular run, Canadian bonds do not
offer attractive relative value, but we are considering reestablishing a
position in Australia, which is experiencing slowing growth and waning
inflationary pressures. We expect to remain underweighted in Japan because we
anticipate that its economic recovery will resume despite recent weakness,
opening the possibility for monetary tightening. With JGBs currently yielding
just under 3%, our analysis indicates that we would not be adequately
compensated for their level of risk.
Distribution Policy
During the 12-month period under review, the fund's Class A and
Institutional shares paid out distributions of $1.43 and $1.50 per share,
respectively. From their inception on May 1, 1996 through October 31, 1996, the
fund's Class B shares paid out $0.36 per share. The fund declares and pays
dividends on a monthly basis. The fund distributes substantially all of its
taxable income, as is required for all investment companies.
As always, we will utilize the resources of Goldman, Sachs & Co.'s London-
based Economics Research Group for economic and market trend analysis as we
continue to seek out attractive global bond investment opportunities. We
appreciate your investment in the Goldman Sachs Global Income Fund and look
forward to continuing to help you achieve your investment goals.
Sincerely,
/s/ Stephen C. Fitzgerald
Stephen C. Fitzgerald
Portfolio Manager, Fixed Income Investments
/s/ Andrew F. Wilson
Andrew F. Wilson
Portfolio Manager, Fixed Income Investments
/s/ Gareth I. Evans
Gareth I. Evans
Portfolio Manager, Currency
Goldman Sachs Global Income Fund
London, November 29, 1996
- --------------------------------------------------------------------------------
14
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Global Income Fund (assuming both the maximum
sales charge of 4.5% and no sales charge for the Class A shares, the first year
maximum redemption fee of 5% and no redemption fee for the Class B shares and
net asset value for the Institutional shares) is compared with its benchmark--
the J.P. Morgan Global Government Bond Index hedged to U.S. Dollars ("J.P.
Morgan GGB Index-$ 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.
HYPOTHETICAL $10,000 INVESTMENT
[CHART APPEARS HERE]
Class A Shares (a)
<TABLE>
<CAPTION>
Class A Shares Class A Shares J.P. Morgan GGB Index-
(no sales charge) (w/sales charge) $ Hedged
<S> <C> <C> <C>
09/01/91 $10,000 $9,500 $10,000
10/31/91 $10,145 $9,688 $10,263
10/31/92 $11,034 $10,538 $11,156
10/31/93 $12,220 $11,670 $12,509
10/31/94 $11,672 $11,146 $12,051
10/31/95 $13,432 $12,827 $13,903
10/31/96 $14,921 $14,250 $15,306
</TABLE>
Class B Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class B Shares Class B Shares J.P. Morgan GGB
(no redemption charge) (w/redemption charge) Index-$ Hedged
<S> <C> <C> <C>
05/01/96 $10,000 $10,000 $10,000
10/31/96 $10,624 $10,124 $10,653
</TABLE>
Institutional shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Institutional J.P. Morgan GGB
Shares Index-$ Hedged
<S> <C> <C>
08/01/95 $10,000 $10,000
10/31/95 $10,442 $10,351
10/31/96 $11,651 $11,395
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------
Average Annual Total Return
----------------------------------------------------
One Year Five Year Since Inception(b)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Class A, excluding
sales charge 11.05% 8.01% 8.02%
- ---------------------------------------------------------------------------
Class A, including
sales charge 6.08% 7.02% 7.08%
- ---------------------------------------------------------------------------
Class B, excluding
redemption charge N/A N/A 6.24%(c)
- ---------------------------------------------------------------------------
Class B, including
redemption charge N/A N/A 1.24%(c)
- ---------------------------------------------------------------------------
Institutional Class 11.55% N/A 12.95%
- ---------------------------------------------------------------------------
</TABLE>
(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, Class B and Institutional shares commenced operations August 2,
1991, May 1, 1996 and August 1, 1995, respectively.
(c) An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve months
of operations.
- --------------------------------------------------------------------------------
15
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount (a) Rate Date Value
================================================================================
<S> <C> <C> <C>
Debt Obligations--83.2%
British Pound Sterling--6.2%
United Kingdom Treasury
BPS 9,000,000 8.50% 12/07/05 $ 15,573,120
- --------------------------------------------------------------------------------
Danish Krone--2.5%
Kingdom of Denmark
DKK 33,000,000 9.00% 11/15/00 $ 6,415,484
- --------------------------------------------------------------------------------
Deutschemark--14.8%
Federal Republic of Germany
DEM 8,000,000 7.12% 12/20/02 $ 5,742,980
7,500,000 6.75 07/15/04 5,245,292
33,000,000 6.50 10/14/05 22,549,455
3,500,000 7.38 01/03/05 2,528,510
Treuhandanstalt
2,000,000 6.50 04/23/03 1,388,437
- --------------------------------------------------------------------------------
$ 37,454,674
- --------------------------------------------------------------------------------
Irish Pound--2.7%
Republic of Ireland
IEP 4,000,000 8.00% 10/18/00 $ 6,905,421
- --------------------------------------------------------------------------------
Italian Lira--5.4%
Republic of Italy
ITL 19,000,000,000 10.50% 11/01/00 $ 13,851,419
- --------------------------------------------------------------------------------
Japanese Yen--8.9%
International Bank for Reconstruction &
Development
JPY 700,000,000 6.75% 06/18/01 $ 7,536,474
Japanese Developmental Bank
1,400,000,000 6.50 09/20/01 15,019,116
- --------------------------------------------------------------------------------
$ 22,555,590
- --------------------------------------------------------------------------------
Netherlands Guilder--2.5%
Dutch Government Bond
NLG 10,000,000 7.00% 06/15/05 $ 6,350,937
- --------------------------------------------------------------------------------
Spanish Peseta--2.5%
Government of Spain
ESP 500,000,000 10.30% 06/15/02 $ 4,448,842
Kingdom of Spain
200,000,000 10.15 01/31/06 1,804,930
- --------------------------------------------------------------------------------
$ 6,253,772
- --------------------------------------------------------------------------------
Swedish Krona--1.8%
Kingdom of Sweden
SEK 32,000,000 6.00% 02/09/05 $ 4,489,558
- --------------------------------------------------------------------------------
United States Dollar--35.9%
United States Treasury Notes
USD 10,000,000 6.88% 07/31/99 $ 10,243,700
18,000,000 5.25 01/31/01 17,507,880
17,000,000 6.38 03/31/01 17,196,520
8,200,000 6.25 02/15/03 8,229,438
10,000,000 7.88 11/15/04 10,975,000
12,000,000 6.50 08/15/05 12,125,640
14,000,000 7.00 07/15/06 14,616,840
- --------------------------------------------------------------------------------
$ 90,895,018
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $206,293,080) $210,744,993
- --------------------------------------------------------------------------------
Short-Term Obligations--15.4%
Euro-Time Deposit
USD 38,987,507 5.50% 11/01/96 38,987,507
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $38,987,507) $ 38,987,507
- --------------------------------------------------------------------------------
Total Investments
(Cost $245,280,587/(b)/ ) $249,732,500
================================================================================
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $6,414,087
Gross unrealized loss for investments in which cost
exceeds value (2,188,683)
- --------------------------------------------------------------------------------
Net unrealized gain $4,225,404
================================================================================
</TABLE>
/(a)/ The principal amount of each security is stated in the currency in which
the bond is denominated. See below.
BPS = British Pound Sterling ITL = Italian Lira
NLG = Netherlands Guilder JPY = Japanese Yen
DKK = Danish Krone ESP = Spanish Peseta
DEM = Deutschemark SEK = Swedish Krona
IEP = Irish Pound USD = United States Dollar
/(b)/ The aggregate cost for federal income tax purposes is $245,507,096. 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.
16
<PAGE>
Letter 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 preservation of capital. In pursuit of its objective, the fund invests in a
diversified portfolio of municipal securities with a weighted average credit
quality of double-A or better. The fund buys only investment-grade securities
or, if unrated, deemed to be of comparable quality. Under normal interest rate
conditions, the fund's duration is expected to be within one year of its
benchmark, the Lehman Brothers 15-Year Municipal Bond Index. The fund's
approximate interest rate sensitivity is comparable to that of a 15-year bond.
After a Weak Start, the Municipal Bond Market Strengthened
The municipal bond market outperformed Treasuries during the 12-month
period under review, though both markets came under pressure when rates rose
during the first half of 1996. The average price of a 15-year municipal bond (as
calculated from data provided by Municipal Market Data, an independent municipal
market information provider) rose approximately 0.50%, while yields declined
from 5.35% on October 31, 1995 to 5.30% on October 31, 1996.
The municipal bond market began the period under review on a weak note. Tax
reform uncertainty impacted investor demand during November and December 1995,
while municipal bond supply was high due to seasonably heavy year-end issuance
and relatively low interest rates. The market environment improved during
January and February 1996, when fading tax reform concerns helped to revive
investor interest in the sector and issuance declined. From March through the
end of the period, the market's technical balance was generally healthy, though
occasional spikes in supply periodically overwhelmed demand and briefly impacted
performance. The largest of these surges occurred in June when supply rose to
its highest level since late 1995, but subsequently both new issuance and
secondary supply fell dramatically from July through September.
On the demand side, interest in municipal bonds was generally stable until
late summer and early fall. Demand from individual investors (who control
approximately 65% of municipal bond ownership either through mutual funds or
direct investment) began to decline when interest rates declined and municipal
yields fell below the psychologically significant 6% level. In addition,
property/casualty companies (who control approximately 10% of municipal bond
ownership) also dropped out of the market because the sector had become somewhat
unattractive relative to Treasuries. The supply drought finally abated in
October when many issuers sought to take advantage of lower interest rates, and
a continued weakness in demand caused municipals to underperform taxable bonds
for the month.
Municipal Bond Yield Curve
[YIELD CURVE LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Year of Maturity 10/31/96 10/31/95
---------------- -------- --------
<S> <C> <C>
1997 3.6 3.9
1998 3.9 4.1
1999 4.15 4.2
2000 4.3 4.3
2001 4.4 4.4
2002 4.5 4.5
2003 4.6 4.6
2004 4.7 4.7
2005 4.8 4.8
2006 4.9 4.95
2007 5 5.05
2008 5.1 5.15
2009 5.2 5.25
2010 5.25 5.35
2011 5.3 5.4
2012 5.35 5.45
2013 5.4 5.5
2014 5.4 5.55
2015 5.45 5.55
2016 5.45 5.55
2017 5.45 5.55
2018 5.5 5.55
2019 5.5 5.6
2020 5.5 5.6
2021 5.5 5.6
2022 5.5 5.6
2023 5.5 5.6
2024 5.5 5.6
2025 5.5 5.6
</TABLE>
The yield curve steepened at the short end and shifted downward at the longer
end.
Performance Review: Term Structure, Sector Weightings and Security Selection
Contributed to the Fund's Favorable Performance
During the period under review, the fund's Class A shares outperformed
their benchmark, the Lehman Brothers 15-Year Municipal Bond Index (the "Index").
The fund's Class B shares, which opened on May 1, 1996 while interest rates were
still rising, also performed well but slightly lagged the benchmark.
- --------------------------------------------------------------------------------
17
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
We are pleased to report that the fund's Class A shares outperformed most of
their peers. For the 12 months ended October 31, 1996, Class A shares ranked in
the top 20% of general municipal debt funds (36 out of 228) based on total
return, according to Lipper Analytical Services, Inc. (Please note that Lipper
rankings do not take sales charges into account and that past performance is not
a guarantee of future results. Class B shares were not included because they
were not in existence during the entire 12-month period.)
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B*
(10/31/95- (5/1/96-
10/31/96) 10/31/96)
-------- --------
<S> <C> <C>
Total Return (based on net asset value) 6.13% 4.40%
- --------------------------------------------------------------------------------
Return From Monthly Distributions 4.72% 1.98%
- --------------------------------------------------------------------------------
Return From Price Appreciation 1.41% 2.42%
- --------------------------------------------------------------------------------
Lehman Brothers 15-Year Municipal
Bond Index 5.99% 4.80%
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.37 $14.37
- --------------------------------------------------------------------------------
NAV Change +$0.20 +$0.34
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
The fund's positive performance during the period can be attributed to our
term structure management, sector weightings and specific security selections.
.. The portfolio's neutral term structure is "credit-barbelled," emphasizing
high-quality bonds with maturities of 20 to 30 years on the long end of the
yield curve and lower quality bonds with four to ten year maturities on the
short end of the curve. However, during the period, we regularly adjusted the
term structure to take advantage of changing market conditions. For example,
when the municipal bond yield curve flattened during September and the beginning
of October, we sold securities in the 20- to 30-year range in favor of 15- to
20-year bonds. In mid-October, the yield curve steepened as we anticipated, and
the fund's 15- to 20-year bonds outperformed 20- to 30-year bonds. By the end of
the month, when longer maturity bonds had become more attractively valued, we
reestablished a more evenly distributed maturity structure.
.. In September, we underweighted the fund's municipal bond position relative
to the Index when our analysis indicated that municipal bonds had become
expensive compared with Treasuries. We replaced a small percentage of the fund's
duration with U.S. Treasury bond futures contracts, which we preferred over
buying Treasuries directly because they allowed us to participate in a Treasury
rally without incurring taxable net investment income. This strategy proved
successful when municipal bonds underperformed Treasuries in October, and we
returned the fund to its 100% municipal bond weighting after municipals had
cheapened to an attractive level at the end of the month.
.. The fund's performance also benefited from our extensive credit analysis.
Our research helped us identify specific investment opportunities, such as
"story" bonds. These securities are often misunderstood or incorrectly valued,
but can have unique security structures and attractive yield potential.
Portfolio Composition and Investment Strategies:
Revenue Bonds Were Stressed Over GOs
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Variable Rate Demand Notes 7.6%
General Obligations 5.5%
Insured Revenue Bonds 34.7%
Revenue Bonds 27.9%
Insured General Obligations 24.3%
</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.
- --------------------------------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
.. Revenue Bonds. We emphasized revenue bonds over general obligation bonds
because the sector offers higher yields and better price appreciation potential.
As of October 31, the fund held a 62.6% position in a combination of insured and
uninsured revenue bonds, overweighted compared with the Index (53.9%). (Revenue
bonds pay interest and principal out of a specific revenue stream, such as sales
taxes, hospital charges, tolls, electric rates and airport fees.)
.. General Obligation (GO) Bonds. As of October 31, the fund's GO holdings,
which are backed by the general taxing power of a municipality, were
underweighted relative to the Index, 29.8% versus 45.6%. Though the fund's total
GO allocation was little changed from a year ago, we did increase its weighting
in insured GOs (to 24.3% versus 12.6% last year) and reduced uninsured GOs (to
5.5% versus 16.6% last year) due to security-specific investment opportunities.
.. Variable Rate Demand Notes (VRDNs). VRDNs, which are high-quality cash
equivalents, were used to manage the portfolio's excess liquidity. The position
accounted for 7.6% of the portfolio, nearly unchanged from last year.
.. Credit Quality. During the period, the fund's average credit quality has
remained double-A. However, in contrast to last year's emphasis on triple-A-
rated bonds, this year the fund's credit quality was structured like a
"barbell," with higher quality securities at the long end of the yield curve and
lower quality securities (but still investment grade) at the short end. As of
October 31, 70.5% of the fund was invested in triple-A-rated securities, nearly
the same as a year ago, while double-A- and single-A-rated securities were
reduced to 9.3% and 1.8%, respectively. In the late spring of 1996, we initiated
a new position in triple-B-rated securities (the lowest credit category for
investment-grade securities), which accounted for 18.4% of the portfolio by the
end of the period. We used extensive credit research to identify specific
securities that offered higher yields than average triple-B-rated securities,
but still were of sound credit quality. The triple-B-rated position benefited
the fund's performance during the period by enabling us to lock in above-market
yields and providing greater price appreciation potential relative to the
market. Each of these positions is monitored carefully, and we will remain
vigilant for any changes in their credit quality.
Market Outlook
We have a bullish long-term outlook for municipal bond supply, since new
money issuance (bonds issued for purposes other than refunding older debt) tends
to be stable and grows at the same rate as GDP. In addition, we do not
anticipate a significant increase in refunding unless interest rates drop
substantially. On the demand side, investor interest is likely to remain
healthy, as we believe that two to four more years of divided government (a
Democratic president and a Republican-controlled Congress) should avert any
significant tax reform that would threaten municipal bonds' tax-exempt status.
Distribution Policy
During the period under review, the fund's Class A shares paid out
distributions of $0.65 per share. The fund's Class B shares, which opened on May
1, 1996, paid out $0.27 per share from their inception through October 31, 1996.
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.
- --------------------------------------------------------------------------------
19
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
We value your investment in the Goldman Sachs Municipal Income Fund and we
look forward to reporting on the fund's progress in the coming year.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Elisabeth Schupf Lonsdale
Elisabeth Schupf Lonsdale
Portfolio Managers
Goldman Sachs Municipal Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
20
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Municipal Income Fund (assuming both the
maximum sales charge of 4.5% and no sales charge for Class A shares and the
maximum redemption fee of 5% and no redemption fee for the Class B shares) 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
Class A /(a)/
[LINE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman 15-year
Date (no sales charge) (w/sales charge) Muni Index
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
8/1/93 $10,000 $9,550 $10,000
- --------------------------------------------------------------------------------
10/31/93 $10,455 $9,984 $10,385
- --------------------------------------------------------------------------------
10/31/94 $9,878 $9,434 $9,860
- --------------------------------------------------------------------------------
10/31/95 $11,241 $10,735 $11,414
- --------------------------------------------------------------------------------
10/31/96 $11,933 $11,395 $12,100
- --------------------------------------------------------------------------------
</TABLE>
Class B
[LINE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman
(no redemption (w/redemption 15-year
Date charge) charge) Muni Index
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/96 10,000 10,000 10,000
- --------------------------------------------------------------------------------
Oct 31, 96 10,440 9,940 10,480
- --------------------------------------------------------------------------------
</TABLE>
-----------------------------------
Average Annual Total Return
-----------------------------------
One Year Since Inception/(b)/
--------------------------------------------------------
Class A, excluding
sales charge 6.13% 5.27%
--------------------------------------------------------
Class A, including
sales charge 1.35% 3.80%
--------------------------------------------------------
Class B, excluding
redemption charge N/A 4.40%/(c)/
--------------------------------------------------------
Class B, including
redemption charge N/A (0.60%)/(c)/
--------------------------------------------------------
/(a)/For comparative purposes, Class A initial investment is assumed to be made
on the first day of the month following the Fund's commencement of
operations.
/(b)/Class A and Class B commenced operations July 20, 1993 and May 1, 1996,
respectively.
/(c)/An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
21
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Debt Obligations--102.2%
Arizona--5.1%
Maricopa County, AZ Unified School District No. 41 GO
(FSA)(AAA/Aaa)
$2,500,000 6.25% 07/01/15 $ 2,653,300
- --------------------------------------------------------------------------------
California--8.1%
Contra Costa, CA Water District Series G RB (MBIA)
(AAA/Aaa)
$2,000,000 5.75% 10/01/14 $ 2,022,980
San Buenaventura, CA Sewer Revenue RB (FGIC)
(AAA/Aaa)
2,255,000 5.50 03/01/15 2,231,435
- --------------------------------------------------------------------------------
$ 4,254,415
- --------------------------------------------------------------------------------
Colorado--4.8%
Englewood MFH RB (BBB)
$2,500,000 6.65% 12/01/26 $ 2,499,750
- --------------------------------------------------------------------------------
Connecticut--3.9%
Mashantucket Western Pequot Tribe RB (BBB/Baa)
$2,000,000 6.50% 09/01/05 $ 2,072,220
- --------------------------------------------------------------------------------
Florida--2.8%
Escambia County, FL Housing Authority, Single Family
(GNMA/FNMA)(Aaa)
$1,390,000 6.80% 10/01/15 $ 1,464,949
- --------------------------------------------------------------------------------
Illinois--19.1%
Chicago, IL GO Series A-2 (AMBAC) (AAA/Aaa) (e)
$1,750,000 6.25% 01/01/14 $ 1,877,873
Cook County, IL GO(FGIC) (AAA/Aaa)
2,000,000 5.75 11/15/12 2,015,720
Lake County, IL Unified School District No. 116 GO (FSA) (AAA/Aaa)
2,000,000 7.60 02/01/14 2,428,340
1,525,000 6.10 02/01/16 1,588,089
O'Hare International Airport RB (MBIA)(AAA/Aaa)
2,000,000 6.38 01/01/15 2,109,780
- --------------------------------------------------------------------------------
$10,019,802
- --------------------------------------------------------------------------------
Indiana--9.5%
East Allen, IN Elementary School Building Corp. RB (FSA)
(AAA/Aaa)
$3,115,000 5.88% 07/01/12 $ 3,178,079
Indiana Transportation Finance Authority RB Series A
(MBIA) (AAA/Aaa)
1,500,000 7.25 06/01/15 1,789,305
- --------------------------------------------------------------------------------
$ 4,967,384
================================================================================
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Kentucky--2.0%
Nelson County, KY Industrial Building RB for Mabex
Universal Corp. Project AMT (A3)
$1,000,000 6.50% 04/01/05 $ 1,066,790
- --------------------------------------------------------------------------------
Maine--1.5%
Maine Educational Loan Authority RB Series A-1 (Aaa)
$ 725,000 6.80% 12/01/07 $ 765,462
- --------------------------------------------------------------------------------
Michigan--3.6%
Detroit, MI GO (BBB-)
$1,885,000 5.70% 05/01/02 $ 1,907,714
- --------------------------------------------------------------------------------
New York--9.0%
New York State Municipal Bond Agency RB, Series A (BBB+)
$1,610,000 6.60% 03/15/01 $ 1,699,854
New York State Thruway Authority Highway & Bridges RB
(BBB/Baa1)
1,000,000 5.25 04/01/03 1,004,630
Syracuse, NY IDA RB (AA)
2,000,000 5.13 10/15/02 2,005,600
- --------------------------------------------------------------------------------
$ 4,710,084
- --------------------------------------------------------------------------------
North Dakota--3.8%
Mercer County, ND PCRB for Basin Electric Power 2nd
Series (AMBAC) (AAA/Aaa) (e)
$2,000,000 6.05% 01/01/19 $ 2,055,380
- --------------------------------------------------------------------------------
Ohio--8.9% Akron, OH COPs (a) (BBB) (c)
$2,000,000 6.90% 12/01/16 $ 1,438,500
Kent State University RB (MBIA) (AAA/Aaa)
2,280,000 5.50 05/01/28 2,181,504
Trumbull County, OH GO (AMBAC) (AAA/Aaa)
1,000,000 5.75 12/01/03 1,061,870
- --------------------------------------------------------------------------------
$ 4,681,874
- --------------------------------------------------------------------------------
Texas--8.8%
Denison, TX Waterworks & Sewer RB (AAA/Aaa)
$1,250,000 5.50% 09/01/08 $ 1,258,525
1,250,000 5.40 09/01/09 $ 1,258,475
East Texas Criminal Justice Facilities Financing Corp. RB
(AMBAC) (AAA/Aaa)
$2,000,000 5.75 11/01/09 $ 2,032,560
Fort Bend, TX Independent School District RB (AAA/Aaa)
50,000 5.00 02/15/18 46,226
- --------------------------------------------------------------------------------
$ 4,595,786
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
22
22
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Debt Obligations(continued)
Washington--7.1%
Chelan County, WA Public Utility RB (AAA/Aaa)/c/
$2,500,000 6.35% 07/01/28 $ 2,540,125
Washington State Series C GO (AA/Aa)
1,155,000 6.50 07/01/00 1,232,373
- --------------------------------------------------------------------------------
$ 3,772,498
- --------------------------------------------------------------------------------
Wisconsin--4.2%
Wisconsin Housing & Economic Development Authority RB,
Series B (AA/Aa)/e/
$2,060,000 7.10% 09/01/15 $ 2,181,623
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $52,677,902) $53,669,031
- --------------------------------------------------------------------------------
Short-Term Obligations--8.4%
Alabama--6.5%
Columbia County, AL IDB/b/ (A/A2)
$1,200,000 3.65% 11/01/96 $ 1,200,000
Parrish, AL IDB/b/ (A/A1)
2,200,000 3.65 11/01/96 2,200,000
- --------------------------------------------------------------------------------
$ 3,400,000
- --------------------------------------------------------------------------------
Wyoming--1.9%
Converse, WY PCRB/b/ (AAA)
$1,000,000 3.65% 11/01/96 $ 1,000,000
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $4,400,000) $ 4,400,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $57,077,902/d/) $58,069,031
================================================================================
- --------------------------------------------------------------------------------
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $ 1,018,643
Gross unrealized loss for investments in which cost
exceeds value (27,514)
- --------------------------------------------------------------------------------
Net unrealized gain $ 991,129
================================================================================
/a/The interest rate disclosed for these securities represents effective
yields to maturity.
/b/Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next interest reset dates.
/c/When-issued security.
/d/The amount stated also represents aggregate cost for federal income tax
purposes.
/e/Portions of these securities are being segregated for when-issued securities.
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.
COPS --Certificates of Participation
FGIC --Insured by Financial Guaranty
Insurance Co.
FSA --Financial Security Assurance Co.
GO --General Obligation
IDA --Industrial Development Authority
IDB --Industrial Development Bond
MBIA --Insured by Municipal Bond Investors
Assurance
MFH --Multi-Family Housing
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
================================================================================
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
23
23
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
========================================
<S> <C> <C> <C>
Assets:
Investments in securities, at value (cost $38,555,545, $245,280,587
and $57,077,902) $38,632,147 $249,732,500 $58,069,031
Receivables:
Investment securities sold 3,011,458 -- --
Interest 255,950 4,572,733 688,717
Forward foreign currency exchange contracts -- 1,073,237 --
Fund shares sold 38,729 23,757 12,145
Foreign tax withheld -- 100,251 --
Cash 17,149 248 48,127
Variation margin 6,788 -- --
Deferred organization expenses, net 23,998 -- 30,090
Other assets 65,284 31,883 29,773
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets 42,051,503 255,534,609 58,877,883
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased 11,129,422 -- 6,076,685
Forward foreign currency exchange contracts -- 1,816,332 --
Fund shares repurchased 14,381 124,500 128,184
Investment adviser fees 6,423 94,713 18,124
Administration fees -- 32,334 6,857
Authorized dealer service fees 6,166 44,409 9,224
Distribution fees 151 35,488 154
Accrued expenses and other liabilities 57,538 211,388 116,255
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 11,214,081 2,359,164 6,355,483
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets:
Paid in capital 30,678,648 247,410,169 52,495,830
Accumulated undistributed net investment income 53,331 6,704,225 60,331
Accumulated net realized loss on investment transactions (45,759) (4,636,687) (1,024,890)
Accumulated net realized foreign currency gain -- 43,634 --
Net unrealized gain on investments and futures 151,202 4,864,862 991,129
Net unrealized loss on translation of assets and liabilities denominated in foreign
currencies -- (1,210,758) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets $30,837,422 $253,175,445 $52,522,400
==================================================================================================================================
Net asset value, offering /(a)/ and redemption price per share
Class A $14.36 $14.53 $14.37
Class B $14.37 $14.53 $14.37
Institutional -- $14.52 --
==================================================================================================================================
Shares Outstanding
Class A 2,131,467 13,670,270 3,637,437
Class B 16,317 17,603 17,778
Institutional -- 3,735,251 --
- ----------------------------------------------------------------------------------------------------------------------------------
Total shares outstanding, $.001 par value (unlimited number of shares authorized) 2,147,784 17,423,124 3,655,215
==================================================================================================================================
</TABLE>
/(a)/Maximum public offering price per share (NAV per share x 1.0471) for Class
A shares is $15.04, $15.21 and $15.05 for Government Income, Global Income
and Municipal Income, respectively. At redemption, Class B shares are
subject to a contingent deferred sales charge, assessed on the amount equal
to the lesser of the current net asset value or the original purchase price
of the shares.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Goldman Sachs Trust
- ------------------------------------------------------------------------------
Statements of Operations
For the Year Ended October 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
======================================
<S> <C> <C> <C>
Investment income:
Interest/(a)/ $2,048,891 $18,287,214 $2,869,729
- ------------------------------------------------------------------------------
Total income 2,048,891 18,287,214 2,869,729
- ------------------------------------------------------------------------------
Expenses:
Investment adviser fees 148,120 1,965,605 211,283
Administration fees 44,433 393,263 79,231
Authorized dealer service fees 74,171 549,289 132,051
Distribution fees 74,281 549,538 132,304
Custodian fees 44,987 210,420 36,172
Transfer agent fees 72,237 121,212 90,284
Professional fees 58,897 92,538 60,094
Registration fees 14,992 63,673 32,549
Amortization of deferred organization
expenses 18,848 46,256 17,593
Trustee fees 478 3,073 707
Other 8,763 78,430 27,214
- ------------------------------------------------------------------------------
Total expenses 560,207 4,073,297 819,482
Less--expenses reimbursable and fees
waived by Goldman Sachs (411,644) (1,241,452) (370,128)
- ------------------------------------------------------------------------------
Net expenses 148,563 2,831,845 449,354
- ------------------------------------------------------------------------------
Net investment income 1,900,328 15,455,369 2,420,375
- ------------------------------------------------------------------------------
Realized and unrealized gain (loss)
on investment, options, futures and
foreign currency transactions:
Net realized gain (loss) from:
Investment transactions 115,970 9,268,666 1,390,846
Futures transactions (68,389) -- (151,156)
Foreign currency related transactions -- (2,192,328) --
Net change in unrealized gain (loss) on:
Investments and options (332,205) 54,149 (513,085)
Futures 74,600 -- --
Translation of assets and liabilities
denominated in foreign currencies -- 4,948,769 --
- ------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investment, options, futures and
foreign currency transactions (210,024) 12,079,256 726,605
- ------------------------------------------------------------------------------
Net increase in net assets resulting
from operations $1,690,304 $27,534,625 $3,146,980
==============================================================================
</TABLE>
/(a)/Net of $96,252 in foreign withholding tax for the Global Income
Fund.
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
=============================================
<S> <C> <C> <C>
From operations:
Net investment income $ 1,900,328 $ 15,455,369 $ 2,420,375
Net realized gain from investment transactions 47,581 9,268,666 1,239,690
Net realized loss from foreign currency related transactions -- (2,192,328) --
Net change in unrealized gain (loss) on investments, futures and options (257,605) 54,149 (513,085)
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- 4,948,769 --
- ------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,690,304 27,534,625 3,146,980
- ------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (1,898,372) (22,455,377) (2,418,570)
Class B (3,324) (3,052) (1,805)
Institutional Class -- (4,050,770) --
- ------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,901,696) (26,509,199) (2,420,375)
- ------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 8,922,548 39,747,372 6,389,765
Reinvestment of dividends and distributions 1,614,587 16,968,046 1,484,778
Cost of shares repurchased (8,990,920) (82,019,748) (9,875,982)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 1,546,215 (25,304,330) (2,001,439)
- ------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 1,334,823 (24,278,904) (1,274,834)
Net assets:
Beginning of year 29,502,599 277,454,349 53,797,234
- ------------------------------------------------------------------------------------------------------------------------
End of year $ 30,837,422 $ 253,175,445 $ 52,522,400
========================================================================================================================
Accumulated undistributed net investment income $ 53,331 $ 6,704,225 $ 60,331
========================================================================================================================
Summary of share transactions:
Shares sold 624,626 2,811,314 449,496
Reinvestment of dividends and distributions 112,977 1,198,568 104,201
Shares repurchased (628,175) (5,784,097) (694,794)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 109,428 (1,774,215) (141,097)
========================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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.
27
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
October 31, 1996
- --------------------------------------------------------------------------------
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 non-diversified portfolio. As of October 31, 1996, the Funds offer
Class A and Class B shares. In addition, Global Income offers Institutional and
Service shares. As of October 31, 1996, there outstanding no Service 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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that may affect the reported amounts.
A. Investment Valuation
- -----------------------
Investments in debt securities, other than money market instruments, held by the
Funds 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 Government Income and Municipal
Income 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 Government Income and Municipal
Income, 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. Security Transactions and Investment Income
- ----------------------------------------------
Security transactions are recorded on the trade date. Realized gains and losses
on sales of portfolio securities are calculated on the identified cost basis.
Interest income is recorded on the basis of interest accrued. Premiums on
interest-only securities and on collateralized mortgage obligations with nominal
- --------------------------------------------------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 for
distribution and are classified as interest income in the accompanying
Statements of Operations. Original issue discounts ("OID") 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. OID amortization on
mortgage backed REMIC securities is initially recorded based on estimates of
principal paydowns using the most recent OID factors available from the issuer.
Recorded amortization amounts are adjusted when actual OID factors are received.
For Municipal Income, market premiums on other long-term debt securities are
amortized to interest income while for Global Income, 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
- ----------------------------------------------
Global Income 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. Global Income may also purchase and sell forward contracts to seek to
increase total return. 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
- ------------------------
Government Income and Global Income 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.
- --------------------------------------------------------------------------------
29
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
F. Option Accounting Principles
- -------------------------------
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 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.
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.
G. Futures Contracts
- --------------------
The Funds may enter into futures transactions in order to hedge against changes
in interest rates, securities prices, currency exchange rates in the case of
Global Income or to seek to increase total return. A Fund will engage in futures
transactions only for bona fide hedging purposes as defined in regulations of
the CFTC or to seek to increase total return to the extent permitted by such
regulations. 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.
Payments for futures contracts ("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. The predominant
risk is that changes in the value of the futures contract that may not directly
correlate with changes in the value of the underlying securities. The risk may
decrease the effectiveness of the Funds' hedging strategies and may also result
in a loss to the Funds.
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.
- --------------------------------------------------------------------------------
30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
At October 31, 1996, the Funds had approximately the following amounts of
capital loss carryforward for U.S. Federal tax purposes:
<TABLE>
<CAPTION>
Year of
Fund Amount Expiration
- ----------------------------------- ------------ ----------------
<S> <C> <C>
Global Income $4,471,734 2002
Municipal Income $1,534,884 2002
</TABLE>
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 and Class B shareholders of the Funds bear all expenses and fees
relating to their respective distribution and authorized dealer service plans as
well as other expenses which are directly attributable to such shares. Transfer
agent fees are subject to separate arrangements for each class.
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 Global Income. 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 Government Income, Global
Income and Municipal Income, respectively. As compensation for the services
rendered pursuant to the Subadvisory Agreement, GSAM International is entitled
to a subadvisory fee from Global Income of .50% of the average daily net assets.
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.
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 Global Income, transfer agent fees) to the extent
such expenses exceed .00%, .06% and .05% per annum of Government Income, Global
Income and Municipal Income, respectively.
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, 1996,
Goldman Sachs retained approximately $17,300, $52,600 and $24,900 of sales loads
related to Government Income, Global Income and Municipal Income, 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% and .75% of each Fund's average
daily net assets attributable to Class A and Class B shares, respectively.
- --------------------------------------------------------------------------------
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
The Trust, on behalf of each Fund, has 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, on an annual basis, up to .25% of the
average daily net assets attributable to the Class A and Class B shares. Goldman
Sachs also serves as the Transfer Agent of the Funds for a fee.
For the year ended October 31, 1996, the advisors, administrators and
distributor have voluntarily agreed to waive certain fees and reimburse other
expenses as follows (in thousands):
<TABLE>
<CAPTION>
Waivers
--------------------------------------
Reimburse-
Admin- Class A Reimburse- ment
Fund Advisor istrator 12b-1 ment Outstanding
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Government
Income 74 44 74 220 27
Global
Income 848 -- 56 337 7
Municipal
Income -- -- 132 238 30
</TABLE>
The Investment Advisors and Administrator may discontinue or modify such waivers
and limitations in the future at their discretion.
For the year ended October 31, 1996, Government Income and Municipal Income
incurred commissions expense of approximately $1,200 and $2,750 respectively, in
connection with futures contracts entered into with Goldman Sachs. At October
31, 1996, Goldman Sachs owes approximately $7,000 to Government Income related
to variation margin on futures contracts.
4. Line of Credit Facility
The Funds participate in a $100,000,000 uncommitted, unsecured revolving line of
credit facility. In addition, Global Income participates in a $50,000,000
committed, unsecured revolving line of credit facility. Both facilities are 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 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, 1996, 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, 1996, were as follows:
<TABLE>
<CAPTION>
================================================================================
Government Global Municipal
Fund Income Income Income
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchases of U.S.
Government and
agency obligations $133,097,699 $117,740,548 $ --
- --------------------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) 9,741,716 410,144,747 184,788,273
- --------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 136,922,990 102,151,633 --
- --------------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and
agency obligations) 3,909,735 446,269,068 189,391,870
================================================================================
</TABLE>
For the year ended October 31, 1996, option transactions in Global Income were
as follows:
<TABLE>
<CAPTION>
Options Purchased Cost
- --------------------------------------------------------------------------------
<S> <C>
Balance outstanding, beginning of period $ --
Options purchased 202,160
Options expired (202,160)
- --------------------------------------------------------------------------------
Balance outstanding, end of period $ --
================================================================================
</TABLE>
32
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
At October 31, 1996, Global Income had outstanding forward foreign currency
exchange contracts to sell foreign currencies as follows:
<TABLE>
<CAPTION>
===============================================================================
Value on
Foreign Currency Settlement Current Unrealized
Sale Contracts Date Value Gain/(Loss)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Danish Krone
Expiring 1/22/97 $ 6,348,652 $ 6,443,676 $ (95,024)
Deutschemark
Expiring 11/27/96 37,735,809 38,044,516 (308,707)
Expiring 2/27/97 12,671,000 12,775,513 (104,513)
British Pound Sterling
Expiring 11/14/96 15,423,575 16,184,359 (760,784)
Irish Pound
Expiring 1/8/97 6,842,743 6,964,425 (121,682)
Italian Lira
Expiring 1/29/97 1,326,853 1,335,737 (8,884)
Japanese Yen
Expiring 1/24/97 23,059,781 22,755,697 304,084
Netherlands Guilder
Expiring 1/9/97 6,442,727 6,510,658 (67,931)
Spanish Peseta
Expiring 1/16/97 6,543,897 6,612,046 (68,149)
Swedish Krona
Expiring 1/28/97 4,708,899 4,736,457 (27,558)
Swiss Franc
Expiring 1/29/97 12,952,107 12,453,735 498,372
Expiring 1/29/97 12,083,214 12,109,196 (25,982)
- -------------------------------------------------------------------------------
Total Foreign Currency
Sale Contracts $146,139,257 $146,926,015 $(786,758)
===============================================================================
</TABLE>
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, 1996, Global Income had sufficient cash and/or securities to
cover any commitments under these contracts.
Global Income 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 $1,073,237 and $1,816,332 respectively, in the accompanying
Statement of Assets and Liabilities. Included in the "Receivable and Payable for
forward foreign currency exchange contracts" are $270,781 and $227,118
respectively, related to forward contracts closed but not settled as of
October 31, 1996.
6. Summary of Share Transactions
Share activity for the year ended October 31, 1996 is as follows:
<TABLE>
<CAPTION>
Government Income Fund Dollars Shares
===============================================================================
<S> <C> <C>
Class A Shares:
Shares sold $8,675,868 607,156
Reinvestment of dividends and
distributions 1,611,387 112,752
Shares repurchased (8,971,389) (626,797)
----------------------------------
1,315,866 93,111
----------------------------------
Class B Shares
Shares sold 246,680 17,470
Reinvestment of dividends
and distributions 3,200 225
Shares repurchased (19,531) (1,378)
----------------------------------
230,349 16,317
- -------------------------------------------------------------------------------
$1,546,215 109,428
===============================================================================
<CAPTION>
Global Income Fund Dollars Shares
===============================================================================
<S> <C> <C>
Class A Shares:
Shares sold $ 15,545,777 1,089,521
Reinvestment of dividends
and distributions 13,419,614 947,846
Shares repurchased (76,216,894) (5,376,065)
----------------------------------
(47,251,503) (3,338,698)
----------------------------------
Class B Shares
Shares sold 265,053 18,628
Reinvestment of dividends
and distributions 1,708 119
Shares repurchased (16,373) (1,144)
----------------------------------
250,388 17,603
----------------------------------
Institutional Shares:
Shares sold 23,936,542 1,703,165
Reinvestment of dividends
and distributions 3,546,724 250,603
Shares repurchased (5,786,481) (406,888)
----------------------------------
21,696,785 1,546,880
- -------------------------------------------------------------------------------
$(25,304,330) (1,774,215)
================================================================================
</TABLE>
33
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Municipal Income Fund Dollars Shares
================================================================================
<S> <C> <C>
Class A Shares:
Shares sold $ 6,139,212 431,736
Reinvestment of dividends
and distributions 1,482,976 104,074
Shares repurchased (9,874,431) (694,685)
------------------------------------
(2,252,243) (158,875)
------------------------------------
Class B Shares
Shares sold 250,553 17,760
Reinvestment of dividends
and distributions 1,802 127
Shares repurchased (1,551) (109)
------------------------------------
250,804 17,778
- --------------------------------------------------------------------------------
$ (2,001,439) (141,097)
================================================================================
</TABLE>
Share activity for the year ended October 31, 1995 is as follows:
<TABLE>
<CAPTION>
Global Income Fund Dollars Shares
================================================================================
<S> <C> <C>
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
- -------------------------------------------------------------------------------
$(141,736,340) (10,321,532)
===============================================================================
</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 Funds' custodian, or at subcustodians. GSAM monitors the
market value of the underlying securities by pricing them daily.
8. Joint Repurchase Agreement Account
Government Income, 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, 1996, Government Income had a 0.3% undivided interest in the
repurchase agreement in the joint account which equaled $8,400,000 in principal
amount. As of October 31, 1996, 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:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
===============================================================================
<S> <C> <C> <C>
Bear Stearns & Co., dated 10/31/96, repurchase price $700,108,500 (FNMA:
$555,686,102, 5.50%-8.50%, 2/1/09-6/1/26; FHLMC: $166,359,033, 5.50%-8.50%,
9/1/98-8/1/26)
$700,000,000 5.58% 11/01/96 $700,000,000
Lehman Brothers, Inc. dated 10/31/96, repurchase price $924,843,329 (Treasury
Notes: $942,903,967, 4.38%-8.50%, 11/15/96-8/15/03)
924,700,00 5.58 11/01/96 924,700,000
Nomura Securities International, Inc. dated 10/31/96, repurchase price
$700,108,500 (FNMA: $256,658,433, 5.50%-8.00%, 6/1/03-10/1/26; FHLMC:
$465,441,174, 6.00%-9.00%, 9/1/1-10/1/26)
700,000,000 5.58 11/01/96 700,000,000
Smith Barney, Inc. dated 10/31/96, repurchase price $170,026,161 (U.S
Treasury Interest Only Stripped Securities: $11,653,277, 2/15/98-5/15/02; U.S.
Treasury Notes: $85,997,728, 5.25%-7.75%, 5/15/97-10/15/06; U.S. Treasury
Principal Only Stripped Securities: $33,993,571, 5/15/97-5/15/05; U.S.
Treasury Bills: $41,756,285, 12/12/96-3/20/97)
170,000,000 5.54 11/01/96 170,000,000
Union Bank of Switzerland, Inc. dated 10/31/96, repurchase price $175,026,979
(U.S. Treasury Notes: $178,694,649, 6.88%-7.75%, 8/31/99-1/31/00)
175,000,000 5.55 11/01/96 175,000,000
- -------------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $2,669,700,000
===============================================================================
</TABLE>
34
<PAGE>
- --------------------------------------------------------------------------------
9. Certain Reclassifications
In accordance with Statement of Position 93-2, the Government Income, Global
Income and Municipal Income Funds have reclassified $18,448, $46,256 and
$17,593, respectively, from paid-in capital to accumulated undistributed net
investment income. Additionally, the Global Income Fund has reclassified
$862,007, $207,585 and $380 from accumulated net realized gain, accumulated net
realized foreign currency gain and paid in capital, respectively to accumulated
undistributed net investment income. These reclassifications have no impact on
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, 1996, the Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 14% of the
outstanding shares of Global Income.
- --------------------------------------------------------------------------------
35
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(a)/ 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 and of net
beginning investment futures related investment investment futures investment
of period income transactions transactions operations income transactions income
GOVERNMENT INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares $14.47 $0.92 $(0.11) -- $0.81 $(0.92) -- --
1996-Class B shares/(c)/ 14.11 0.41 0.26 -- 0.67 (0.41) -- --
1995-Class A shares 13.47 0.94 1.00 -- 1.94 (0.94) -- --
1994-Class A shares 14.90 0.85 (1.28) -- (0.43) (0.85) (0.12) (0.02)
For the Period February 10, 1993/(d)/ through October 31,
=========================================================
1993-Class A shares 14.32 0.56 0.58 -- 1.14 (0.56) -- --
GLOBAL INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended October 31,
=========================================================
1996-Class A shares $14.45 $0.71 $0.62 $0.18 $1.51 $(1.43) -- --
1996-Class B shares/(c)/ 14.03 0.34 0.41 0.11 0.86 (0.36) -- --
1996-Institutional
shares 14.45 1.15 0.32 0.10 1.57 (1.50) -- --
1995-Class A shares 13.43 0.89 0.92 0.15 1.96 (0.94) -- --
1995- Institutional
shares/(f)/ 14.09 0.22 0.34 0.06 0.62 (0.26) -- --
1994-Class A shares 15.07 0.84 (1.37) (0.12) (0.65) (0.22) (0.16) --
1993-Class A shares 14.69 0.85 1.07 (0.42) 1.50 (0.85) (0.27) --
1992-Class A shares 14.60 1.14 0.45 (0.36) 1.23 (1.14) -- --
For the Period August 2, 1991/(d)/ through October 31,
=========================================================
1991-Class A shares 14.55 0.25 0.23 (0.19) 0.29 (0.24) -- --
<CAPTION>
In excess of
net realized Net
gain on increase
investment, From Total (decrease) Net asset
option and paid distributions in net value at
futures in to asset end of
transactions capital shareholders value period
- -----------------------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares -- -- $(0.92) $(0.11) $14.36
1996-Class B shares/(c)/ -- -- (0.41) 0.26 14.37
1995-Class A shares -- -- (0.94) 1.00 14.47
1994-Class A shares (0.01) -- (1.00) (1.43) 13.47
For the Period February 10, 1993 /(d)/ through October 31,
==========================================================
1993-Class A shares -- -- (0.56) 0.58 14.90
GLOBAL INCOME FUND
- -----------------------------------------------------------------------------------------------------
For the Years Ended October 31,
===========================================================
1996-Class A shares -- -- $(1.43) $0.08 $14.53
1996-Class B shares/(c)/ -- -- (0.36) 0.50 14.53
1996-Institutional
shares -- -- (1.50) 0.07 14.52
1995-Class A shares -- -- (0.94) 1.02 14.45
1995-Institutional
shares/(f)/ -- -- (0.26) 0.36 14.45
1994-Class A shares -- (0.61) (0.99) (1.64) 13.43
1993-Class A shares -- -- (1.12) 0.38 15.07
1992-Class A shares -- -- (1.14) 0.09 14.69
For the Period August 2, 1991 (d) through October 31,
============================================================
1991-Class A shares -- -- (0.24) 0.05 14.60
<CAPTION>
Ratio of Net
Ratio of net assets
net investment at end
expenses income Portfolio of
Total to average to average turnover period
return /(b/) net assets net assets rate /(h)/ (in 000s)
===================================================================================================
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares 5.80% 0.50% 6.42% 485.09% $30,603
1996-Class B shares/(c)/ 4.85/(g)/ 1.25/(e)/ 5.65/(e)/ 485.09 234
1995-Class A shares 14.90 0.47 6.67 449.53 29,503
1994-Class A shares (2.98) 0.11 6.06 654.90 14,452
For the Period February 10, 1993/(d)/ through October 31,
=========================================================
1993-Class A shares 8.03/(g)/ 0.00/(e)/ 4.87/(e)/ 725.41/(g/ 12,860
- ---------------------------------------------------------------------------------------------------
For the Years Ended October 31,
=========================================================
1996-Class A shares 11.05% 1.16% 5.81% 232.15% $198,665
1996-Class B shares/(c)/ 6.24/(g)/ 1.70/(e)/ 5.16/(e)/ 232.15 256
1996-Institutional
shares 11.55 0.65 6.35 232.15 54,254
1995-Class A shares 15.08 1.29 6.23 265.86 245,835
1995-Institutional
shares/(f)/ 4.42/(g)/ 0.65/(e)/ 6.01/(e)/ 265.86 31,619
1994-Class A shares (4.49) 1.28 5.73 343.74 396,584
1993-Class A shares 10.75 1.30 5.78 313.88 675,662
1992-Class A shares 8.77 1.37 7.85 270.75 588,893
For the Period August 2, 1991 (d) through October 31,
=========================================================
1991- Class A shares 2.00 0.38 /(g)/ 1.72 /(g)/ 34.22 /(g)/ 388,744
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
------------------------------
Ratio of
net
Ratio of investment
expenses income
to average to average
net assets net assets
==============================================================
- --------------------------------------------------------------
<S> <C> <C>
For the Years Ended October 31,
==========================================================
1996-Class A shares 1.89% 5.03%
1996-Class B shares/(c)/ 2.39/(e)/ 4 .51/(e)/
1995-Class A shares 2.34 4.80
1994-Class A shares 2.86 3.31
For the Period February 10, 1993 /(d)/ through October 31,
==========================================================
1993-Class A shares 4.00/(e)/ 0.87/(e)/
- ------------------------------------------------------------
For the Years Ended October 31,
==========================================================
1996-Class A shares 1.64% 5.33%
1996-Class B shares/(c)/ 2.14 /(e)/ 4.72/(e)/
1996-Institutional
shares 1.11 5.89
1995-Class A shares 1.58 5.94
1995-Institutional
shares/(f)/ 1.08/(e)/ 5.58/(e)/
1994-Class A shares 1.53 5.48
1993-Class A shares 1.55 5.53
1992-Class A shares 1.62 7.60
For the Period August 2, 1991 (d) through October 31,
==========================================================
1991-Class A shares 0.44/(g)/ 1.66/(g)/
- ------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations (a) 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 and of net
beginning investment futures related investment investment futures investment
of period income transactions transactions operations income transactions income
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares $14.17 $0.65 $0.20 -- $0.85 $(0.65) -- --
1996- Class B shares /(c)/ 14.03 0.27 0.34 -- 0.61 (0.27) -- --
1995- Class A shares 13.08 0.67 1.09 -- 1.76 (0.67) -- --
1994- Class A shares 14.64 0.73 (1.51) -- (0.78) (0.73) (0.05) --
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 14.32 0.22 0.32 -- 0.54 (0.22) -- --
<CAPTION>
Distributions to shareholders
----------------------------------------
In excess of
net realized Net
gain on increase
investment, From Total (decrease) Net asset
option and paid distributions in net value at
futures in to asset end of
transactions capital shareholders value period
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares -- -- $(0.65) $0.20 $14.37
1996- Class B shares /(c)/ -- -- (0.27) 0.34 14.37
1995- Class A shares -- -- (0.67) 1.09 14.17
1994- Class A shares -- -- (0.78) (1.56) 13.08
For the Period July 20, 1993
1993- Class A shares -- -- (0.22) 0.32 14.64
<CAPTION>
Ratio of
Ratio of net
net investment
expenses income Portfolio
Total to average to average turnover
return /(b/) net assets net assets rate /(h)/
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares 6.13% 0.85% 4.58% 344.13%
1996- Class B shares /(c)/ 4.40 /(g)/ 1.60 /(e)/ 3.55 /(e)/ 344.13
1995- Class A shares 13.79 0.76 4.93 335.55
1994- Class A shares (5.51) 0.45 5.28 357.54
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 3.73 /(g)/ 0.00 /(e)/ 5.15 /(e)/ 99.99 /(g)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
---------------------
Net Ratio of
assets net
at end Ratio of investment
of expenses income
period to average to average
(in 000s) net assets net assets
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares $52,267 1.55% 3.88%
1996- Class B shares /(c)/ 255 2.05 /(e)/ 3.10 /(e)/
1995- Class A shares 53,797 1.49 4.20
1994- Class A shares 47,373 1.55 4.18
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 30,166 2.42 /(e)/ 2.73 /(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 distributions, a complete redemption of the investment
at the net asset value at the end of period and no sales charge. Total
return would be reduced if a sales charge for Class A shares or a contingent
deferred sales charge for Class B shares were taken into account.
(c) Class B shares commenced operations on May 1, 1996.
(d) Commencement of operations.
(e) Annualized.
(f) Institutional shares commenced operations on June 1, 1995.
(g) Not annualized.
(h) Includes the effect of mortgage dollar roll transactions for the Government
Income Fund.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
37
<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, 1996, 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, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of the
Goldman Sachs Government Income Fund, Goldman Sachs Global Income Fund and
Goldman Sachs Municipal Income Fund as of October 31, 1996, 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 12, 1996
- --------------------------------------------------------------------------------
38
<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.
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
- -------------------------------------
Annual Report
October 31, 1996
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
[LOGO OF GOLDMAN SACHS APPEARS HERE]
================================================================================
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
- -------------------------
Annual Report
October 31, 1996
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
[GOLDMAN SACHS LOGO APPEARS HERE]
================================================================================
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS, INCLUDING MUNICIPAL BONDS/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 edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than 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.
BA: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
- ----------
/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 do not
necessarily represent ratings which will be given to these securities on the
date of a Fund's fiscal year end.
1-A
<PAGE>
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
CA: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
UNRATED: 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 or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issuer 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 judgment to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designed by the symbols
Aa1, A1, Baa1 and B1.
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.
2-A
<PAGE>
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 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.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
STANDARD & POOR'S RATINGS GROUP
AAA: Bonds and debt rated AAA have the highest rating assigned by Standard
& Poor's. Capacity to pay interest and repay principal is extremely strong.
3-A
<PAGE>
AA: Bonds and debt 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 and debt 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 and debt 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.
BB, B, CCC, CC, C: Bonds and debt rated BB, B, CCC, CC and C are regarded,
on balance, as predominately speculative with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and
C the highest. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
BB: Bonds and debt rated BB have less near-term vulnerability to default
than other speculative issues. However, such securities face major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for bonds that are subordinated
to senior debt assigned an actual or implied BBB- rating.
B: Bonds and debt rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal.
The B rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied BB or BB-rating.
CCC: Bonds and debt rated CCC have currently identifiable vulnerability to
default, and are dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, such
securities are not likely to have the capacity to pay interest and repay
principal.
The CCC rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied B or B-rating.
4-A
<PAGE>
CC: The rating CC is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC rating.
C: The rating C is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC-debt rating. The
C rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
C1: The rating C1 is reserved for income bonds on which no interest is
being paid.
D: Bonds and debt rated D are in default and payment of interest and/or
repayment of principal is in arrears. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
N.R.: Not rated.
Notes: Bonds which are unrated expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative obligations. The Fund is dependent on the Investment
Adviser's judgment, analysis and experience in the evaluation of such bonds.
Investors should note that credit factors affecting high yield, fixed
income securities change quickly and the assignment of a rating to a particular
bond by a rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
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 plus sign (+) 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.
5-A
<PAGE>
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.
A-3: Issued carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable t the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B: Issues rated B are regarded as having only speculative capacity
for timely payment.
C: This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D: Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes such
payments will be made during such grace period.
FITCH INVESTORS SERVICE, L.P.
Bond Ratings
- ------------
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings
take into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA: Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA: Bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories
6-A
<PAGE>
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.
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified, which
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Bonds have certain identifiable characteristics that, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or reorganization of the
obligor. DDD represents the highest potential for recovery on these bonds, and D
represents the lowest potential for recovery.
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, DDD, DD, or D Categories.
7-A
<PAGE>
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+.
F-2: Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned F-1+ and F-1 ratings.
F-3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is
adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
F-S: Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D: Default. Issues assigned this rating are in actual or imminent
payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
8-A
<PAGE>
DUFF & PHELPS
-------------
Long-Term Debt and Preferred Stock
- ----------------------------------
AAA: Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong.
Risk is modest but may vary slightly from time to time because of economic
conditions.
BBB+, BBB, BBB-: Below average protection factors but still
considered sufficient for prudent investment. Considerable variability in risk
during economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that
obligations will not be met when due. Financial protection factors will
fluctuate widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable
uncertainty exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable company
developments.
Commercial Paper/Certificates of Deposits
- -----------------------------------------
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.
DUFF 1 MINUS: High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
9-A
<PAGE>
DUFF 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets
is good. Risk factors are small.
DUFF 3: Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
DUFF 4: Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
DUFF 5: Issuer failed to meet scheduled principal and/or interest
payments.
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 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.
10-A
<PAGE>
MIG-2/VMIG-2: This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG-3/VMIG-3: This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG-4/VMIG-4: This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
SG: This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
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 three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
- - Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
- - Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3: Speculative capacity to pay principal and interest.
11-A
<PAGE>
APPENDIX B
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 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-B
<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
partners' capital of approximately $5.3 billion as of November 29, 1996.
.. Thirty-four offices worldwide where professionals focus on identifying
financial opportunities.
.. The number one underwriter of all international equity issues for 1993,
1994 and 1995.*
.. Premier lead manager of negotiated municipal bond offerings over the past
six years (1990-1995).
.. The number one lead manager of U.S. common stock offerings from (1989-
1995).*
* Source: Securities Data Corporation. Ranking excludes REITS, Trusts and
-----------------------------------
Rights.
2-B
<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
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1991 Provides advisory services for the largest privatization in the region
of the sale of Telefonos de Mexico
1995 Dow Jones Industrial Average breaks 5000
1996 Goldman Sachs takes Deutsche Telekom public
Dow Jones Industrial Average breaks 6000
1997 Dow Jones Industrial Average breaks 7000
3-B
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY STATE.
SUBJECT TO COMPLETION -- JUNE 13, 1997
PART B
STATEMENT OF ADDITIONAL INFORMATION
SERVICE SHARES
GOLDMAN SACHS ADJUSTABLE RATE GOVERNMENT FUND
GOLDMAN SACHS SHORT DURATION GOVERNMENT FUND
GOLDMAN SACHS SHORT DURATION TAX-FREE FUND
GOLDMAN SACHS GOVERNMENT INCOME FUND
GOLDMAN SACHS MUNICIPAL INCOME FUND
GOLDMAN SACHS CORE FIXED INCOME FUND
GOLDMAN SACHS GLOBAL INCOME FUND
GOLDMAN SACHS HIGH YIELD 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 Goldman Sachs Adjustable Rate
Government Fund, Goldman Sachs Short Duration Government Fund, Goldman Sachs
Short Duration Tax-Free Fund, Goldman Sachs Government Income Fund, Goldman
Sachs Municipal Income Fund, Goldman Sachs Core Fixed Income Fund, Goldman Sachs
Global Income Fund and Goldman Sachs High Yield Fund, each dated __________,
1997, as amended and/or supplemented from time to time (each a "Prospectus"),
which may be obtained without charge from institutions ("Service Organizations")
that hold Service Shares for the benefit of their customers, or by calling
Goldman, Sachs & Co. at the telephone number, or writing to one of the
addresses, listed below.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Introduction B-3
<S> <C>
Other Investments and Practices B-10
Investment Restrictions B-53
Management B-70
Portfolio Transactions B-86
Shares of the Trust B-87
Net Asset Value B-91
Taxation B-92
Performance Information B-104
Other Information B-116
Financial Statements B-117
Service Plan B-118
Appendix A 1-A
Appendix B 1-B
</TABLE>
The date of this Additional Statement is __________, 1997.
<PAGE>
<TABLE>
<S> <C>
GOLDMAN SACHS ASSET MANAGEMENT GOLDMAN SACHS ASSET MANAGEMENT
ADVISER TO GOLDMAN SACHS SHORT INTERNATIONAL
DURATION TAX-FREE FUND, ADVISER TO GOLDMAN SACHS
GOLDMAN SACHS GOVERNMENT GLOBAL INCOME FUND
INCOME FUND, GOLDMAN SACHS 133 PETERBOROUGH COURT
MUNICIPAL INCOME FUND, LONDON EC4A 2BB, ENGLAND
GOLDMAN SACHS CORE FIXED
INCOME FUND AND GOLDMAN GOLDMAN, SACHS & CO.
SACHS HIGH YIELD FUND DISTRIBUTOR
ONE NEW YORK PLAZA 85 BROAD STREET
NEW YORK, NEW YORK 10004 NEW YORK, NEW YORK 10004
GOLDMAN SACHS FUNDS GOLDMAN, SACHS & CO.
MANAGEMENT, L.P. TRANSFER AGENT
ADVISER TO GOLDMAN SACHS 4900 SEARS TOWER
ADJUSTABLE RATE GOVERNMENT CHICAGO, ILLINOIS 60606
FUND AND GOLDMAN SACHS SHORT
DURATION GOVERNMENT FUND
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
</TABLE>
TOLL FREE (IN U.S.) .......800-621-2550
<PAGE>
INTRODUCTION
Goldman Sachs Trust (the "Trust") was formed under the laws of the
state of Delaware on January 28, 1997. The Trust is a successor to a
Massachusetts business trust that was merged with the Trust on April 30, 1997.
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 the following series, among others: Goldman Sachs
Adjustable Rate Government Fund ("Adjustable Rate Fund"), Goldman Sachs 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"), Goldman Sachs
Short Duration Tax-Free Fund ("Short Duration Tax-Free Fund"), Goldman Sachs
Short Duration Government Fund ("Short Duration Government Fund") and Goldman
Sachs High Yield Fund ("High Yield Fund") and 27 other series of shares.
Adjustable Rate Fund, Core Fund, Global Income Fund, Government Income Fund,
Municipal Income Fund, Short Duration Tax-Free Fund, Short Duration Government
Fund and High Yield 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 six classes of shares:
Institutional Shares, Administration Shares, Service Shares, Class A Shares,
Class B Shares and Class C Shares. Adjustable Rate Fund is authorized to issue
four classes of shares: Institutional Shares, Administration Shares, Service
Shares and Class A Shares. Government Income Fund, Municipal Income Fund,
Global Income Fund and High Yield Fund are authorized to issue five classes of
shares: Institutional Shares, Service Shares, Class A Shares, Class B Shares and
Class C Shares. Additional series may be added in the future from time to time.
Goldman Sachs Asset Management ("GSAM"), a separate operating division
of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the investment adviser to
Core Fund, Government Income Fund, Municipal Income Fund, Short Duration Tax-
Free Fund and High Yield Fund. Goldman Sachs Asset Management International
("GSAMI"), an affiliate of Goldman Sachs, serves as investment adviser to the
Global Income Fund. Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate
of Goldman Sachs, serves as the investment adviser to Adjustable Rate Fund and
Short Duration Government Fund. GSAM, GSAMI and GSFM 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,
B-3
<PAGE>
unlike certificates of deposits, shares of the Funds are not insured by the
Federal Deposit Insurance Corporation.
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
B-4
<PAGE>
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, 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
three years. The duration target of the Short Duration Government Fund is that
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. 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 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
B-5
<PAGE>
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 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
B-6
<PAGE>
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 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.
B-7
<PAGE>
Core Fund's overall returns are generally likely to move in the
opposite direction from interest rates. Therefore, when interest rates decline,
Core Fund's return is likely to increase. Conversely, when interest rates
increase, Core Fund's return is likely to decline. However, the Adviser
believes that, given the flexibility of managers to invest in a diversified
portfolio of securities, Core Fund's return is not likely to decline as quickly
as that of other fixed-income funds with a comparable average portfolio
duration. In exchange for accepting a higher degree of potential share price
fluctuation, investors have the opportunity 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 will attempt to control
----------------------------------
its exposure to interest rate risk, including overall market exposure and the
spread risk of particular sectors and securities, 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
B-8
<PAGE>
access to input from Goldman Sachs' economists, fixed-income analysts and
mortgage specialists.
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 prospects 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
B-9
<PAGE>
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 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 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.
HIGH YIELD FUND
High Yield Fund's Investment Process. GSAM starts the investment
-------------------------------------
process with economic analysis based on research generated by the Goldman Sachs
Global Economic Research Group and others to determine broad growth trends,
industry-specific events and market forecasts. The market value of non-
investment grade fixed income securities tends to reflect individual
developments within a company to a greater extent than higher rated corporate
debt or Treasury bonds that react primarily to fluctuations in interest rates.
Therefore, determining the creditworthiness of issuers is critical. To that
end, the High Yield Fund's portfolio managers have access to Goldman, Sachs &
Co.'s highly regarded Credit Research and Global Investment Research
Departments, as well as analysis from the firm's High Yield Research Group, a
dedicated group of 14 professionals in the high yield and emerging market
corporate bond research area, consisting of industry and regional market
specialists. In addition, the Fund's portfolio managers may review the opinions
of the two largest independent credit rating agencies, Standard & Poor's Ratings
Group and Moody's Investors Services, Inc. High Yield Fund's portfolio managers
and credit analysts also conduct their own in-depth analysis of each issue
considered for inclusion in the Fund's portfolio. The portfolio managers and
credit analysts evaluate such factors as a company's competitive position, the
strength of its balance sheet, its ability to withstand economic downturns and
its potential to generate ample cash flow to service its debt. The ability to
accurately analyze a company's future cash flow by correctly anticipating the
impact of economic, industry-wide and specific events are critical to successful
high yield investing. GSAM's goal is to identify companies with the potential
to strengthen their balance sheets by increasing their earnings, reducing their
debt or effecting a turnaround. GSAM analyzes trends in a company's debt
picture (i.e., the level of its interest coverage) as well as new developments
in its capital structure on an ongoing basis. GSAM believes that this constant
reassessment is more
B-10
<PAGE>
valuable than relying on a "snapshot" view of a company's ability to service
debt at one or two points in time.
High Yield Fund's portfolio is diversified among different sectors and
industries on a global basis in an effort to reduce overall risk. While GSAM
will avoid excessive concentration in any one industry, the Fund's specific
industry weightings are the result of individual security selection. Emerging
market debt considered for the High Yield Fund's portfolio will be selected by
specialists knowledgeable about the political and economic structure of those
economies.
Return on and Risks of High Yield Securities. Over the past decade,
---------------------------------------------
high yield bonds have delivered consistently higher yields and total return (and
higher volatility) than either investment grade corporate bonds or U.S. Treasury
bonds. However, because these non-investment grade securities involve higher
risks in return for higher income, they are best suited to long-term investors
who are financially secure enough to withstand volatility and the risks
associated with such investments. See "Other Investments and Practices."
Different types of fixed income securities may react differently to changes in
the economy. High yield bonds, like stocks, tend to perform best when the
economy is strong, inflation is low and companies experience healthy profits,
which can lead to higher stock prices and higher credit ratings. Government
bonds are likely to appreciate more in a weaker economy when interest rates are
declining. In certain types of markets, adding some diversification in the high
yield asset class may help to increase returns and decrease overall portfolio
risk.
For high yield, non-investment grade securities, as for most
investments, there is a direct relationship between risk and return. Along with
their potential to deliver higher yields and greater capital appreciation than
most other types of fixed income securities, high yield securities are subject
to higher risk of loss, greater volatility and are considered speculative by
traditional investment standards. The most significant risk associated with
high yield securities is credit risk: the risk that the company issuing a high
yield security may have difficulty in meeting its principal and/or interest
payments on a timely basis. As a result, extensive credit research and
diversification are essential factors in managing risk in the high yield arena.
To a lesser extent, high yield bonds are also subject to interest rate risk:
when interest rates increase, the value of fixed income securities tends to
decline.
OTHER INVESTMENTS AND PRACTICES
OBLIGATIONS OF THE UNITED STATES, ITS AGENCIES, INSTRUMENTALITIES AND SPONSORED
ENTERPRISES
Each Fund may invest in U.S. government securities ("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
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<PAGE>
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, or 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 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
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<PAGE>
Adjustable Rate, Short Duration Government, Core, Global Income, High
Yield and Government Income Funds (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. 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
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<PAGE>
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 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
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<PAGE>
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, 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
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<PAGE>
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.
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
B-16
<PAGE>
primarily conventional Mortgage Loans. The lenders originating and servicing
the Mortgage Loans are subject to certain eligibility requirements established
by Fannie Mae.
Fannie Mae has certain contractual responsibilities. With respect to each
Pool, Fannie Mae is obligated to distribute scheduled monthly installments of
principal and interest after Fannie Mae's servicing and guaranty fee, whether or
not received, to Certificate holders. Fannie Mae also is obligated to
distribute to holders of Certificates an amount equal to the full principal
balance of any foreclosed Mortgage Loan, whether or not such principal balance
is actually recovered. The obligations of Fannie Mae under its guaranty of the
Fannie Mae Certificates are obligations solely of Fannie Mae.
FREDDIE MAC CERTIFICATES. The Federal Home Loan Corporation ("Freddie
------------------------
Mac") is a publicly held U.S. government sponsored enterprise. The principal
activity of Freddie Mac currently is the purchase of first lien, conventional,
residential mortgage loans and participation interests in such mortgage loans
and their resale in the form of mortgage securities, primarily Freddie Mac
Certificates. A Freddie Mac Certificate represents a pro rata interest in a
group of mortgage loans or participations in mortgage loans (a "Freddie Mac
Certificate group") purchased by Freddie Mac.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest at the rate provided for by such
Freddie Mac Certificate (whether or not received on the underlying loans).
Freddie Mac also guarantees to each registered Certificate holder ultimate
collection of all principal of the related mortgage loans, without any offset or
deduction, but does not, generally, guarantee the timely payment of scheduled
principal. The obligations of Freddie Mac under its guaranty of Freddie Mac
Certificates are obligations solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed-rate mortgage 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
B-17
<PAGE>
group may include whole loans, participation interests in whole loans, undivided
interests in 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 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
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<PAGE>
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, Global and
Government Income Funds, 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 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
B-19
<PAGE>
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 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
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<PAGE>
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
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
B-21
<PAGE>
Pass-Throughs, one or more classes of certificates may be subordinate
certificates which provide that the rights of the subordinate certificate-
holders to receive any or a specified portion of distributions with respect to
the underlying mortgage loans may be subordinated to the rights of the senior
certificate-holders. If so structured, the subordination feature may be
enhanced by distributing to the senior certificate-holders on certain
distribution dates, as payment of principal, a specified percentage (which
generally declines over time) of all principal payments received during the
preceding prepayment period ("shifting interest credit enhancement"). This will
have the effect of accelerating the amortization of the senior certificates
while increasing the interest in the trust fund evidenced by the subordinate
certificates. Increasing the interest of the subordinate certificates relative
to that of the senior certificates is intended to preserve the availability of
the subordination provided by the subordinate certificates. In addition,
because the senior certificate-holders in a shifting interest credit enhancement
structure are entitled to receive a percentage of principal prepayments which is
greater than their proportionate interest in the trust fund, the rate of
principal prepayments on the mortgage loans will have an even greater effect on
the rate of principal payments and the amount of interest payments on, and the
yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a
reserve fund may be established relating to such certificates (the "Reserve
Fund"). The Reserve Fund may be created with an initial cash deposit by the
originator or servicer and augmented by the retention of distributions otherwise
available to the subordinate certificate-holders or by excess servicing fees
until the Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate-holders of the full
amount of scheduled monthly payments of principal and interest due to 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 that 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
B-22
<PAGE>
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.
ASSET-BACKED SECURITIES
Core, Government Income, High Yield and Global Income Funds 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
B-23
<PAGE>
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, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS
Each Fund may invest in zero coupon bonds, deferred interest and capital
appreciation bonds and pay-in-kind ("PIK") securities. 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, capital appreciation bonds and PIK securities
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.
PIK securities may be debt obligations or preferred shares that provide the
issuer with the option of paying interest or dividends on such obligations in
cash or in the form of additional securities rather than cash. Similar to zero
coupon bonds and deferred interest bonds, PIK securities are designed to give an
issuer flexibility in managing cash flow. PIK securities that are debt
securities can either be senior or subordinated debt and generally trade flat
(i.e., without accrued interest). The trading price of PIK debt securities
generally reflects the market value of the underlying debt plus an amount
representing accrued interest since the last interest payment.
Zero coupon, deferred interest, capital appreciation and PIK 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 for each taxable year and generally are required to distribute
such accrued amounts (net of deductible expenses, if any) to avoid being subject
to tax. Because no cash is generally received at the time of the accrual, a
Fund may be required to liquidate other portfolio securities to
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<PAGE>
obtain sufficient cash 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, Global Income, Government Income and High Yield Funds 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 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.
High Yield Securities. Bonds rated BB or below by Standard & Poor's
---------------------
Ratings Group (Standard & Poor's) or Ba or below by Moody's Investor Service,
Inc. ("Moody's") (or comparable rated and unrated securities) are commonly
referred to as "junk bonds" and are considered speculative; the ability of their
issuers to make principal and interest payments may be questionable. In some
cases, such bonds may be highly speculative, have poor prospects
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<PAGE>
for reaching investment grade standing and be in default. As a result,
investment in such bonds will entail greater risks than those associated with
investment grade bonds (i.e., bonds rated AAA, AA, A or BBB by Standard and
Poor's or Aaa, Aa, A or Baa by Moody's). Analysis of the creditworthiness of
issuers of high yield securities may be more complex than for issuers of higher
quality debt securities, and the ability of a Fund to achieve its investment
objective may, to the extent of its investments in high yield securities, be
more dependent upon such creditworthiness analysis than would be the case if the
Fund were investing in higher quality securities. See Appendix B for a
description of the corporate bond and preferred stock ratings by Standard &
Poor's, Moody's, Fitch Investors Service Corp. and Duff & Phelps.
The amount of high yield, fixed income securities proliferated in the 1980s
and early 1990s as a result of increased merger and acquisition and leveraged
buyout activity. Such securities are also issued by less-established
corporations desiring to expand. Risks associated with acquiring the securities
of such issuers generally are greater than is the case with higher rated
securities because such issuers are often less creditworthy companies or are
highly leveraged and generally less able than more established or less leveraged
entities to make scheduled payments of principal and interest.
The market values of high yield, fixed income securities tends to reflect
those individual corporate developments to a greater extent than do those of
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. Issuers of such high yield securities may not be able
to make use of more traditional methods of financing and their ability to
service debt obligations may be more adversely affected than issuers of higher
rated securities by economic downturns, specific corporate developments or the
issuers' inability to meet specific projected business forecasts. These non-
investment grade securities also tend to be more sensitive to economic
conditions than higher-rated securities. Negative publicity about the junk bond
market and investor perceptions regarding lower-rated securities, whether or not
based on fundamental analysis, may depress the prices for such securities.
Since investors generally perceive that there are greater risks associated
with non-investment grade securities of the type in which High Yield Fund
invests, the yields and prices of such securities may tend to fluctuate more
than those for higher-rated securities. In the lower quality segments of the
fixed-income securities market, changes in perceptions of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
than do changes in higher quality segments of the fixed-income securities
market, resulting in greater yield and price volatility.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In
addition, the prices of fixed-income
B-26
<PAGE>
securities fluctuate in response to the general level of interest rates.
Fluctuations in the prices of portfolio securities subsequent to their
acquisition will not affect cash income from such securities but will be
reflected in the High Yield Fund's net asset value.
The risk of loss from default for the holders of high yield, fixed-income
securities is significantly greater than is the case for holders of other debt
securities because such high yield, fixed-income securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities. Investment by the High Yield Fund in already
defaulted securities poses an additional risk of loss should nonpayment of
principal and interest continue in respect of such securities. Even if such
securities are held to maturity, recovery by the High Yield Fund of its initial
investment and any anticipated income or appreciation is uncertain. The High
Yield Fund may be required to liquidate other portfolio securities to satisfy
the High Yield Fund's annual distribution obligations in respect of accrued
interest income on securities which are subsequently written off, even though
the High Yield Fund has not received any cash payments of such interest.
The secondary market for high yield, fixed-income securities is
concentrated in relatively few markets and is dominated by institutional
investors, including mutual funds, insurance companies and other financial
institutions. Accordingly, the secondary market for such securities is not as
liquid as and is more volatile than the secondary market for higher-rated
securities. In addition, the trading volume for high-yield, fixed-income
securities is generally lower than that of higher rated securities and the
secondary market for high yield, fixed-income securities could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the High Yield Fund's ability to dispose of particular
portfolio investments. Prices realized upon the sale of such lower rated or
unrated securities, under these circumstances, may be less than the prices used
in calculating the High Yield Fund's net asset value. A less liquid secondary
market also may make it more difficult for the High Yield Fund to obtain precise
valuations of the high yield securities in its portfolio.
Certain proposed and recently enacted federal laws could adversely affect
the secondary market for high yield securities and the financial condition of
issuers of these securities. The form of proposed legislation and the
probability of such legislation being enacted is uncertain.
Non-investment grade or high-yield, fixed-income securities also present
risks based on payment expectations. High yield, fixed-income securities
frequently contain "call" or buy-back features which permit the issuer to call
or repurchase the security from its holder. If an issuer exercises such a "call
option" and redeems the security, the High Yield Fund may have to replace such
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<PAGE>
security with a lower-yielding security, resulting in a decreased return for
investors. In addition, if the High Yield Fund experiences unexpected net
redemptions of the High Yield Fund's shares, it may be forced to sell its
higher-rated securities, resulting in a decline in the overall credit quality of
the High Yield Fund's portfolio and increasing the exposure of the High Yield
Fund to the risks of high yield securities. The High Yield Fund may also incur
additional expenses to the extent that it is required to seek recovery upon a
default in the payment of principal or interest on a portfolio security.
Credit ratings issued by credit rating agencies are designed to evaluate
the safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the conditions of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in non-investment
grade and comparable unrated obligations will be more dependent on the Adviser's
credit analysis than would be the case with investments in investment-grade debt
obligations. The Adviser employs its own credit research and analysis, which
includes a study of existing debt, capital structure, ability to service debt
and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. The Adviser continually
monitors the investments in the High Yield Fund's portfolio and evaluates
whether to dispose of or to retain non-investment grade and comparable unrated
securities whose credit ratings or credit quality may have changed.
BANK OBLIGATIONS
Government Income, Global Income, High Yield and Core Funds may each invest
in obligations issued or guaranteed by United States and foreign banks
(Government Income Fund may only invest in U.S. dollar denominated securities).
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 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
generally permitted to engage in a wider variety of 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.
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<PAGE>
MUNICIPAL SECURITIES
Core, Municipal Income, High Yield and Short Duration Tax-Free Funds 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 or counsel selected by the Adviser,
excluded from gross income for federal income tax purposes. The Core, Municipal
Income, High Yield and Short Duration Tax-Free Funds 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 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
B-29
<PAGE>
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, Municipal
Income, High Yield and Core Funds. 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 may be readily marketable.
The obligations of the issuer to pay the principal of and interest on a
Municipal Security are subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Act, and laws, if any, that may be enacted by Congress or state
legislatures extending the time for payment of principal or interest or imposing
other constraints upon the enforcement of such obligations. There is also the
possibility that, as a result of litigation or other conditions, the power or
ability of the issuer to pay when due principal of or interest on a Municipal
Security may be materially affected.
Municipal Leases, Certificates of Participation and Other Participation
-----------------------------------------------------------------------
Interests. The Core, High Yield, 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
B-30
<PAGE>
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 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, High Yield, 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
B-31
<PAGE>
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 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
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<PAGE>
usually purchased at a price which represents a premium over their face value.
Private Activity Bonds. Short Duration Tax-Free, Municipal Income, High
----------------------
Yield, and Core Funds 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. A Tax Exempt Fund's distributions of its interest income from private
activity bonds may subject certain investors to the federal alternative minimum
tax whereas Core Fund's distributions of any tax-exempt interest it receives
from any source will be taxable for regular federal income tax purposes.
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
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 and the bond would not otherwise be readily
marketable. 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
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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, High Yield, 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 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 to 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
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premium and meeting the insurer's underwriting standards, the bond issuer is
able to obtain a high credit rating (usually, Aaa from Moody's or AAA from
Standard & Poor's) for the issued security. Such insurance is likely to
increase the purchase price and resale value of the security. New issue
insurance policies are non-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. The Municipal Securities
invested in by the High Yield Fund will not be subject to this requirement.
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 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
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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.
FOREIGN INVESTMENTS
Core, High Yield 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, High Yield and Global Income Funds may
temporarily hold funds in bank deposits in foreign currencies during completion
of investment programs, Core, High Yield and Global Income Funds 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
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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, High Yield Fund or Global
Income Fund is uninvested and no return is earned thereon. The inability of
Core Fund, High Yield 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, High Yield Fund
or Global Income Fund due to subsequent declines in value of the portfolio
securities, or, if Core Fund, High Yield 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 adversely affect Core, High
Yield or Global Income Funds' 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.
INVESTING IN EMERGING COUNTRIES
Market Characteristics. Debt securities of most emerging markets issuers
----------------------
may be less liquid and are generally subject to greater price volatility than
securities of issuers in the U.S. and other developed countries. The markets
for securities of emerging markets may have substantially less volume than the
market for similar securities in the U.S. and may not be able to absorb, without
price disruptions, a significant increase in trading volume or trade size.
Additionally, market making and arbitrage activities are generally less
extensive in such markets, which may contribute to increased volatility and
reduced liquidity of such markets. The less liquid the market, the more
difficult it may be for the Fund to accurately price its portfolio securities or
to
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dispose of such securities at the times determined to be appropriate. The risks
associated with reduced liquidity may be particularly acute to the extent that a
Fund needs cash to meet redemption requests, to pay dividends and other
distributions or to pay its expenses.
Securities markets of emerging markets may also have less efficient
clearance and settlement procedures than U.S. markets, making it difficult to
conduct and complete transactions. Delays in the settlement could result in
temporary periods when a portion of a Fund's assets is uninvested and settlement
could result in temporary periods when a portion of the Fund's assets is
uninvested and no return is earned thereon. Inability to make intended security
purchases could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities could result either in losses to
the Fund due to subsequent declines in value of the portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability of the Fund to the purchaser.
Transaction costs, including brokerage commissions and dealer mark-ups, in
emerging markets may be higher than in the U.S. and other developed securities
markets. As legal systems in emerging markets develop, foreign investors may be
adversely affected by new or amended laws and regulations. In circumstances
where adequate laws exist, it may not be possible to obtain swift and equitable
enforcement of the law.
Economic, Political and Social Factors. Emerging markets may be subject to
--------------------------------------
a greater degree of economic, political and social instability than the U.S.,
Japan and most Western European countries. Such instability may result from,
among other things: (i) authoritarian governments or military involvement in
political and economic decision-making, including changes or attempted changes
in government through extra-constitutional means; (ii) popular unrest associated
with demands for improved economic, political and social conditions; (iii)
internal insurgencies; (iv) hostile relations with neighboring countries; and
(v) ethnic, religious and racial disaffection and conflict. Many emerging
markets have experienced in the past, and continue to experience, high rates of
inflation. In certain countries inflation has at times accelerated rapidly to
hyperinflationary levels, creating a negative interest rate environment and
sharply eroding the value of outstanding financial assets in those countries.
The economies of many emerging markets are heavily dependent upon international
trade and are accordingly affected by protective trade barriers and the economic
conditions of their trading partners. In addition, the economies of some
emerging markets may differ unfavorably from the U.S. economy in such respects
as growth of gross domestic product, rate of inflation, capital reinvestment,
resources, self-sufficiency and balance of payments position.
Restrictions on Investment and Repatriation. Certain emerging markets
-------------------------------------------
require governmental approval prior to investments by
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foreign persons or limit investments by foreign persons to only a specified
percentage of an issuer's outstanding securities or a specific class of
securities which may have less advantageous terms (including price) than
securities of the issuer available for purchase by nationals. Repatriation of
investment income and capital from certain emerging markets is subject to
certain governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect the operation
of a Fund.
SOVEREIGN DEBT OBLIGATIONS
Investments in sovereign debt obligations involves special risks not
present in corporate debt obligations. The issuer of the sovereign debt or the
governmental authorities that control the repayment of the debt may be unable or
unwilling to repay principal or interest when due, and a Fund may have limited
recourse in the event of a default. During periods of economic uncertainty, the
market prices of sovereign debt, and a Fund's net asset value, may be more
volatile than prices of debt obligations of U.S. issuers. In the past, the
governments of certain emerging markets have encountered difficulties in
servicing their debt obligations, withheld payments of principal and interest
and declared moratoria on the payment of principal and interest on their
sovereign debts.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from foreign governments, multinational agencies and other
entities to reduce principal and interest arrearages on their debt. The failure
of a sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of the third parties' commitments to lend funds to the sovereign
debtor, which may further impair such debtor's ability or willingness to timely
service its debts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Core, High Yield and Global
Income Funds 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.
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<PAGE>
At the maturity of a forward contract, Global Income Fund, High Yield 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, High Yield or Core Funds may enter into forward foreign
currency exchange contracts in several circumstances. First, when Global
Income, High Yield or Core Funds enter into a contract for the purchase or sale
of a security quoted or denominated in a foreign currency, or when Global
Income, High Yield or Core Funds anticipate the receipt in a foreign currency of
a dividend or interest payment on such a security which it holds, Global Income,
High Yield or Core Funds 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, High Yield or Core Funds will
attempt to protect themselves 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 U.S. 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 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 U.S. dollar value of only a portion of a Fund's foreign
assets.
Global Income, High Yield and Core Funds 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
Advisers determine that there is a pattern of correlation between the two
currencies. The Global Income, High Yield and Core Funds may also purchase and
sell
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<PAGE>
forward contracts to seek to increase total return when the Advisers anticipate
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 a Fund's portfolio.
Global Income, High Yield and Core Funds' custodian will place cash or
liquid assets, 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 and forward contracts entered into to seek 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 accounts will be marked-to-
market on a daily basis. Although the contracts are not presently regulated by
the Commodity Trading Futures Commission ("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, Core and High Yield Funds will not enter into a forward contract
with a term of greater than one year.
While Global Income, Core and High Yield Funds 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, Core and
High Yield Funds 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 quoted or
denominated in a particular currency and forward contracts entered into by
Global Income, Core and High Yield Funds. 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.
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<PAGE>
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, Adjustable Rate, Government Income, Short Duration Government,
Global Income and High Yield Funds may enter into mortgage swaps and Core, High
Yield and Global Income Funds may also enter into currency swaps. Each Fund may
enter into swap transactions for hedging purposes or 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, cap, floor and collar positions.
A Fund will enter into interest rate and mortgage swaps only on a net
basis, which means that the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate and mortgage swaps do not involve the delivery of
securities, other underlying assets or principal. Accordingly, the risk of loss
with respect to interest rate and mortgage swaps is limited to the net amount of
payments that a Fund is contractually obligated to make. If the other party to
an interest rate swap defaults, a Fund's risk of loss consists of the net amount
of payments that such Fund is contractually entitled to receive, if any. In
contrast, currency swaps usually involve the delivery of the entire principal
amount of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. 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 assets, 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. Inasmuch as these
transactions are entered into
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for hedging purposes or are offset by cash or liquid assets, as permitted by
applicable law, 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.
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 exchanges
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
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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 assets, as
permitted by applicable law, either of which, in the case of Global Income Fund,
Core Fund or High Yield 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
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 assets, as permitted
by applicable law, 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 composed of
securities in which it may invest. A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
options it had purchased.
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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 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, Global Income
----------------------------------------------------
and High Yield Funds may write covered put and call options and purchase put and
call options on foreign currencies in
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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, Core and High Yield Funds 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, Core and High Yield Funds
may purchase call options on currency to seek to increase total return when the
Advisers anticipate 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 included in the Fund's portfolios.
A call option written by Core, Global Income and High Yield Funds 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.
Core, Global Income and High Yield Funds would normally purchase call
options in anticipation of an increase in the U.S. 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, Global Income and High Yield Funds would normally purchase put
options in anticipation of a decline in the U.S. 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, Global Income and High Yield
Funds, 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 U.S. 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
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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,
Core, Global Income and High Yield Funds may use options on currency to seek to
increase total return. Global Income Fund, High Yield Fund and Core 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, High Yield and Core Funds may forego the opportunity to
profit from an increase in the market value of the underlying currency. Also,
when writing put options, Global Income, High Yield and Core Funds accept, 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, High Yield and Core Funds 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, High Yield and Core Funds 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, High Yield and Core Funds would
realize either no gain or a loss on the purchase of the call option. Put
options may be purchased by the Global Income, High Yield and Core Funds for
the purpose of benefiting from a decline in the value of currencies which it
does not own. Global Income, High Yield and Core Funds 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 Global Income, High Yield and Core Funds 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
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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 purposes (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 assets, as permitted by applicable law, 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 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
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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 to hedge against changes in interest
rates or securities prices or, in the case of Core, High Yield and Global Income
Funds, 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 various securities (such as U.S. Government
Securities), securities indices, foreign currencies in the case of Global
Income, Core and High Yield Funds and any other financial instruments and
indices. A Fund will engage in futures and related options transactions 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 traded 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).
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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, Global Income and High
Yield Funds 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 to seek to hedge
against an anticipated rise in interest rates or a decline in market prices or
foreign currency rates that would adversely affect the U.S. 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. Similarly,
Core Fund, High Yield 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 seek 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 Advisers, 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
Funds 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
a Fund enter into a greater or lesser number of futures contracts or by
attempting to achieve only a partial hedge against price changes affecting a
Fund's portfolio securities. When hedging of this character is successful, any
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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, a 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 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 financial
instrument. 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 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
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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
Internal Revenue Code of 1986, as amended (the "Code") for maintaining their
qualifications as regulated investment companies for federal income tax
purposes. See "Taxation."
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
establish with the custodian a segregated account consisting of cash or liquid
assets, as permitted by applicable law, 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 the
value of
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securities 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.
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 a Fund's portfolio are various futures on
U.S. Government Securities, securities indices and foreign currencies.
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 Fund. Each Fund will hold and
maintain in a segregated account until the settlement date cash or liquid
assets, as permitted by applicable law, 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, a Fund's
right to purchase or repurchase the mortgage-related securities subject to the
mortgage dollar roll may be restricted and the instrument which a Fund is
required to repurchase may be worth less than an instrument which a Fund
originally held. Successful use of mortgage dollar rolls will depend upon the
Adviser's ability to manage a Fund's interest rate and mortgage prepayments
exposure. For these reasons, there is no assurance that mortgage dollar rolls
can be successfully employed.
CONVERTIBLE SECURITIES
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Convertible securities include corporate notes or preferred stock but are
ordinarily 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 and High Yield Fund invest 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 a Fund would call the loan in anticipation of an important vote
to be taken among holders of the securities or the giving or withholding of
their consent on a material matter affecting the investment. As with other
extensions of credit there are risks of delay in recovering, or even loss of
rights in, the collateral should the borrower of 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.
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However, a Fund will not invest more than 15% of its net 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
1933 Act 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 the Funds' portfolio 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 the 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.
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,
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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 assets, 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 of 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 management fees payable
by the Fund to the Adviser will be reduced by an amount equal to the Fund's
proportionate share of the management fees paid by such money market fund to the
Adviser or any of its affiliates.
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 a Fund
or as being collateral for a loan by a 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
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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 management agreements with the Advisers or their affiliates, may transfer
uninvested cash balances into a single joint account, the daily aggregate
balance of which will be invested in one or more repurchase agreements.
INVESTMENT RESTRICTIONS
The Trust has adopted the following investment restrictions on behalf of
the Funds, none of which may be changed without the approval of the holders of a
majority of the outstanding voting securities of the affected 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
Municipal Securities, are considered by the Trust not to be fundamental and
accordingly may be changed without shareholder approval. See "INVESTMENT
OBJECTIVES 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 asset coverage
requirement with respect to borrowings), any limitation which involves a maximum
percentage shall not be considered
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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, A FUND MAY NOT:
(1) make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act of 1940, as
amended (the "Act"). This restriction does not, however, apply to
any Fund classified as a non-diversified company under the Act.
(2) invest more than 25% of its total assets in the securities of one or
more issuers conducting their principal business activities in the
same industry (excluding the U.S. government or its agencies or
instrumentalities). (For the purposes of this restriction, state and
municipal governments and their agencies, authorities and
instrumentalities are not deemed to be industries; telephone
companies are considered to be a separate industry from water, gas
or electric utilities; personal credit finance companies and
business credit finance companies are deemed to be separate
industries; and wholly-owned finance companies are considered to be
in the industry of their parents if their activities are primarily
related to financing the activities of their parents). This
restriction does not apply to investments in municipal securities
which have been pre-refunded by the use of obligations of the U.S.
government or any of its agencies or instrumentalities. Each of the
Municipal Income and Short Duration Tax-Free Funds 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. These municipal securities
include (a) municipal securities, the interest on which is paid
solely from revenues of similar projects such as hospitals, electric
utility systems, multi-family housing, nursing homes, commercial
facilities (including hotels), steel companies or life care
facilities, (b) municipal securities whose issuers are in the same
state and (c) industrial development obligations.
(3) borrow money, except (a) the Fund may borrow from banks (as defined
in the Act) or through reverse repurchase agreements in amounts up
to 33 1/3% or its total assets (including the amount borrowed), (b)
the Fund may, to
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<PAGE>
the extent permitted by applicable law borrow up to an additional 5%
of its total assets for temporary purposes, (c) the Fund may obtain
such short-term credits as may be necessary for the clearance of
purchases and sales of portfolio securities, (d) the Fund may
purchase securities on margin to the extent permitted by applicable
law and (e) the Fund may engage in transactions in mortgage dollar
rolls which are accounted for as financings.
(4) make loans, except through (a) the purchase of debt obligations 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 as permitted by
applicable law.
(5) underwrite securities issued by others, except to the extent that
the sale of portfolio securities by the Fund may be deemed to be an
underwriting.
(6)(a) for each Fund other than Core Fund, purchase, hold or deal in real
estate, although a Fund may purchase and sell securities that are
secured by real estate or interests therein, securities of real
estate investment trusts and mortgage-related securities and may
hold and sell real estate acquired by a Fund as a result of the
ownership of securities.
(6)(b) in the case of the Core Fund, 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.
(7) invest in commodities or commodity contracts, except that the Fund
may invest in currency and financial instruments and contracts that
are commodities or commodity contracts.
(8) issue senior securities to the extent such issuance would violate
applicable law.
Each Fund may, notwithstanding any other fundamental investment restriction
or policy, invest some or all of its assets in a single open-end investment
company or series thereof with substantially the same fundamental investment
objectives, restrictions and policies as the Fund.
In addition, as non-fundamental policies, a Fund may not:
B-59
<PAGE>
(1) Invest in companies for the purpose of exercising control or
management.
(2) Invest 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.
(3) Purchase additional securities if the Fund's borrowings exceed
(excluding covered mortgage dollar rolls) 5% of its net assets.
(4) Make short sales of securities, except short sales against the box.
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 and Officers
deemed to be "interested persons" of the Trust for purposes of the Act are
indicated by an asterisk.
Ashok N. Bakhru, Age 53, 1325 Avenue of the Americas, 34th Floor, New York, New
York 10019. Chairman and Trustee. Executive Vice President-Finance and
--------------------
Administration and Chief Financial Officer, Coty Inc. (since April 1996);
President, ABN Associates, Inc. (June 1994 through March 1996); Senior Vice
President, Scott Paper Company (until June 1994); Director, Arkwright Mutual
Insurance Company; Trustee, International House of Philadelphia; Member of
Cornell University Council; Trustee of Walnut Street Theater.
David B. Ford,* Age 51, One New York Plaza, New York, New York 10004. Trustee.
-------
Managing Director, Goldman Sachs (since 1996); General Partner, Goldman Sachs,
(1986-1996); Co-Head of GSAM since December 1994.
Douglas C. Grip,* Age 35, One New York Plaza, New York, New York 10004.
President and Trustee. Vice President, Goldman Sachs since May 1996; President,
- ---------------------
MFS Retirement Services Inc., of Massachusetts Financial Services prior thereto.
John P. McNulty,* Age 44, One New York Plaza, New York, New York 10004.
Trustee. Managing Director, Goldman Sachs since 1996; General Partner of
- -------
Goldman Sachs from 1990 to 1994 and 1995-1996; Co-Head of GSAM since November
1996; Limited Partner of Goldman Sachs from 1994 to November 1995.
B-60
<PAGE>
Mary P. McPherson, Age 60, Taylor Hall, Bryn Mawr College, Bryn Mawr, PA 19010.
Trustee. President of Bryn Mawr College since 1978; Director of Josiah Macy,
- -------
Jr. Foundation since 1977; Director of the Philadelphia Contributionship since
1985; Director of Amherst College since 1986; Director of Dayton Hudson
Corporation since 1988; Director of the Spencer Foundation since 1993; and
member of PNC Advisory Board since 1993.
Alan A. Shuch,* Age 48, One New York Plaza, New York, New York 10004. Trustee.
-------
Limited Partner, Goldman Sachs (since 1994); 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 66, One Northfield Plaza, #218, Northfield, Illinois
60093. Trustee. Chairman, Executive Committee, First Commonwealth, Inc. (a
-------
managed dental care company, since January 1996); Chairman and Chief Executive
Officer, MSP Communications Inc. (a company engaged in radio broadcasting) since
November 1988; Director, Federal Express Corporation since 1976; Evanston
Hospital Corporation (since 1980) and First Commonwealth,Inc. (since 1988) and
North American Private Equity Group (a venture capital fund).
William H. Springer, Age 67, 701 Morningside Drive, Lake Forest, Illinois 60045.
Trustee. Vice Chairman and Chief Financial and Administrative Officer,
- -------
Ameritech (a telecommunications holding company) from February 1987 to
retirement in June 1992; Director, Walgreen Co. (a retail drugstore business);
and Baker, Fentress & Co. (a closed-end non-diversified management investment
company) April 1992 to present.
Richard P. Strubel, Age 57, 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) from January 1984 to October
1994.
Pauline Taylor,* Age 50, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs since June 1992; Director of
- ---------
Shareholder Servicing since June 1992.
Nancy L. Mucker,* Age 47, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
John W. Mosior,* Age 58, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
Scott M. Gilman,* Age 37, One New York Plaza, New York, New York 10004.
Treasurer. Director, Mutual Funds Administration, GSAM since April 1994.
- ---------
Assistant Treasurer of Goldman Sachs Funds
B-61
<PAGE>
Management, Inc. since March 1993. Vice President, Goldman Sachs since March,
1990.
John M. Perlowski,* Age 32, One New York Plaza, New York, New York 10004.
Assistant Treasurer. Vice President, Goldman, Sachs & Co., since July 1995.
- -------------------
Director/Fund Accounting & Custody, Investors Bank & Trust Co., November 1993 to
July 1995. Formerly, Manager, Audit Division, Arthur Andersen, September 1986 to
November 1993.
Michael J. Richman,* Age 36, 85 Broad Street, New York, New York 10004.
Secretary. Associate General Counsel of GSAM since February 1994; Vice
- ---------
President and Assistant General Counsel of Goldman Sachs; Counsel to the Funds
Group, GSAM since June 1992; Partner, Hale and Dorr from September 1991 to June
1992.
Howard B. Surloff,* Age 31, 85 Broad Street, New York, New York 10004. Assistant
---------
Secretary. Vice President and Assistant General 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, LLP prior
thereto.
Valerie A. Zondorak,* Age 31, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Vice President, Goldman Sachs (since March 1997); Counsel
- --------------------
to the Funds Group, GSAM (since March 1997); Associate of Shereff, Friedman,
Hoffman & Goodman, LLP (prior thereto).
Steven E. Hartstein*, Age 33, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Legal Products Analyst, Goldman Sachs since June 1993;
- -------------------
Funds Compliance Officer, Citibank Global Asset Management from August 1991 to
June 1993); Legal Assistant, Brown & Wood prior thereto.
Deborah A. Farrell*, Age 25, 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 36, One New York Plaza, New York, New York 10004.
Assistant Secretary. Vice President and Senior Portfolio Manager, GSAM since
- -------------------
1988.
Elizabeth D. Anderson*, Age 27, One New York Plaza, New York, New York 10004.
Assistant Secretary. Portfolio Manager, GSAM since April 1996; Junior Portfolio
- -------------------
Manager, Goldman Sachs 1995-1996. Funds Trading Assistant, GSAM 1993-1995.
Compliance Analyst, Prudential Insurance, from 1991 to 1993.
The Trustees and officers of the Trust hold comparable positions with
certain other investment companies of which Goldman Sachs, GSAM or GSFM is the
investment adviser, administrator and/or distributor. As of _______, 1997, the
Trustees and officers as a
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<PAGE>
group owned less than 1% of the outstanding shares of beneficial interest of
each Fund.
B-63
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the one-year period ended October
31, 1996:
<TABLE>
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement from Goldman
Compensation Benefits Accrued Sachs Funds
from the as of Part of (including
Funds/1/ Trust's Expenses the Funds)/2/
------------ ---------------- --------------
<S> <C> <C> <C>
Name of Trustees
Ashok N. Bakhru $4,109 $0 $77,375
Marcia L. Beck/3/ $0 $0 $0
David B. Ford $0 $0 $0
Douglas C. Grip $0 $0 $0
Paul C. Nagel, Jr./4/ $2,525 $0 $50,500
Alan A. Shuch $0 $0 $0
Jackson W. Smart $3,169 $0 $65,750
William H. Springer $3,169 $0 $65,750
Richard P. Strubel $3,169 $0 $65,750
</TABLE>
/1/ Reflects amount paid by Goldman Sachs Trust, a Massachusetts business
trust, during fiscal year ended October 31, 1996.
/2/ The Goldman Sachs Funds consisted of 29 mutual funds, including the seven
series of the Trust, on October 31, 1996.
/3/ Resigned as of May 1, 1996.
/4/ Retired as of June 30, 1996.
B-64
<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, Short Duration Tax-Free Fund, High Yield Fund and
Core Fund pursuant to a management agreement. GSFM, 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 a management agreement. GSFM, a
Delaware limited partnership, is an affiliate of Goldman Sachs. GSAMI, 133
Peterborough Court, London EC4A 2BB, England, serves as investment adviser to
Global Income Fund pursuant to a management agreement. 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.
See "MANAGEMENT" in the Funds' Prospectuses for a description of the applicable
Adviser's duties as investment adviser.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
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, Brazil, Frankfurt, George Town, Hong Kong, London, Madrid, Mexico,
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. The Advisers manage money for
some of the world's largest institutional investors.
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
B-65
<PAGE>
surveys conducted in the U.S. and abroad. Goldman Sachs is also among the
leading investment firms using quantitative analytics (now used by a growing
number of investors) to structure and evaluate portfolios. For example, Goldman
Sachs' options evaluation model analyzes each security's term, coupon and call
option, providing an overall analysis of the security's value 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 within 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 1996, has assembled an experienced team of
professionals for selection of the Tax Exempt Funds' portfolio securities.
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, High Yield Fund and Core Fund, the applicable Adviser
expects to utilize Goldman Sachs' sophisticated option-adjusted analytics to
help make strategic asset allocations within the markets for U.S. government,
Mortgage-Backed and other securities and to employ this technology periodically
to re-evaluate the Funds' investments as market conditions change. Goldman
Sachs has also developed a prepayment model designed to estimate mortgage
prepayments and cash flows under different interest rate scenarios. Because a
Mortgage-Backed Security incorporates the borrower's right to prepay the
mortgage, the Advisers use a sophisticated option-adjusted spread (OAS) model to
measure expected returns. A security's OAS is a function of the level and shape
of the yield curve, volatility and the applicable Adviser's expectation of how a
change in interest rates will affect prepayment levels. Since the OAS model
assumes a relationship between prepayments and interest rates, the Advisers
consider it a better way to measure a security's expected return and absolute
and relative values than yield to maturity. In using OAS
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<PAGE>
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 customers. Use of these services by the Advisers
with respect to a Fund does not preclude Goldman Sachs from providing these
B-67
<PAGE>
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 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 Adviser 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
Adviser 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 management agreement, (the "Management Agreements"), was most
recently approved by the Trustees of the Trust, including a majority of the
Trustees of the Trust who are not parties to such agreements or "interested
persons" (as such term is defined in the Act) of any party thereto (the "non-
interested Trustees"), on April 23, 1997. The applicable Fund's
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<PAGE>
Management 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 sole initial shareholder of Short Duration Tax-Free Fund on
September 25, 1992, the sole initial shareholder of Core Fund on October 29,
1993, and the shareholders of each other Fund on April 21, 1997. Each
Management Agreement will remain in effect until June 30, 1998 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 Management Agreement will terminate automatically if assigned (as
defined in the Act). Each Management 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 on 60 days' written notice of the Trust.
The Management Agreements provide that GSAM, GSFM and GSAMI, in their
capacity as advisers may each render similar services to others so long as the
services under the Management Agreements are not impaired thereby. Pursuant to
the Management Agreements, the Advisers are entitled to receive the fee set
forth below and the Advisers are currently limiting the fee to the rate set
forth below:
<TABLE>
<CAPTION>
Contractual Current
Fund Rate* Rate
- ---- ---- ----
<S> <C> <C>
GSAM
Municipal Income .55% .55%
Government Income .65% .25%
Short Duration Tax-Free .55% .40%
Core Fixed Income .55% .40%
High Yield .70% .65%
GSFM
Short Duration Government .65% .40%
Adjustable Rate Government .55% .40%
GSAMI
Global Income .90% .59%
- ----------------------------
</TABLE>
* The Contractual Rate is identical to the aggregate advisory and
administration fee rates payable by each Fund under the previous separate
advisory (including subadvisory in the case of Global Income Fund) and
administration agreements. For the fiscal year ended October 31, 1996, the
annual rate expressed is the combined advisory and administration fees paid
(after fee waivers). Such reduction or limits, if any, are calculated
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<PAGE>
monthly on a cumulative basis and may be discontinued or modified by the
applicable Adviser at its discretion at any time, although they have no
current intention to do so.
For the fiscal years ended October 31, 1996, 1995 and 1994, the amounts of
the investment advisory and administration fees incurred by each Fund then in
existence were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Adjustable Rate Fund $2,535,709 $2,947,492 $6,798,185
Short Duration Government 411,360 517,091 1,063,867
Fund/(1)/
Short Duration Tax-Free Fund 169,796 260,970 468,868
Core Fund/(2)/ 246,568 137,158 56,255
Global Income Fund/(3)(6)/ 1,117,226 706,460 1,518,814
Government Income Fund/(4)(6)/ 74,060 44,037 0
Municipal Income Fund/(5)(6)/ 211,283 154,707 35,494
</TABLE>
_________________________
/(1)/ Had expense limitations not been in effect, Short Duration Government Fund
would have paid advisory fees of $514,200, $646,364 and $1,329,834,
respectively, for such years.
/(2)/ Core Fund commenced operations January 5, 1994.
/(3)/ For the same periods, Global Income Fund paid GSAMI subadvisory fees of
$837,920, $1,412,921 and $3,037,627, respectively. If expense limitations
had not been in effect, Global Income Fund would have paid advisory and
subadvisory fees of $1,474,204 and $491,401, respectively, for the year
ended October 31, 1996 and $789,127 and $1,578,254, respectively, for the
year ended October 31, 1995.
/(4)/ Had expense limitations not been in effect, Government Income Fund would
have paid advisory fees of $148,120, $101,737 and $65,604, respectively,
for such years.
/(5)/ Had expense limitations not been in effect for the years ended October 31,
1995 and 1994, Municipal Income Fund would have paid advisory fees of
$200,207 and $174,161, respectively, for such years.
/(6)/ Reflects combined fees under separate investment advisory and
administration agreements which were combined in a Management Agreement
effective May 1, 1997.
The fees and services under the Investment Advisory and Administration
Agreements are identical to the fees and services under the Management
Agreement.
Each Adviser performs administrative services for the applicable Funds
under the Management Agreement. Such
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<PAGE>
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 the agreement with the Trust's custodian, transfer and
dividend disbursing agent or agreements with other institutions, with personnel
to perform such executive, administrative and clerical services as are
reasonably necessary to provide effective administration of the Funds, (c)
arranging, to the extent not provided pursuant to such agreements, for the
preparation, at the Funds' expense, of each Fund's tax returns, reports to
shareholders, periodic updating of the Funds' prospectuses and statements of
additional information, and reports filed with the SEC and other regulatory
authorities, (d) providing the Funds, to the extent not provided pursuant to
such agreements, with adequate office space and certain related office equipment
and services, and (e) maintaining all of the Funds' records other than those
maintained pursuant to such agreements.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED
-------------------------------------------------------------------------
BY GOLDMAN SACHS. The involvement of the Advisers and Goldman Sachs and their
- ----------------
affiliates, in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect to
the Funds or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Advisers and their advisory affiliates have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
objectives similar to those of the Funds and/or which engage in transactions in
the same types of securities, 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 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.
B-71
<PAGE>
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 the Funds, the Advisers may have
access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf of the Funds in
accordance with such analysis and models. In addition, neither Goldman Sachs
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Funds. The proprietary activities or portfolio strategies of Goldman Sachs and
its affiliates or the activities or strategies used for accounts managed by them
or other customer accounts could conflict with the transactions and strategies
employed by the Advisers in 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
B-72
<PAGE>
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, High Yield and Core Funds, 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. At times, these activities may cause
departments of the Firm to give advice to clients that may cause these clients
to take actions adverse to the interest of the client. To the extent affiliated
transactions are permitted, the Funds will deal with Goldman Sachs and its
affiliates on an arm's-length basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of a Fund in order to increase the assets
of the Fund. Increasing a Fund's assets may enhance investment flexibility and
diversification and may contribute to economies of scale that tend to reduce a
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 a 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.
B-73
<PAGE>
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. 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, Class B and Class C Shares of each of the Funds that
offer such classes of shares. Goldman Sachs receives 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 and Class C Shares, of such Fund shares. No Class B Shares were
outstanding during the fiscal years ended October 31, 1994 and 1995. No Class C
Shares were outstanding during the fiscal years ended October 31, 1994, 1995 and
1996. Goldman Sachs retained approximately the following combined commissions
on sales of Class A and B shares during the following periods:
<TABLE>
<CAPTION>
1996** 1995* 1994
------- -------- --------
<S> <C> <C> <C>
Adjustable Rate Fund* $79,000 $40,000 N/A
Municipal Income Fund $24,900 $48,000 $ 76,000
Government Income Fund $17,300 $22,000 $ 5,000
Global Income Fund $52,600 $15,000 $350,000
- ---------------------
</TABLE>
* Prior to May 15, 1995 Adjustable Rate Fund did not offer Class A Shares.
** Prior to May 1, 1997, the Municipal, Government Income and Global Income
Funds did not offer Class B 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
B-74
<PAGE>
assumption by Goldman Sachs of the expenses related thereto, Goldman Sachs
received fees for the fiscal years ended October 31, 1996, 1995 and 1994 by each
Fund then in existence as follows:
Fund 1996 1995 1994
- ---- ------- ------- -------
Adjustable Rate Fund 278,337 306,662 679,819
Short Duration Government Fund 0 0 0
Short Duration Tax-Free Fund 16,980 26,098 46,887
Core Fund/(1)/ 24,657 13,716 5,637
Global Income Fund 121,212 106,764 132,123
Municipal Income Fund 90,284 63,695 70,811
Government Income Fund 72,237 94,095 57,960
- ------------------------
/(1)/ Core Fund commenced operations on January 5, 1994.
The foregoing distribution and transfer agency agreements each provide
that Goldman Sachs may render similar services to others so long as the services
each provides thereunder to the Funds are not impaired thereby. Each such
agreement also provides that the Trust will indemnify Goldman Sachs against
certain liabilities.
EXPENSES
- --------
Except as set forth in the Prospectuses under "MANAGEMENT" 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, 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-75
<PAGE>
The Advisers voluntarily have agreed to reduce or otherwise limit certain
Other Expenses (excluding management fees, fees payable under administration,
distribution, service and authorized dealer service plans, taxes, interest,
brokerage fees and litigation, indemnification, transfer agency fees (in the
case of Global Income Fund and High Yield Fund) 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%
High Yield Fund 0.01%
Such reductions or limits are calculated monthly on a cumulative
basis. Although the Advisers have no current intention of modifying or
discontinuing such expense limitations or the limitations on the management
fees, described above under "Management -- Investment Advisers," each may do so
in the future at its discretion. For the fiscal year ended October 31, 1996,
October 31, 1995 and October 31, 1994, Other Expenses of each Fund were reduced
by the Advisers in the following amounts:
1996 1995 1994
------- ------- -------
Adjustable Rate Fund 386,863 551,405 442,880
Short Duration
Government Fund 169,069 219,994 115,389
Short Duration
Tax-Free Fund 238,097 213,139 192,696
Core Fund* 233,065 176,469 141,815
Municipal Income Fund 238,203 196,265 198,806
Government Income Fund 219,091 242,036 224,285
Global Income Fund** 337,079 70,195 0
- ----------------------
* Core Fund commenced operations on January 5, 1994.
** For the fiscal year ended October 31, 1994, there was no expense
limitation.
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
- ----------------------------
B-76
<PAGE>
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, Core Fund
and High Yield Fund may invest are traded on exchanges at fixed commission
rates. In connection with portfolio transactions, the Management Agreement
provides that the Advisers shall attempt to obtain the best net price and the
most favorable execution. The Management Agreement provides that, on occasions
when an Adviser deems 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 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. The Management Agreement permits each Adviser, in its
discretion, to purchase and sell portfolio securities to and from dealers who
provide the Trust with brokerage or research services in which dealers may
execute brokerage transactions at a higher cost to the Fund. Brokerage and
research services furnished by firms through which the Fund's effect their
securities transactions may be used by the Advisers in servicing other accounts
and not all of these services may be used by the Adviser in connection with the
specific Fund generating the brokerage credits. The fees received under the
Management Agreement
B-77
<PAGE>
are not reduced by reason of the Adviser receiving such brokerage and research
services. In addition, in selecting brokers and dealers, the Advisers may take
into account sales of shares of the Funds and other funds in the Goldman Sachs
Group of Funds by such brokers and dealers.
For the fiscal years ended October 31, 1995 and 1994, the Funds then in
existence paid no brokerage commissions.
B-78
<PAGE>
For the fiscal year ended October 31, 1996, the Funds then in existence paid
brokerage commissions as follows:
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons Paid/3/ Research
=========== ================= ======================= ==========
<S> <C> <C> <C> <C>
Fiscal Year Ended
October 31, 1996:
Adjustable Rate Fund $108,000 $108,000(100%)/1/ $2,121,317,579(100%)/2/ $N/A
Short Duration Government Fund 24,000 24,000(100%)/1/ 447,205,928(100%)/2/ N/A
Short Duration Tax-Free Fund 1,000 1,000(100%)/1/ 8,559,280(100%)/2/ N/A
Core Fixed Income Fund 4,000 4,000(100%)/1/ 43,548,299(100%)/2/ N/A
Government Income Fund 1,200 1,200(100%)/1/ 24,437,288(100%)/2/ N/A
Municipal Income Fund 2,750 2,750(100%)/1/ 51,101,625(100%)/2/ N/A
</TABLE>
_______________________________
1 Percentage of total commissions paid.
2 Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
3 Refers to Market Value of Futures Contracts.
B-79
<PAGE>
During the fiscal year ended October 31, 1996, the Funds acquired and
sold securities of their regular broker-dealers: Chase Securities, Inc., Lehman
Brothers, Inc., Salomon Brothers, Inc., Merrill Lynch, Robert W. Baird, Daiwa
Securities, J.P. Morgan & Co., Inc., Donaldson, Lufkin, Jenrette, Nomura
Securities and Morgan Stanley & Co.
At October 31, 1996, Short Duration Tax-Free Fund, Global Income Fund
and Municipal Income Fund held no securities of their regular broker-dealers.
As of the same date, Short Duration Government Fund, Adjustable Rate Fund,
Government Income Fund and Core Fund held the following amounts of securities of
their regular broker-dealers, as defined in Rule 10b-1 under the 1940 Act, or
their parents ($ in thousands): Short Duration Government Fund: Lehman
Brothers, Inc. ($370), Nomura Securities ($280) and Bear Stearns ($280);
Adjustable Rate Fund: Lehman Brothers, Inc. ($4,531), Bear Stearns ($3,430) and
Nomura Securities ($3,430); Government Income Fund: Lehman Brothers, Inc.
($2,774), Nomura Securities (2,774) and Bear Stearns ($2,100); Nomura Securities
(2,774); Core Fund: Lehman Brothers, Inc. ($4,808), Nomura Securities ($3,640)
and Bear Stearns ($3,640).
SHARES OF THE TRUST
The Funds were reorganized from series of a Massachusetts business
trust as part of Goldman Sachs Trust, a Delaware business trust, by a
Declaration of Trust dated January 28, 1997 on April 30, 1997.
The Act requires that where more than one class or series of shares
exists, each class or series must be preferred over all other classes or series
in respect of assets specifically allocated to such class or series. The
Trustees have authority to classify and reclassify any series of shares into one
or more classes of shares. As of the date of this Additional Statement, the
Trustees have authorized: (i) the issuance of six classes of shares of Short
Duration Government Fund, Short Duration Tax-Free Fund and Core Fund:
Institutional Shares, Administration Shares, Service Shares, Class A Shares,
Class B Shares and Class C Shares; (ii) the issuance of four classes of shares
of Adjustable Rate Fund: Institutional Shares, Administration Shares, Service
Shares and Class A Shares; and (iii) the issuance of five classes of shares of
Global Income Fund, Government Income Fund, Municipal Income Fund and High Yield
Fund: Institutional Shares, Service Shares, Class A Shares, Class B Shares and
Class C Shares. As of October 31, 1996, no Service Shares of the Adjustable
Rate Fund were outstanding; no Class A, Class B or Class C Shares of Short
Duration Government Fund, Short Duration Tax-Free Fund and Core Fund were
outstanding; no Class C Shares of Government Income Fund and Municipal Income
Fund were outstanding; and no shares of High Yield Fund were outstanding.
B-80
<PAGE>
Each Institutional Share, Administration Share, Service Share, Class A
Share, Class B Share and Class C Share of a Fund represents a proportionate
interest in the assets belonging to the applicable class of the Fund. All
expenses of a Fund are borne at the same rate by each class of shares, except
that fees under Administration and Service Plans are borne exclusively by
Administration and Service Shares, fees under Distribution and Authorized Dealer
Service Plans are borne exclusively by Class A, Class B or Class C Shares and
transfer agency fees are borne at different rates by Class A, Class B or Class C
Shares than Institutional, Administration and Service Shares. The Trustees may
determine in the future that it is appropriate to allocate other expenses
differently between classes of shares and may do so to the extent consistent
with the rules of the SEC and positions of the Internal Revenue Service. Each
class of shares may have different minimum investment requirements and be
entitled to different shareholder services. Currently, shares of a class may
only be exchanged for shares of the same or an equivalent class of another fund.
See "Exchange Privilege" in the Prospectus.
Institutional Shares may be purchased at net asset value without a
sales charge 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 at net asset value without a sales
charge for accounts held in the name of an institution that, directly or
indirectly, provides certain account administration and shareholder liaison
services to its customers, including maintenance of account records and
processing orders to purchase, redeem and exchange Service Shares. Service
Shares bear the cost of account administration fees at the annual rate of up to
0.50% of the average daily net assets of the Fund attributable to Service
Shares.
Class A Shares are sold, with an initial sales charge, 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.
B-81
<PAGE>
Class B Shares of the Funds are sold subject to a contingent deferred
sales charge 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.
Class C Shares of the Funds are sold subject to a contingent deferred
sales charge of up to 1.0% 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 C 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 C Shares. Class C
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 C Shares.
It is possible that an institution or its affiliate may offer
different classes of shares (i.e., Institutional, Administration, Service, Class
A, Class B and Class C Shares) to its customers and thus receive different
compensation with respect to different classes of shares of each Fund.
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 share, are freely transferable and have no preemptive, subscription or
conversion rights.
As of July 15, 1997, the following entities and persons beneficially
owned 5% or more of the outstanding shares of the following Funds: Adjustable
Rate Fund:
Short Duration Government Fund:
Short Duration Tax-Free Fund:
Government Income Fund:
Core Fund:
B-82
<PAGE>
Rule 18f-2 under the Act provides that any matter required to be
submitted by the provisions of the Act, applicable state law or otherwise to the
holders of the outstanding voting securities of an investment company (such as
the Trust) shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each class or
series affected by such matter. Rule 18f-2 further provides that a class or
series shall be deemed to be affected by a matter unless the interests of each
class or series in the matter are substantially identical or the matter does not
affect any interest of such class or series. However, Rule 18f-2 exempts the
selection of independent public accountants, the approval of principal
distribution contracts and the election of Trustees from the separate voting
requirements of Rule 18f-2.
The Trust is not required to hold annual meetings of shareholders and
does not intend to hold such meetings. In the event that a meeting of
shareholders is held, each share of the Trust will be entitled, as determined by
the Trustees, either to one vote for each share or to one vote for each dollar
of net asset value represented by such shares on all matters presented to
shareholders including the election of Trustees (this method of voting being
referred to at "dollar based voting"). However, to the extent required by the
Act or otherwise determined by the Trustees, series and classes of the Trust
will vote separately from each other. Shareholders of the Trust do not have
cumulative voting rights in the election of Trustees. Meetings of shareholders
of the Trust, or any series or class thereof, may be called by the Trustees,
certain officers or upon the written request of holders of 10% or more of the
shares entitled to vote at such meetings. The shareholders of the Trust will
have voting rights only with respect to the limited number of matters specified
in the Declaration of Trust and such other matters as the Trustees may determine
or may be required by law.
The Declaration of Trust provides for indemnification of Trustees,
officers and agents of the Trust unless the recipient is adjudicated (i) to be
liable by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such person's office or (ii)
not to have acted in good faith in the reasonable belief that such person's
actions were in the best interest of the Trust. The Declaration of Trust
provides that, if any shareholder or former shareholder of any series is held
personally liable solely by reason of being or having been a shareholder and not
because of the shareholder's acts or omissions or for some other reason, the
shareholder or former shareholder (or heirs, executors, administrators, legal
representatives or general successors) shall be held harmless from and
indemnified against all loss and expense arising from such liability. The
Trust, acting on behalf of any affected series, must, upon request by such
shareholder, assume the defense of any claim made against such shareholder for
any act or obligation of the series and satisfy any judgment thereon from the
assets of the series.
B-83
<PAGE>
The Declaration of Trust permits the termination of the Trust or of
any series or class of the Trust (i) by a majority of the affected shareholders
at a meeting of shareholders of the Trust, series or class; or (ii) by a
majority of the Trustees without shareholder approval if the Trustees determine
that such action is in the best interest of the Trust or its shareholders. The
factors and events that the Trustees may take into account in making such
determination include (i) the inability of the Trust or any successor series or
class to maintain its assets at an appropriate size; (ii) changes in laws or
regulations governing the Trust, series or class or affecting assets of the type
in which it invests; or (iii) economic developments or trends having a
significant adverse impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder
approval to cause the Trust, or any series thereof, to merge or consolidate with
any corporation, association, trust or other organization or sell or exchange
all or substantially all of the property belonging to the Trust or any series
thereof. In addition, the Trustees, without shareholder approval, may adopt a
master-feeder structure by investing all or a portion of the assets of a series
of the Trust in the securities of another open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration
of Trust without a shareholder vote. However, shareholders of the Trust have
the right to vote on any amendment (i) that would affect the voting rights of
shareholders; (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). Series
Trustees may, but are not required to, serve as Trustees of the Trust or any
other series or class of the Trust. The Series Trustees have, to the exclusion
of any other Trustees of the Delaware Trust, all the powers and authorities of
Trustees under the Trust Instrument with respect to any other series or class.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Delaware law, the shareholders of the Funds are not generally
subject to liability for the debts or obligations of the Trust. Similarly,
Delaware law provides that a series of the Trust will not be liable for the
debts or obligations of any other series of the Trust. However, no similar
statutory or other authority limiting business trust shareholder liability
exists in other states. As a result, to the extent that a Delaware business
trust or a shareholder is subject to the jurisdiction of courts of such other
states, the courts may not apply Delaware law and may thereby subject the
Delaware business trust shareholders to liability. To guard against this risk,
the Declaration of Trust contains an express disclaimer of shareholder liability
for acts or obligations
B-84
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of a Fund. Notice of such disclaimer will normally be given in each agreement,
obligation or instrument entered into or executed by a series or the Trustees.
The Declaration of Trust provides for indemnification by the relevant Fund for
all loss suffered by a shareholder as a result of a obligation of the series.
The Declaration of Trust also provides that a series shall, upon request, assume
the defense of any claim made against any shareholder for any act or obligation
of the series and satisfy any judgment thereon. In view of the above, the risk
of personal liability of shareholders is remote.
In addition to the requirement under Delaware law, the Declaration of
Trust provides that shareholders of a series may bring a derivative action on
behalf of the series only if the following conditions are met: (a) shareholders
eligible to bring such derivative action under Delaware law who hold at least
10% of the outstanding shares of the series, or 10% of the outstanding shares of
the series or class to which such action relates, shall join in the request for
the Trustees to commence such action; and (b) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and to
investigate the basis of other advisers in considering the merits of the request
and shall require an undertaking by the shareholders making such request to
reimburse the Fund for the expense of any such advisers in the event that the
Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not
be liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason or willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
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 are valued under valuation procedures established by the Trustees.
Portfolio securities, other than money market instruments and with the exception
of Global Income Fund, for which accurate market quotations are readily
available are valued as follows: (a) via electronic feeds to the custodian bank
containing dealer-supplied bid quotations or bid quotations
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from a nationally recognized pricing service; (b) securities for which the
custodian bank is unable to obtain an external price or with respect to which
the Adviser believes an external price does not reflect accurate market values,
will be valued by the Adviser in good faith based on valuation models that take
into account daily spread and yield changes on U.S. Treasury securities (i.e.,
matrix pricing); (c) overnight repurchase agreements will be valued by the
Adviser at cost; (d) term repurchase agreements (i.e., those whose maturity
exceeds seven days) and interest rate swaps, caps, collars and floors will be
valued at the average of the bid quotations obtained daily from at least two
dealers or, for term repurchase agreements, recognized counterparties; (e) debt
securities with a remaining maturity of 60 days or less are valued by the
Adviser at amortized cost, which the Trustees have determined to approximate
fair value; (f) spot and forward foreign currency exchange contracts will be
valued using a pricing service such as Reuters then calculating then mean
between the last bid and asked quotations supplied by certain independent
dealers in such contracts; (g) exchange-traded options and futures contracts
will be valued by the custodian bank at the last sale price on the exchange
where such contracts and options are principally traded; and (h) over-the-
counter options will be valued by an independent unaffiliated broker identified
by the portfolio manager/trader and contacted by the custodian bank.
Portfolio securities of the Global Income Fund for which accurate
market quotations are available are valued as follows: (a) securities listed on
any U.S. or foreign stock exchange or on the National Association of Securities
Dealers Automated Quotations System ("NASDAQ") will be valued at the last sale
price on the exchange or system in which they are principally traded, on the
valuation date. If there is no sale on the valuation day, securities traded
principally: (i) on a U.S. exchange or NASDAQ will be valued at the mean between
the closing bid and asked prices, and (ii) on a foreign exchange will be valued
at the official bid price. The last sale price and official bid price for
securities traded principally on a foreign exchange will be determined as of the
close of the London Foreign Exchange; (b) over-the-counter securities not quoted
on NASDAQ will be valued at the last sale price on the valuation day or, if no
sale occurs, at the mean between the last bid and asked prices; (c) options and
futures contracts will be valued at the last sale price in the market where such
contract is principally traded; and (d) forward foreign currency exchange
contracts will be valued at the mean between the last bid and asked quotations
supplied by a dealer in such contracts.
All other securities, including those for which a pricing service
supplies no exchange quotation or a quotation that is believed by the portfolio
manager/trader to be inaccurate; will be valued at fair value as stated in the
valuation procedures which were approved 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
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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, Core and High
Yield Funds calculate their net asset value. 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
may 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 or intends to qualify and elect 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 gross
income (including tax-exempt interest) for its taxable year 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
gross income for its taxable year from the sale or other disposition of any of
the following which was held for less than three months: (i) stock or
securities,
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(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 stocks or securities (the "short-short
test"); and (c) a Fund diversify its holdings so that, at the close of each
quarter of its taxable year, (i) at least 50% of the market value of its total
(gross) assets is comprised of cash, cash items, United States Government
Securities, securities of other regulated investment companies and other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the value of the Fund's total assets and to not more than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total (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 a
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 and other 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, certain net realized foreign exchange gains, 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
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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,
that 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 that Fund against their U.S. federal income tax liabilities, if any,
and to claim refunds to the extent the credit exceeds such liabilities. For
U.S. federal income tax purposes, the tax basis of shares owned by a shareholder
of the Fund will be increased by an amount equal under current law to 65% of the
amount of undistributed net capital gain included in the shareholder's gross
income. Each Fund intends to distribute for each taxable year 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 or Core Fund and may therefore make it more
difficult for Global Income Fund or Core Fund to satisfy the distribution
requirements described above, as well as the excise tax distribution
requirements described below. However, Global Income Fund and Core Fund
generally expect 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 (if any) 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 capital gains, if any,
during the eight years following the year of the loss. At October 31, 1996, the
Funds had approximately the following amounts of capital loss carry forwards:
Years of
Amount Expiration
----------- ----------
Adjustable Rate Fund $47,923,000 2000-2003
Short Duration
Government Fund $13,272,000 2002-2003
Short Duration
Tax-Free Fund $ 4,271,000 2002-2003
Core Fixed Income Fund $ 77,000 2004
Global Income Fund $ 4,472,000 2002
Municipal Income Fund $ 1,535,000 2002
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These amounts are available to be carried forward to offset future capital
gains to the extent permitted by the Code and applicable tax 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
capital gains over its 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 capital gains over capital losses for the
prior year that were not distributed during such year and on which the Fund did
not pay federal income tax. The Funds anticipate that they will generally make
timely distributions of income and capital gains in compliance with these
requirements so that they will generally not be required to pay the excise tax.
For federal income tax purposes, dividends declared by a Fund in October,
November or December as of a record date in such a month which are actually paid
in January of the following year will be treated as if they were 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. Each of the Tax Exempt Funds intends to take
the position that it
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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 these
Funds, 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 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.
These provisions may require a Fund to recognize income or gains without a
concurrent receipt of cash. Any gain or loss recognized on actual or deemed
sales of these futures contracts, forward 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, that
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 and instruments 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
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(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,
High Yield 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 and Global Income, and High Yield Funds 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 in some cases. 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 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 by such shareholders, 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 the amounts they are
required to distribute.
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
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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 may not be able to
claim a credit for the full amount of their proportionate shares of the foreign
taxes paid by the 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, or Global Income or High Yield Funds acquire stock (including,
under proposed regulations, an option to acquire stock such as is inherent in a
convertible bond) in certain foreign corporations that receive at least 75% of
their annual gross income from passive sources (such as interest, dividends,
rents, royalties or capital gain) or hold at least 50% of their assets in
investments producing such passive income ("passive foreign investment
companies") Core, Global Income or High Yield Funds 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, Global Income or High Yield
Funds is timely distributed to its shareholders. Core, Global Income or High
Yield Funds would not be able to pass through to their 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, Global
Income or High Yield Funds to recognize taxable income or gain without the
concurrent receipt of cash. Core, Global Income or High Yield Funds may limit
and/or manage their 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 obtain cash to enable it 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.
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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 applicable 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 compliance with federal tax requirements.
Tax laws not only limit the purposes for which tax-exempt bonds may be issued
and the supply of such bonds, but also contain numerous and complex 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 a 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
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"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 such 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 a 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 a corporate shareholder's
liability, if any, for corporate alternative minimum tax, and will be taken into
account in determining the extent to which a shareholder's Social Security or
certain railroad retirement benefits are taxable.
ALL FUNDS. Distributions from 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 in limited instances, including
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
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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.
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 in
a transaction that is treated as a sale for tax purposes, 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, 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, subject to the rules
described below. Shareholders should consult their own tax advisers with
reference to their particular circumstances to determine whether a redemption
(including an exchange) or other disposition of Fund Shares is properly treated
as a sale for tax purposes, as is assumed in this discussion. 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
B-96
<PAGE>
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 Tax-Free or Municipal Income Funds 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, each of 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 such 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 Short Duration Tax-Free Fund or Municipal
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
B-97
<PAGE>
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 the
applicable Fund reasonably estimates that at least 95% of its distributions will
be exempt-interest dividends. A Fund may refuse to accept an application that
does not contain any required taxpayer identification number or certification
that the number provided is correct. If the backup withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in shares, will be reduced by the amounts required to be withheld.
Any amounts withheld may be credited against a shareholder's U.S. federal income
tax liability. Investors should consult their tax advisers about the
applicability of the backup withholding provisions.
NON-U.S. SHAREHOLDERS
The foregoing discussion relates solely to U.S. federal income tax law as
it applies to "U.S. persons" (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates) subject to tax under
such law. Dividends from investment company taxable income distributed by a
Fund to a shareholder who is not a U.S. person will be subject to U.S.
withholding tax at the rate of 30% (or a lower rate provided by an applicable
tax treaty) unless the dividends are effectively connected with a U.S. trade or
business of the shareholder, in which case the dividends will be subject to tax
on a net income basis at the graduated rates applicable to U.S. individuals or
domestic corporations. Distributions of net capital gain, including amounts
retained by a Fund which are designated as undistributed capital gains, to a
shareholder who is not a U.S. person will not be subject to U.S. federal 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 capital 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
B-98
<PAGE>
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 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.
B-99
<PAGE>
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 and Class C 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 each Fund is subject to different fees and expenses and
may have different returns for the same period. Any performance data for Class
A, Class B or Class C Shares which is based upon a Fund's net asset value per
share would be reduced if a sales charge were taken into account.
B-100
<PAGE>
YIELD
<TABLE>
<CAPTION>
Investment SEC 30-Day Pro-Forma
Fund Period Yield Yield/1/
- -------------------------------- ----------- ----------- ---------
<S> <C> <C> <C>
30-Days
ended
10/31/96
ADJUSTABLE RATE FUND
Institutional Shares 6.00% 5.94%
Administration Shares 5.75% 5.69%
Service Shares/2/
Class A Shares
- Assumes 1.5% sales charge 5.66% 5.35%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.43% 6.16%
Administration Shares 6.19% 5.93%
Service Shares 5.96% 5.71%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.34% 3.71%
Administration Shares 4.09% 3.42%
Service Shares 3.84% 3.22%
CORE FUND
Institutional Shares 6.60% 6.25%
Administration Shares 6.37% 6.03%
Service Shares 6.12% 5.78%
GLOBAL INCOME FUND
Institutional Shares 5.20% 4.76%
Service Shares/2/
Class A Shares
(Assumes 4.5% sales charge) 4.54% 4.08%
Class B Shares 4.23% 3.80%
MUNICIPAL INCOME FUND
Class A Shares 4.21% 3.56%
(assumes 4.5% sales charge)
Class B Shares 3.68% 3.25%
GOVERNMENT INCOME FUND
Class A Shares 6.04% 4.76%
(assumes 4.5% sales charge)
Class B Shares 5.57% 4.48%
</TABLE>
B-101
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION RATE
<S> <C> <C> <C>
30 Day Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate/1/
- -------------------------------- ------------------ ----------- ------------
30-Days
ended
10/31/96
ADJUSTABLE RATE FUND
Institutional Shares 5.87% 5.81%
Administration Shares 5.62% 5.56%
Service Shares/2/
Class A Shares
- Assumes no sales charge 5.62% 5.31%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.24% 5.97%
Administration Shares 6.00% 5.72%
Service Shares 5.78% 5.49%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.19% 3.56%
Administration Shares 3.94% 3.28%
Service Shares 3.69% 3.06%
MUNICIPAL INCOME FUND
Class A Shares 4.27% 3.59%
-assumes no sales charge
Class B Shares 3.53% 3.09%
GOVERNMENT INCOME FUND
Class A Shares 6.33% 5.00%
-assumes no sales charge
Class B Shares 5.58% 4.50%
CORE FUND
Institutional Shares 6.46% 6.12%
Administration Shares 6.23% 5.89%
Service Shares 5.98% 5.63%
GLOBAL INCOME FUND
Institutional Fund 5.95% 6.18%
Service Shares/2/
Class A Shares
- Assumes no sales charge 5.44% 4.96%
Class B Shares 5.02% 4.59%
</TABLE>
B-102
<PAGE>
TAX-EQUIVALENT YIELD/6/
<TABLE>
<CAPTION>
Pro-Forma
Investment Tax-Equivalent Tax-Equivalent
Fund Period Rate Yield/1/
- ---------------------------- --------------------- ------------- -----------------
<S> <C> <C> <C>
30-Days
ended
10/31/96
SHORT DURATION
TAX-FREE FUND/3/
Institutional Shares 6.94% 5.89%
Administration Shares 6.52% 5.43%
Service Shares 6.11% 5.07%
MUNICIPAL INCOME FUND/3/
Class A Shares 7.07% 5.94%
-assumes no sales charge
Class B Shares 5.84% 5.12%
_______________________________
</TABLE>
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 outstanding during the periods indicated.
3 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.
The above tables should not be considered a representation of future
performance.
B-103
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
-------------------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Expense Expense
Fund Date Investment Period Limitations Limitations
- -------------------------------- ---------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
ADJUSTABLE RATE FUND
Institutional Shares 7/17/91/1a/ ended 10/31/96 5.32% 5.19%
11/1/95 one year ended
10/31/96 6.86% 6.80%
11/1/91 five years ended
10/31/96 5.13% 5.05%
Administration Shares 4/15/93/1b/ ended 10/31/96 4.69% 4.64%
11/1/95 one year ended
10/31/96 6.60% 6.53%
Service Shares/1c/ N/A N/A
Class A Shares 5/12/95/1d/ ended 10/31/96
Assumes 1.5% Sales Charge 5.29% 4.96%
Assumes No Sales Charge 6.40% 6.07%
11/1/95 one year ended
Assumes 1.5% Sales Charge 10/31/96 4.99% 4.66%
Assumes No Sales Charge 6.60% 6.27%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 8/15/88/2a/ ended 10/31/96 7.24% 6.84%
11/1/95 one year ended
10/31/96 6.75% 6.47%
11/1/91 five years
ended 10/31/96 5.67% 5.44%
Administration Shares 2/28/96/2b/ ended 10/31/96 4.00% 3.82%
Service Shares 4/10/96/2b/ ended 10/31/96 4.35% 4.20%
</TABLE>
B-104
<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 10/31/96 4.21% 3.71%
11/1/95 one year ended
10/31/96 4.50% 3.92%
Administration Shares 5/20/93/3b/ ended 10/31/96 3.51% 3.15%
11/1/95 one year ended
10/31/96 4.24% 3.66%
Service Shares 9/20/94/3c/ ended 10/31/96 4.36% 3.92%
11/1/95 one year ended
10/31/96 3.98% 3.40%
CORE FUND
Institutional Shares 1/15/94/4a/ 10/31/96 6.34% 5.70%
11/1/95 one year ended
10/31/96 5.98% 5.58%
Administration Shares 2/28/96/4b/ ended
10/31/96 3.56% 3.29%
Service Shares 3/13/96/4b/ ended
10/31/96 4.90% 4.69%
</TABLE>
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>
GLOBAL INCOME FUND/5C/
Class A Shares 8/2/91/5a/ ended 10/31/96
Assumes 4.5% Sales Charge 7.08% 6.76%
Assumes No Sales Charge 8.02% 7.71%
Assumes 4.5% Sales Charge 11/1/95 one year 6.08% 5.57%
Assumes No Sales Charge ended 10/31/96 11.05% 10.53%
Assumes 4.5% Sales Charge 11/1/91 five years 7.02% 6.73%
Assumes No Sales Charge ended 10/31/96 8.01% 7.69%
Class B Shares/5b/ 5/1/96 ended 10/31/96/5d/ 6.24% 6.01%
Institutional Shares 8/1/95/5e/ ended 10/31/96 12.95% 12.45%
11/1/95 one year
ended 10/31/96 11.55% 11.05%
Service Shares/5f/
MUNICIPAL INCOME FUND
Class A Shares 7/20/93/6a/ ended 10/31/96
Assumes 4.5% Sales Charge 3.80% 2.78%
Assumes No Sales Charge 5.27% 4.23%
11/1/95 ended 10/31/96
Assumes 4.5% Sales Charge 1.35% 0.65%
Assumes No Sales Charge 6.13% 5.40%
Class B Shares/6b/ 5/1/96 ended 10/31/96 4.40% 4.07%
</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>
GOVERNMENT INCOME FUND
Class A Shares 2/10/93/7a/ ended 10/31/96
Assumes 4.5% Sales Charge 5.41% 2.92%
Assumes No Sales Charge 6.72% 4.21%
11/1/95 ended 10/31/96
Assumes 4.5% Sales Charge 1.06% -0.33%
Assumes No Sales Charge 5.80% 4.35%
Class B Shares/7b/ 5/1/96 ended 10/31/96 4.85% 4.17%
- ----------------
</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 of Adjustable Rate Fund commenced operations on May 12,
1995.
2a Institutional Shares of Short Duration Government Fund commenced
operations on August 15, 1988.
2b Administration Shares of Short Duration Government Fund commenced
operations on February 28, 1996. Service Shares of Short Duration
Government Fund commenced operations on April 10, 1996. An aggregate
total return (not annualized) is shown instead of an average annual
total return since Administration and Service Shares have not
completed a full 12 months of operation as of October 31, 1996.
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 Administration Shares of Core Fund commenced operations on February
28, 1996. Service Shares of Core Fund commenced operations on March
13, 1996. An aggregate total return (not annualized) is shown instead
of an average annual total return since Administration and Service
Shares have not completed a full 12 months of operation as of October
31, 1996.
5a Class A Shares of Global Income Fund commenced operations on August 2,
1991.
5b Class B Shares of Global Income Fund commenced operations on May 1,
1996.
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 Class B Shares have not completed a
full 12 months of operation as of October 31, 1996.
5e Institutional Shares of Global Income Fund commenced operations on
August 1, 1995.
5f No Service Shares of Global Income Fund were outstanding during the
periods indicated.
6a Class A shares of Municipal Income Fund commenced operations on July
20, 1993.
6b Class B Shares of Municipal Income Fund commenced operations on May 1,
1996. An aggregate total return (not annualized) is shown instead of
an average annual total return since Class B Shares have not completed
a full 12 months of operation as of October 31, 1996.
B-107
<PAGE>
7a Class A Shares of Government Income Fund commenced operations on
February 10, 1993.
7b Class B Shares of Government Income Fund commenced operations on May
1, 1996. An aggregate total return (not annualized) is shown instead
of an average annual total return since Class B Shares have not
completed a full 12 months of operation as of October 31, 1996.
The above table should not be considered a representation of future
performance.
B-108
<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, Government Income and Short Duration
Government Funds 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 and Municipal Income Funds may from time to
time advertise their 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, Global Income and High Yield Funds may each from time to time
advertise its performance relative to certain indices and benchmark investments,
including: (a) the Lipper Analytical Services, Inc. Mutual Fund Performance
Analysis, Fixed Income
B-109
<PAGE>
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 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.
The Trust 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;
B-110
<PAGE>
.. 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 Trust 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.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed by GSAM and/or its affiliates,
certain attributes or benefits to be derived from asset allocation strategies
and the Goldman Sachs mutual funds that may be offered as investment options for
the strategic asset allocations. Such advertisements and information may also
include GSAM's current economic outlook and domestic and international market
views to suggest periodic tactical modifications to current asset allocation
strategies. Such advertisements and information may include other material
which highlight or summarize the services provided in support of an asset
allocation program.
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
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
B-111
<PAGE>
asset value of each respective Fund at the time of redemption by a distribution
in kind of securities (instead of cash) from such Fund. The securities
distributed in kind would be readily marketable and would be valued for this
purpose using the same method employed in calculating each Fund's net asset
value per share. See "Net Asset Value." If a shareholder receives redemption
proceeds in kind, the shareholder should expect to incur transaction costs upon
the disposition of the securities received in the redemption.
The right of a shareholder to redeem shares and the date of payment by a
Fund may be suspended for more than seven days for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or when trading on such Exchange is restricted as determined by the
SEC; or during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for a Fund to dispose of securities owned by it or
fairly to determine the value of its net assets; or for such 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 1996 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 back cover of each Fund's Prospectus. Unaudited
financial statements for each Fund for the six months ended April 30, 1997 are
also attached hereto.
B-112
<PAGE>
SERVICE PLAN
Each Fund has adopted a service plan (the "Plan") with respect to its
Service Shares which authorizes it to compensate Service Organizations for
providing certain administration services and personal and account maintenance
services to their customers who are or may become beneficial owners of such
Shares. Pursuant to the Plan, a Fund will enter into agreements with Service
Organizations which purchase Service Shares of the Fund on behalf of their
customers ("Service Agreements"). Under such Service Agreements the Service
Organizations may perform some or all of the following services: (a) act,
directly or through an agent, as the sole shareholder of record and nominee for
all customers, (b) maintain account records for each customer who beneficially
owns Service Shares of a Fund, (c) answer questions and handle correspondence
from customers regarding their accounts, (d) process customer orders to
purchase, redeem and exchange Service Shares of a Fund, and handle the
transmission of funds representing the customers' purchase price or redemption
proceeds, (e) issue confirmations for transactions in shares by customers, (f)
provide facilities to answer questions from prospective and existing investors
about Service Shares of a Fund, (g) receive and answer investor correspondence,
including requests for prospectuses and statements of additional information,
(h) display and make prospectuses available on the Service Organization's
premises, (i) assist customers in completing application forms, selecting
dividend and other account options and opening custody accounts with the Service
Organization and (j) act as liaison between customers and a Fund, including
obtaining information from a Fund, working with a Fund to correct errors and
resolve problems and providing statistical and other information to a Fund. As
compensation for such services, a Fund will pay each Service Organization a
service fee in an amount up to 0.50% (on an annualized basis) of the average
daily net assets of the Service Shares of such Fund attributable to or held in
the name of such Service Organization; provided, however, that the fee paid for
personal and account maintenance services shall not exceed 0.25% such average
daily net assets. For the fiscal years ended October 31, 1996, October 31, 1995
and October 31, 1994, service fees were paid by the Funds as follows:
B-118
<PAGE>
<TABLE>
<CAPTION>
Fund 1996 1995 1994
- -------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Adjustable Rate Fund /(1)/ /(1)/ /(1)/
Short Duration Government Fund $1,222 /(2)/ /(2)/
Short Duration Tax-Free Fund $2,322 $1,797 $ 325
Government Income Fund /(3)/ /(3)/ /(3)/
Municipal Income Fund /(4)/ /(4)/ /(4)/
Core Fund $ 422 /(3)/ /(3)/
Global Income Fund /(4)/ /(4)/ /(4)/
</TABLE>
/(1)/ No Service Shares of Adjustable Rate Fund were outstanding at October 31,
1996, 1995 and 1994.
/(2)/ No Service Shares of Short Duration Government Fund were outstanding at
October 31, 1995 and 1994.
/(3)/ No Service Shares of Government Income Fund were outstanding at October
31, 1996, 1995 and 1994.
/(4)/ No Service Shares of Municipal Income Fund were outstanding at October 31,
1996, 1995 and 1994.
/(5)/ No Service Shares of Core Fund were outstanding at October 31, 1995 and
1994.
/(6)/ No Service Shares of Global Income Fund were outstanding at October 31,
1996, 1995 and 1994.
Each Fund has adopted its Plan pursuant to Rule 12b-1 under the 1940 Act in
order to avoid any possibility that payments to the Service Organizations
pursuant to the Service Agreements might violate the 1940 Act. Rule 12b-1,
which was adopted by the SEC under the Act, regulates the circumstances under
which an investment company or series thereof may bear expenses associated with
the distribution of its shares. In particular, such an investment company or
series thereof cannot engage directly or 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
B-119
<PAGE>
connection with the Funds, such Service Organizations might be required to alter
materially or discontinue the services performed under their Service Agreements.
If one or more of the Service Organizations were restricted from effecting
purchases or sales of Service Shares automatically pursuant to pre-authorized
instructions, for example, effecting such transactions on a manual basis might
affect the size and/or growth of a Fund. Any such alteration or discontinuance
of services could require the Board of Trustees to consider changing a Fund's
method of operations or providing alternative means of offering Service Shares
of a Fund to customers of such Service Organizations, in which case the
operation of such Fund, its size and/or its growth might be significantly
altered. It is not anticipated, however, that any alternation of a Fund's
operations would have any effect on the net asset value per share or result in
financial losses to any shareholder.
Conflict of interest restrictions (including the Employee Retirement Income
Security Act of 1974) may apply to a Service Organization's receipt of
compensation paid by a Fund in connection with the investment of fiduciary
assets in Service Shares of such Fund. Service Organizations, including banks
regulated by the Comptroller of the Currency, the Federal Reserve Board or the
Federal Deposit Insurance Corporation, and investment advisers and other money
managers subject to the jurisdiction of the SEC, the Department of Labor or
state securities 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 were approved by The Goldman
Sachs Group, L.P., as the sole shareholder of Service Shares of each Fund. The
Trustees, including a majority of the Trustees who are not interested persons of
the Trust and who have no direct or indirect financial interest in the operation
of the Plans or the related Service Agreements, most recently voted to approve
each Fund's Plan and Service Agreements at a meeting called for the purpose of
voting on such Plans and Service Agreements on April 23, 1997, including Global
and High Yield Funds. Each Plan and Service Agreement will remain in effect
until April 30, 1998 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
B-120
<PAGE>
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-121
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We welcome the opportunity to review the performance and the investment
activity of the Goldman Sachs Fixed Income Funds for the 12-month period ended
October 31, 1996. To help put the portfolios' performance in perspective, we
will also provide a brief overview of the U.S. economy and the bond market
during the period.
We are pleased to report that the Goldman Sachs Fixed Income Funds fared
well relative to their peers during the period.
The Bond Market Sold Off Amid Rising Rates, Then Stabilized
The U.S. fixed income market began the 12-month period under review with
a robust rally, fueled by weak economic data and low inflation. However, in
February 1996, the bond market began to come under pressure when stronger than
expected economic and job growth as well as surging commodity prices aroused
fears of higher inflation on the horizon. Bond market conditions significantly
worsened during March and April, when a sharp rise in interest rates triggered a
sell-off and increased volatility. By early May, long-term bond yields had
climbed above the psychologically important 7.0% level for the first time in
nearly a year. At the end of May, interest rates began to stabilize and
Treasury prices remained in a narrow trading range throughout the summer and
fall. During September and October, however, interest rates retreated and the
bond market strengthened. The rebound was primarily due to evidence of a
slowing U.S. economy and strong demand for Treasury bonds from the central banks
of China, Japan and Germany, which accelerated their purchases dramatically
toward the end of the period. By the end of October, prices of 30-year
Treasuries broke out of the trading range that had persisted for over six
months.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Table of Contents
Market Overview 1 GS Core Fixed Income Fund 22
GS Adjustable Rate Government Fund 3 Financial Statements 30
GS Short Duration Government Fund 9 Notes to Financial Statements 34
GS Short Duration Tax-Free Fund 15 Financial Highlights 42
- ---------------------------------------------------------------------------------------------------------
</TABLE>
After a Weak Start, Economic Growth Rebounded, Then Moderated
In late 1995, the economy was anemic, with weak consumer and capital
spending contributing to a fourth-quarter real Gross Domestic Product (GDP)
growth of only 0.3% (annualized). During the first quarter of 1996, harsh winter
weather and the General Motors strike continued to restrain economic growth.
Despite these adverse conditions, the economy advanced faster than expected,
with first-quarter real GDP growth reported at 2.0% (annualized). Momentum
accelerated more dramatically during the second quarter, as industrial activity,
automobile sales and home sales all showed significant improvement. As a result,
second-quarter GDP rose a robust 4.7% (annualized), its highest rate in two
years.
The economy's torrid growth cooled markedly during the third quarter,
with annualized real GDP at a revised 2.0%, largely due to lackluster consumer
spending and a widening U.S. trade deficit. In October some evidence of a
slowdown continued, with housing starts falling to their lowest level in a year
and U.S. capacity utilization also down. However, consumer confidence remained
high against a backdrop of low unemployment and higher household income. These
indicators led some economists to interpret October's retail sales numbers (up a
scant 0.2%) as a "breather" they expected to be followed by stronger holiday
shopping, while others were concerned about a more prolonged period of
restrained spending. Despite investors' earlier fears of increased inflationary
pressures and the fact that in October the producer and consumer price indexes
were up 0.4% and 0.3%, respectively, inflation remained subdued throughout the
period.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
The Fed Remained Neutral After Easing in December and January
In response to generally poor year-end 1995 economic conditions, the U.S.
Federal Reserve cut the Federal funds rate by 25 basis points in December 1995
and an additional 25 basis points in January 1996. The Fed then remained neutral
from February through the end of the period, leaving the Federal funds rate at
5.25% as of October 31, 1996.
During the period under review, the yield curve shifted upward everywhere
but at the shortest end, where it steepened. The yield on six-month Treasury
bills fell from 5.55% on October 31, 1995 to approximately 5.26% on October 31,
1996. For the same time period, the yield on the 30-year U.S. Treasury bond rose
from 6.33% a year ago to 6.64%. For the 12-month period ended October 31, 1996,
the total returns of one-year and 30-year Tresuries were 5.84% and 0.72%,
respectively.
Historical Treasury Yield Curve
[GRAPH APPEARS HERE]
The yield curve steepened on the short end and shifted upward on the longer end.
Outlook: Moderate Economic Growth for the Near Term
The recent economic weakness and the tame third-quarter labor cost report
increase the likelihood that the Fed will defer any changes in monetary policy
until 1997. Although a more extended slowdown is possible, as of this writing,
Goldman Sachs' economists believe a resumption of growth is likely if consumer
spending rebounds by year-end and the trade deficit does not significiantly
widen. On the fiscal front, the bond market environment should benefit from the
recent election results with President Clinton balanced by a
Republican-controlled Congress, which points toward continued budgetary
restraint.
We appreciate your confidence in the Goldman Sachs Fixed Income Funds and
we look forward to continuing to serve your investment needs in the future.
Sincerely,
/s/ David B. Ford
David B. Ford
Co-Head,
Goldman Sachs Asset Management
/s/ John P. McNulty
John P. McNulty
Co-Head,
Goldman Sachs Asset Management
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
November 29, 1996
- --------------------------------------------------------------------------------
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Adjustable Rate Government 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). Under normal interest rate
conditions, the fund's duration is expected to be in a range approximately equal
to that of a six-month to one-year U.S. Treasury security.
The ARM Market Began Weak but Improved as Prepayments Slowed and Demand
Increased
The key factors affecting ARM performance during the 12 months under review
were the changing direction of interest rates and, consequently, the pace of
mortgage prepayments. From November 1995 through early February 1996, declining
interest rates spurred homeowners to switch from ARMs to fixed rate mortgages to
lock in attractive rates. The high level of refinancing activity depressed the
ARM market and caused yield spreads between ARMs and Treasuries to widen until
the end of January 1996, when long-term interest rates began to rise. Throughout
the spring, the ARM market strengthened as interest rates climbed sharply.
Spreads between ARMs and Treasuries continued to tighten even after rates
stabilized from the end of May through August, partly due to strong demand from
"crossover" investors from other short-duration fixed income sectors. Although
interest rates declined in September and October, mortgage prepayment fears
remained subdued as rates were still relatively high compared with their levels
a year earlier. Investor demand for seasoned one-year Constant Maturity Treasury
(CMT) ARMs, which our fund stresses, remained especially strong due to their
relative prepayment stability in a falling rate environment.
Performance Review
During the period under review, the fund's Institutional, Administration
and Class A shares all significantly outperformed both the six-month U.S.
Treasury bill and the one-year U.S. Treasury bill. (As of October 31, the fund's
duration was 0.7 years, in between that of the six-month and the one-year U.S.
Treasury bill.) The fund's positive performance can be attributed to the
incremental yield its ARM holdings delivered over similar-duration Treasuries
and tightening spreads between ARMs and Treasuries.
- ------------------------------------------------------------------------
Performance Summary: October 31, 1995 - October 31, 1996
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six-
Month One-Year
Institu- Adminis- Class Treasury Treasury
tional tration A Bill Bill
------ ------- - ---- ----
<S> <C> <C> <C> <C> <C>
Total Return (based 6.86% 6.60% 6.60% 5.48% 5.82%
on net asset value)
- ------------------------------------------------------------------------
Return From 6.25% 5.99% 5.99% NA NA
Monthly
Distributions
- ------------------------------------------------------------------------
Return From Price 0.61% 0.61% 0.61% NA NA
Appreciation
- ------------------------------------------------------------------------
NAV (10/31/96) $9.83 $9.83 $9.83 NA NA
- ------------------------------------------------------------------------
NAV Change +$0.06 +$0.06 +$0.06 NA NA
- ------------------------------------------------------------------------
</TABLE>
We are also pleased to note that the fund outperformed most of its peers.
For the 12 months ended October 31, 1996, the fund's Institutional shares ranked
fourth out of 53 adjustable rate mortgage funds based on total return, as
tracked by Lipper Analytical Services, Inc. (Lipper does not rank the fund's
Administration and Class A shares. Please note that Lipper rankings do not take
sales charges into account and that past performance is not a guarantee of
future results.) As of October 31, 1996, the
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund (continued)
- --------------------------------------------------------------------------------
fund's Institutional shares were ranked "four stars" by Morningstar, Inc., an
independent rating agency.\1\
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Repos/Cash Equivalents 3.4%
CMOs 3.5%
SBA Floaters 7.8%
ARMs 85.3%
</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.
- ---------------------------------------------
/1/ Source (C) 1996 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 10/31/96.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five- and ten-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Institutional shares received five
and four stars for the three- and five-year periods, respectively. The
Institutional shares were rated among 1,054 and 572 fixed income funds for the
three- and five-year periods, respectively. For the one-year period, the
Institutional shares were rated among 1,654 fixed income funds. 22.5% of the
funds receive the four-star rating. The Morningstar rating applies only to the
fund's Institutional shares; the fund's Class A and Administration shares have
not been rated. Class A and Administration shares are subject to additional fees
that may have the effect of lowering performance and may affect and future
Morningstar rating. Morningstar rates funds against their peers in the same
category. In all, there are five Morningstar categories (domestic equity,
international equity, fixed income, municipal and hybrid). Morningstar ratings
range from five stars (highest) to one star (lowest). Funds with five-star
ratings are in the top 10% of their category, four-star ratings in the next
22.5%, three stars the next 35%, two stars the next 22.5% and one star the
lowest 10% of their categories.
Portfolio Composition and Investment Strategies
During the period under review, the portfolio's sector allocation shifted
slightly, with reductions in collateralized mortgage obligations (CMOs) and
Small Business Administration (SBA) loans in favor of ARMs.
.. ARMs. As of October 31, 1996, ARMs accounted for 85.3% of the portfolio, up
from 80.2% a year ago. We emphasized seasoned, one-year CMT issues that offered
relative prepayment and duration stability as well as incremental yield over
Treasuries. The position significantly contributed to the fund's performance
during the period.
.. SBA Floaters. The portfolio held a 7.8% allocation in securities backed by
Small Business Administration loans, which traded at attractive spreads relative
to Treasuries. We trimmed the portfolio's holdings in the sector slightly from
8.9% a year ago to take profits after the position performed well.
.. CMOs. CMOs accounted for 3.5% of the portfolio as of October 31,
approximately half their weighting a year ago (7.7%). This position provided
relatively stable cash flows and a greater number of opportunities to take
advantage of potential mispricing than comparable fixed income sectors. During
December 1995 and January 1996, the sector became expensive versus
similar-duration Treasuries, and we subsequently sold part of the fund's
holdings at a profit. The fund's CMO position included 1.4% in floaters, which
added incremental yield, and 0.4% in sequential-pay CMOs. In addition, the fund
held CMO super floaters, discussed below.
.. Prudent Use of Derivatives. We used higher risk derivatives very sparingly to
enhance the fund's performance without taking on additional undue risk. As of
October 31, 1996, the fund held a 1.5% position in super floaters, which
contributed to its performance during the year. (Super floaters are floating
rate securities whose coupons reset higher and more quickly than regular
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund (continued)
- --------------------------------------------------------------------------------
ARMs in a rising interest rate environment.) The portfolio also included minor
positions in interest-only (IO) and inverse IO securities.
.. Duration. As of October 31, the duration of the fund was 0.7 years, unchanged
from a year earlier. Rather than attempting to make interest rate predictions,
we seek to provide excess returns over a similar-duration U.S. Treasury security
through sector weightings and security selection. During the period, we used
financial futures as a tool to help manage the portfolio's duration.
.. Credit Quality. The fund invests exclusively in securities issued by the U.S.
government and its agencies or instrumentalities, which are considered to be of
the highest credit quality.
ARM Outlook: Seasoned ARMs Are Expected to Perform Well Relative to Other
Sectors
Our outlook for the ARM sector is moderately constructive. Although spreads
have tightened over the course of the year, we expect them to remain stable for
the near term due to strong investor demand and limited supply. In addition, we
believe that our core holding of seasoned ARMs should fare well relative to less
seasoned issues if rates continue to decline and prepayments increase.
Distribution Policy
During the 12-month period ended October 31, 1996, the fund's Institutional,
Administration and Class A shares distributed $0.59, $0.57 and $0.57 per
share, respectively.
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 nor significantly affected its net asset value (NAV) per share.
In conclusion, we appreciate your investment in the GS Adjustable Rate
Government Fund and will continue to seek attractive fixed income investments in
the months ahead.
Sincerely,
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Peter D. Dion
Peter D. Dion
/s/ James P. McCarthy
James P. McCarthy
Portfolio Managers
GS Adjustable Rate Government Fund
November 29, 1996
- --------------------------------------------------------------------------------
5
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Adjustable Rate Government Fund based on a normal minimum
initial investment, for each class, 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
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Institutional Lehman Short (1-2) One Year Six Month
Shares Gov't Index T-Bill T-Bill
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8/1/91 50,000 50,000 50,000 50,000
- --------------------------------------------------------------------------------
10/31/91 51,047 51,581 51,179 50,870
- --------------------------------------------------------------------------------
10/31/92 54,176 55,506 54,161 53,376
- --------------------------------------------------------------------------------
10/31/93 56,414 58,368 56,198 55,197
- --------------------------------------------------------------------------------
10/31/94 57,475 59,511 57,744 57,257
- --------------------------------------------------------------------------------
10/31/95 61,355 64,343 61,766 60,819
- --------------------------------------------------------------------------------
10/31/96 65,576 68,197 65,373 64,158
- --------------------------------------------------------------------------------
</TABLE>
Administration Shares
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Administration Lehman Short (1-2) One Year Six Month
Shares Gov't Index T-Bill T-Bill
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5/1/93 50,000 50,000 50,000 50,000
- --------------------------------------------------------------------------------
10/31/93 50,917 50,931 50,785 50,780
- --------------------------------------------------------------------------------
10/31/94 51,747 51,931 52,182 52,675
- --------------------------------------------------------------------------------
10/31/95 55,100 56,148 55,835 55,951
- --------------------------------------------------------------------------------
10/31/96 58,742 59,511 59,096 59,023
- --------------------------------------------------------------------------------
</TABLE>
Class A Shares
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman Short (1-2) One Year Six Month
(no sales charge) (w/ sales charge) Gov't Index T-Bill 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 10,069 10,277 10,260 10,246
- ---------------------------------------------------------------------------------------------------
10/31/96 10,898 10,735 10,893 10,859 10,809
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------
Average Annual Total Return
--------------------------------------------------
One Year Five Year Since Inception/(b)/
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Institutional Shares 6.86% 5.13% 5.32%
- --------------------------------------------------------------------------------
Administration Shares 6.60% N/A 4.69%
- --------------------------------------------------------------------------------
Class A Shares
excluding sales charge 6.60% N/A 6.40%
- --------------------------------------------------------------------------------
Class A Shares
including sales charge 4.99% N/A 5.29%
- --------------------------------------------------------------------------------
</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.
- --------------------------------------------------------------------------------
6
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations--96.3%
Adjustable Rate Federal Home Loan Mortgage Corp.
(FHLMC)(d)--25.6%
<S> <C> <C> <C>
$ 409,475 7.33% 11/01/17 $ 422,849
1,443,341 7.54 12/01/18 1,482,297
2,695,805 7.40 07/01/18 2,793,527
1,799,007 7.69 01/01/19 1,857,314
10,670,041 7.38 05/01/19 11,021,833
20,341,589 7.58 11/01/19 21,218,921
5,280,731 7.70 05/01/20 5,464,395
19,004,192 7.42 06/01/20 19,698,985
37,238,927 7.73 02/01/22/(a)/ 38,845,042
4,072,603 7.39 08/01/22 4,215,145
2,234,941 7.56 08/01/22 2,331,334
6,804,200 7.53 09/01/22 7,067,182
17,808,242 7.61 11/01/22 18,565,092
10,195,026 7.63 06/01/24 10,506,892
3,045,972 7.31 12/01/24 3,122,121
3,495,056 7.20 02/01/28 3,604,835
4,584,605 7.09 07/01/29 4,671,987
1,815,464 7.62 07/01/30 1,892,059
2,055,859 7.39 05/01/31 2,110,462
- --------------------------------------------------------------------------------
$160,892,272
- --------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association
(FNMA)(d)--55.4%
$ 1,138,394 7.80% 11/01/14 $ 1,187,493
6,190,161 6.54 03/01/17 6,277,194
3,662,002 7.56 03/01/17 3,799,511
4,221,326 6.21 03/01/18 4,247,709
6,778,125 7.66 04/01/18 7,046,064
874,932 7.63 05/01/18 901,180
7,405,181 7.34 07/01/18 7,724,566
5,249,737 7.41 07/01/18 5,456,472
6,398,858 7.08 08/01/18 6,609,828
3,972,504 7.64 08/01/18 4,143,838
3,746,795 7.42 10/01/18 3,896,068
6,780,326 7.41 11/01/18 7,009,162
2,068,449 7.29 12/01/18 2,138,591
13,495,001 7.67 12/01/18/(a)/ 14,077,040
3,484,080 7.27 06/01/19 3,597,870
4,440,531 7.31 07/01/19 4,579,297
1,698,502 7.34 07/01/19 1,755,826
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations(continued)
Adjustable Rate Federal National Mortgage Association
(FNMA)(d)(continued)
<S> <C> <C> <C>
$ 2,849,462 7.46% 01/01/20 $ 2,942,526
3,037,915 7.70 03/01/20 3,168,940
8,771,533 7.40 07/01/20 9,055,204
4,563,057 7.48 09/01/20 4,746,994
4,953,382 7.53 02/01/21 5,167,022
5,289,644 7.28 04/01/21 5,464,044
74,489,219 7.51 09/01/21/(a)/ 77,678,102
4,088,820 7.95 11/01/21 4,210,095
22,090,964 7.56 02/01/22 23,043,747
14,611,569 7.68 06/01/22 15,112,892
6,682,461 7.47 08/01/22 6,893,894
759,290 7.48 08/01/22 776,511
38,116,807 7.56 09/01/22/(a)/ 39,760,785
1,934,079 7.53 02/01/23 1,968,235
277,701 6.22 12/01/23 276,574
18,079,861 7.48 09/01/25 18,856,752
2,565,500 7.33 10/01/27 2,653,702
1,177,401 7.04 07/01/29 1,205,729
3,288,252 7.59 04/01/30 3,376,640
8,565,310 7.58 01/01/31 8,934,732
28,276,177 6.09 02/01/31 28,161,376
- --------------------------------------------------------------------------------
$ 347,902,205
- --------------------------------------------------------------------------------
Adjustable Rate Government National Mortgage Association
(GNMA)(d) -- 2.2%
$ 1,527,707 6.50% 03/20/16 $ 1,551,096
1,806,135 7.12 08/20/17 1,839,711
1,026,294 7.12 08/20/18 1,046,984
8,886,125 6.00 11/20/25 9,040,211
- --------------------------------------------------------------------------------
$ 13,478,002
- --------------------------------------------------------------------------------
Adjustable Rate Small Business Administration (SBA)(d)--7.8%
$ 1,416,469 6.75% 10/25/14 $ 1,449,883
2,562,866 6.75 02/25/15 2,624,144
3,684,715 6.75 03/25/15 3,773,370
2,839,268 6.75 04/25/15 2,907,581
2,057,142 6.75 05/25/15 2,106,637
1,036,764 6.75 08/25/15 1,062,040
1,684,161 6.75 09/25/15 1,725,220
2,069,161 6.75 10/25/15 2,119,917
1,110,382 6.37 09/25/16 1,125,305
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations (continued)
Adjustable Rate Small Business Administration
(SBA)(d)(continued)
$ 4,125,881 6.37% 07/25/17 $ 4,181,333
9,019,837 6.37 08/25/17 9,141,062
4,040,857 6.37 09/25/17 4,095,166
3,577,478 6.37 10/25/17 3,625,559
8,937,943 6.37 02/25/18 9,058,069
- --------------------------------------------------------------------------------
$ 48,995,286
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations-5.3%
Adjustable Rate CMOs(d)-1.8%
FNMA Remic Trust 1990-145, Class A
$ 11,024,778 6.51% 12/25/20 $ 11,025,439
- --------------------------------------------------------------------------------
Inverse Floater(d)-0.0%
FNMA Remic Trust 1991-91, Class S
$ 164,490 17.66% 07/25/98 $ 174,261
- --------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only(d)-0.0%
FNMA Remic Trust 1992-157, Class SA
$2,002,645/(b)/ 14.10% 03/25/04 $ 168,743
- --------------------------------------------------------------------------------
Inverse IOette-0.1%
FHLMC Series 1164, Class O
$ 36,128/(b)/ 29.44% 11/15/06 $ 489,372
- --------------------------------------------------------------------------------
IOette-0.1%
FNMA Remic Trust 1990-145, Class B
$ 27,091/(b)/ 10.00% 12/25/20 $ 657,906
- --------------------------------------------------------------------------------
Regular Floater CMOs(d)-1.4%
FHLMC Series 1011, Class F
$ 8,872,813 6.34% 11/15/20 $ 9,069,612
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs-0.4%
FNMA Remic Trust 1990-65, Class U
$ 616,589 9.50% 11/25/06 $ 619,475
FNMA Remic Trust 1991-37, Class E
1,664,339 8.50% 04/25/05 1,679,418
- --------------------------------------------------------------------------------
$ 2,298,893
- --------------------------------------------------------------------------------
Super Floater CMOs(d)-1.5%
FNMA Remic Trust 1992-157, Class FA
$ 9,859,177(b) 1.22% 03/25/04 $ 9,631,134
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 33,515,360
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $605,544,961) $604,783,125
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Repurchase Agreement-2.1%
Joint Repurchase Agreement Account
$ 13,000,000 5.58% 11/01/96/(a)/$ 13,000,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $13,000,000) $ 13,000,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $618,544,961/(c)/) $617,783,125
================================================================================
Futures contracts open at October 31, 1996:
</TABLE>
<TABLE>
<CAPTION>
Number of
Contracts
Long Settlement Unrealized
Type (Short)(e) Month Gain (Loss)
- --------------------------------- ------------- ------------------- ----------------
<S> <C> <C> <C>
1-Month Libor 45 November 1996 $4,500
Euro Dollars 365 December 1996 309,500
Euro Dollars 280 March 1997 95,000
Euro Dollars 55 June 1997 28,000
5-Year U.S. Treasury Notes 67 December 1996 9,766
10-Year U.S. Treasury Notes (270) December 1996 (302,812)
----------------
$143,954
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
Federal Income Tax Information:
<S> <C>
Gross unrealized gain for investments in which value
exceeds cost $ 2,404,589
Gross unrealized loss for investments in which cost
exceeds value (3,318,600)
- --------------------------------------------------------------------------------------
Net unrealized gain $ (914,011)
======================================================================================
</TABLE>
(a) Portions of these securities are being segregated for futures margin
requirements.
(b) Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
(c) The aggregate costs for federal income tax purposes is $618,697,136.
(d) Variable rate security. Coupon rate disclosed is that which is in effect
at October 31, 1996.
(e) Each Euro Dollar contract represents $1,000,000 in notional par value.
Each Libor contract represents $3,000,000 in notional par value. Each
5-Year and 10-Year U.S. Treasury Note and U.S. Treasury Bond contract
represents $100,000 in notional par value. The total notional amount and
market value are $879,000,000 and $200,909,125, respectively. The
determination of notional amounts and market value 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 Duration Government Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Short Duration Government 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. Under normal interest rate
conditions, the fund's duration is expected to be within one-half year of its
benchmark, the two-year U.S. Treasury security.
Performance Review
During the period under review, the fund's Institutional, Administration
and Service shares all outperformed the two-year U.S. Treasury security,
primarily due to our emphasis on and the favorable performance of
mortgage-backed security investments, as well as our ability to identify
relative value within the sector. In addition, the portfolio's term structure,
which overweighted one- and three-year maturity securities, also contributed to
performance when the yield curve steepened.
During the period, the net asset values (NAVs) of the fund's Institutional
and Administration shares (which opened February 28, 1996) were nearly unchanged
while the NAV of the fund's Service shares (which opened April 10, 1996) rose
$0.10 as interest rates stabilized and subsequently declined.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Institutional Administration* Service*
(10/31/95- (2/28/96- (4/10/96-
10/31/96) 10/31/96) 10/31/96)
-------- -------- --------
<S> <C> <C> <C>
Total Return (based on net 6.75% 4.00% 4.35%
asset value
- --------------------------------------------------------------------------------
Return From Monthly 6.65% 4.10% 3.32%
Distributions
- --------------------------------------------------------------------------------
Return From Price 0.10% -0.10% 1.03%
Depreciation/
Appreciation
- --------------------------------------------------------------------------------
Total Return of Two-Year 5.64% 3.61% 3.71%
U.S. Treasury
- --------------------------------------------------------------------------------
NAV (10/31/96) $9.83 $9.85 $9.82
- --------------------------------------------------------------------------------
NAV Change +$0.01 -$0.01 +$0.10
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
The fund performed well compared with its peers. The Institutional shares
ranked in the top 10% of short-intermediate U.S. government funds (fifth out of
88) based on total return for the 12-month period ended October 31, 1996,
according to Lipper Analytical Services, Inc. (The Administration and Service
shares were not ranked for this period because they were in existence less than
12 months. 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
The fund significantly reduced its allocation in U.S. Treasuries in favor
of collateralized mortgage obligations (CMOs), which offered more attractive
return potential according to our analysis. This strategy proved successful as
mortgage-backed securities outperformed comparable-duration Treasuries.
Portfolio Composition as of October 31, 1996*
<TABLE>
<CAPTION>
[PIE CHART APPEARS HERE]
<S> <C>
Repos/Cash Equivalents 1.1%
Fixed Rate Mortgage
Pass-Throughs 7.2%
U.S. Treasuries 15.8%
ARMs 19.0%
CMOs 56.9%
</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.
- --------------------------------------------------------------------------------
9
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
- --------------------------------------------------------------------------------
.. CMOs. During the period, we more than doubled the portfolio's allocation in
collateralized mortgage obligations, with most of the increase occurring from
February through April. As of October 31, 56.9% of the portfolio was invested in
CMOs, of which 24.7% were sequential-pay CMOs (up from 10.4% last year) and
17.0% were planned amortization class (PAC) CMOs (up from 1.9% last year).
These sectors were favored for their relatively stable cash flows and
incremental yields over Treasuries, and they performed well during the period.
Though the CMO sector was fairly valued relative to equal-duration Treasuries
from January through the end of the period, our extensive research enabled us to
identify specific securities that presented attractive investment opportunities.
.. ARMs. Adjustable rate mortgage securities (ARMs) accounted for 19.0% of the
portfolio as of October 31, down from 23.7% last year. We focused on seasoned
securities indexed to the one-year Constant Maturity Treasury (CMT), which
offered attractive income stability and low relative prepayment risk. A high
level of mortgage refinancing adversely impacted the sector in November and
December of 1995 when rates had eased, but ARMs strengthened when rates started
to rise during the first quarter of 1996 and prepayment fears faded.
.. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. The portfolio's
position in U.S. Treasuries was cut to 15.8%, down from 37.1% a year ago, as we
identified securities in other sectors that offered higher incremental yield. In
addition, repurchase agreements/cash equivalents were reduced to 1.1% from 4.7%
a year ago.
.. Fixed Rate Mortgage Pass-Throughs. Fixed rate pass-throughs, a 7.2%
allocation, offered more attractive yield spreads than most of the other
high-credit quality fixed income sectors. During the period under review, the
technical balance of the pass-through market strengthened, with investor demand
improving as prepayments and supply slowed from the high levels experienced last
November. We continued to emphasize seasoned premium mortgages because they
typically have lower prepayment risk than recently issued mortgages.
.. Issuer Composition. The breakdown of the portfolio's mortgage-backed security
holdings by issuer was 37.8% in Federal National Mortgage Association (FNMA)
issues, 36.0% in Federal Home Loan Mortgage Corporation (FHLMC) issues and 9.2%
in Government National Mortgage Association (GNMA) issues.
.. Credit Quality. The fund invests exclusively in issues of the U.S. government
and its agencies or instrumentalities.
.. Prudent Use of Derivatives. Sequential-pay CMOs and PAC CMOs, which are
typically considered to be lower risk derivatives, represented 24.7% and 17.0%
of the portfolio, respectively, as noted earlier. Other derivative investments
included CMO floaters (10.0%), which are securities whose coupons reset upward
as interest rates rise, and inverse floaters (3.2%), which have coupons that
reset in the opposite direction from interest rates. When floaters are held
along with inverse floaters, they can produce a position with a similar risk
profile as a fixed rate pass-through but provide a higher yield. The fund also
held a small position (1.3%) in PAC interest-only securities (IOs). We invest in
such higher risk derivatives very sparingly in an effort to enhance returns
without taking undue risk. In addition, we used futures as a tool to help manage
the portfolio's duration.
Market Outlook
In general, we have a cautiously optimistic view of the mortgage-backed
securities market in the near term. In the ARM sector, we expect spreads to
remain stable due to strong investor demand and limited supply. Given the
environment of declining rates for the past few months, we will continue to
emphasize seasoned one-year CMT
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
- -------------------------------------------------------------------------------
ARMs due to the relative prepayment stability that these securities offer.
Though we have a neutral outlook for the CMO market, we continue to find areas
that offer attractive investment opportunities. In the mortgage pass-through
market, we believe the recent widening of yield spreads during September and
October has been somewhat overdone, but we will remain vigilant to an increase
in prepayments that may result from a further decline in interest rates. We will
continue to actively allocate the portfolio's assets among the various fixed
income sectors as their relative value changes throughout the coming year.
Distribution Policy
During the period under review, the fund's Institutional shares paid out
distributions of $0.63 per share. From their inceptions through October 31,
1996, the fund's Administration and Service shares distributed $0.39 per share
and $0.32 per share, respectively. (The Administration shares opened on February
28, 1996 and the Service shares opened on April 10, 1996.) The fund distributes
substantially all of its investment company taxable income, as required by tax
law.
We thank you for your support and look forward to continuing to meet your
investment needs in the future.
Sincerely,
/s/Jonathan A. Beinner
Jonathan A. Beinner
/s/James B. Clark
James B. Clark
Portfolio Managers
GS Short Duration Government Fund
November 29, 1996
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Short Duration Government Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Short-Term Government 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
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Institutional Shares(a)
Institutional Shares 2-Year\r T-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
9/1/88 50,000 50,000 50,000
10/31/88 51,283 51,057 51,091
10/21/89 55,940 55,412 55,919
10/31/90 60,543 59,876 60,861
10/31/91 67,161 66,615 67,699
10/31/92 71,365 72,161 73,208
10/31/93 75,326 76,335 77,446
10/31/94 76,072 77,058 78,339
10/31/95 82,895 84,009 85,256
10/31/96 88,507 88,756 90,346
</TABLE>
Administration Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Administration Shares 2-Year\rT-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
2/28/96 50,000 50,000 50,000
10/31/96 52,000 51,805 51,760
</TABLE>
Service Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Service Shares 2-Year\rT-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
4/10/96 50,000 50,000 50,000
10/31/96 52,175 51,855 52,110
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------
Average Annual Total Return
-----------------------------------------------------------
One Year Five Year Since Inception(b)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Institutional shares 6.75% 5.6% 7.24%
- --------------------------------------------------------------------------------
Administrative shares N/A N/A 4.00(c)
- --------------------------------------------------------------------------------
Service shares N/A N/A 4.35(c)
- --------------------------------------------------------------------------------
</TABLE>
/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, Administration and Service shares commenced operations
August 15, 1988, February 28, 1996 and April 10, 1996, respectively.
/c/ An aggregate total return (not annualized) is shown instead of an average
annual total return since the Administration and Service shares have not
completed a full twelve months of operations.
- --------------------------------------------------------------------------------
12
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Government Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations--82.4%
Adjustable Rate Federal Home Loan Mortgage Corp.
(FHLMC)(a)--14.2%
$ 1,208,677 6.00% 11/15/16 $ 1,198,196
1,941,838 7.54 12/01/18/(b)/ 1,994,248
8,544,958 7.73 02/01/22/(b)/ 8,913,502
2,234,941 7.56 08/01/22 2,331,334
- --------------------------------------------------------------------------------
$ 14,437,280
- --------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association
(FNMA)(a)--6.2%
$ 389,769 9.00% 12/01/97 $ 402,558
2,732,146 7.80 11/01/14/(b)/ 2,849,984
3,025,230 7.48 08/01/22/(b)/ 3,093,842
- --------------------------------------------------------------------------------
$ 6,346,384
- --------------------------------------------------------------------------------
Fixed Rate Federal National Mortgage Association (GNMA)--3.5%
$ 1,093,610 6.00% 06/01/09/(b)/ $ 1,065,244
2,058,384 6.00 10/01/09/(b)/ 2,004,994
540,970 6.00 10/01/08/(b)/ 526,938
- --------------------------------------------------------------------------------
$ 3,597,176
- --------------------------------------------------------------------------------
Fixed Rate Government National Mortgage Association--3.3%
$ 3,040,068 10.00% 12/15/17/(b)/ $ 3,338,359
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations (CMOs)--55.3%
Inverse Floater(a)--5.7%
FHLMC Series 1296, Class J
$ 890,613 11.93% 07/15/99/(b)/ $ 948,502
FHLMC Series 1325, Class B
2,416,565 6.06 07/15/97/(b)/ 2,421,833
FHLMC Series 1325, Class C
1,028,325 7.56 07/15/97/(b)/ 1,034,598
FNMA Remic Trust 1991-127, Class S
144,496 12.98 09/25/98 153,084
FNMA Remic Trust, Series 1992-62, Class S
1,212,115 10.00 05/25/99 1,241,097
- --------------------------------------------------------------------------------
$ 5,799,114
- --------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only(a)--0.3%
FHLMC Series 1684, Class JD
$ 2,801,277(c) 3.66% 08/15/20/(b)/ $ 199,759
FNMA Remic Trust 1993-110, Class SC
2,597,458(c) 3.46 04/25/19/(b)/ 126,990
- --------------------------------------------------------------------------------
$ 326,749
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
Mortgage Backed Obligations (continued)
Collateralized Mortgage Obligations (continued)
Planned Amortization Class (PAC CMOs)--11.1%
FHLMC Series 1584, Class E
$ 3,000,000 5.75% 10/15/16/(b)/ $ 2,954,040
FNMA Remic Trust 1992-138, Class C
2,350,000 6.00 12/25/18/(b)/ 2,325,020
GNMA Remic Trust 1996-6, Class PB
6,000,000 6.50 06/16/09 6,038,400
- --------------------------------------------------------------------------------
$ 11,317,460
- --------------------------------------------------------------------------------
Planned Amortization Class Interest-Only (PAC IO) CMOs--0.6%
FHLMC Series 1552, Class JE
$ 10,552,245/(c)/ 7.00% 02/15/14/(b)/ $ 590,926
- --------------------------------------------------------------------------------
Planned Amortization Class Ioette CMOs--0.5%
FNMA Remic Trust 1992-198, Class K
$ 42,908/(c)/ 16.00% 12/25/15 $ 547,555
- --------------------------------------------------------------------------------
Regular Floater (a)--9.9%
FHLMC Series 1684, Class F
$ 5,000,000 5.75% 08/15/20/(b)/ $ 4,818,750
FHLMC Series 1684, Class JC
2,801,277 5.34 08/15/20/(b)/ 2,737,352
FNMA Remic Trust 1993-110, Class FC
2,597,459 5.54 04/25/19/(b)/ 2,565,796
- --------------------------------------------------------------------------------
$ 10,121,898
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--27.1%
FHLMC Series 1033, Class G
$ 2,000,000 8.00% 01/15/06/(b)/ $ 2,095,620
FHLMC Series 1296, Class I
2,493,715 5.24 07/15/99/(b)/ 2,481,546
FHLMC Series 174, Class Z
3,757,885 10.00 08/15/21 4,189,703
FNMA Remic Trust 1988-12, Class A
4,076,171 10.00 02/25/18/(b)/ 4,350,090
FNMA Remic Trust 1988-12, Class B
3,218,030 4.47 02/25/18/(b)/ 3,081,585
FNMA Remic Trust 1989-12, Class X
1,955,861 10.00 12/25/14/(b)/ 2,021,246
FNMA Remic Trust 1989-18, Class B
1,312,493 9.50 01/25/04 1,359,730
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations(continued)
Collateralized Mortgage Obligations(continued)
Sequential Fixed Rate CMOs (continued)
$ 4,628,657 7.75% 10/25/18 (b) $ 4,699,707
FNMA Remic Trust 1992-44, Class CA
3,000,000 12.00 08/25/20/(b)/ 3,394,800
- --------------------------------------------------------------------------------
$ 27,674,027
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 56,377,729
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $83,545,715) $ 84,096,928
- --------------------------------------------------------------------------------
U.S. Treasury Obligations--15.7%
United States Treasury Notes
$ 5,150,000 5.88% 04/30/98 $ 5,166,068
10,900,000 5.13 06/30/98/(b)/ 10,804,620
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $15,894,705) $ 15,970,688
- --------------------------------------------------------------------------------
Repurchase Agreement--1.0%
Joint Repurchase Agreement Account
$ 1,000,000 5.58% 11/01/96/(b)/ $ 1,000,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $1,000,000) $ 1,000,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $100,440,420(d)) $ 101,067,616
================================================================================
Futures contracts open at October 31, 1996 are as follows:
Number of
Contracts
Long Settlement Unrealized
Type (Short)(e) Month Gain (Loss)
- ------------------------- -------------- ------------------ ----------------
Euro Dollars 40 December 1996 $28,000
Euro Dollars 29 March 1997 34,650
Euro Dollars 37 June 1997 38,950
Euro Dollars 47 September 1997 68,625
Euro Dollars 45 December 1997 80,375
Euro Dollars 35 March 1998 25,250
Euro Dollars 20 June 1998 9,000
2 Year U.S. Treasury Notes 71 December 1996 87,859
5 Year U.S. Treasury Notes (89) December 1996 (173,203)
10 Year U.S. Treasury Notes (44) December 1996 (131,781)
20 Year U.S. Treasury Notes (7) December 1996 (34,844)
--------------
$32,881
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 826,961
Gross unrealized loss for investments in which
cost exceeds value (213,881)
- --------------------------------------------------------------------------------
Net unrealized gain $ 613,080
================================================================================
/(a)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(b)/Portions of these securities are being segregated for futures margin
requirements.
/(c)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(d)/The aggregate cost for federal income tax purposes is $100,454,536.
/(e)/Each Euro Dollar contract represents $1,000,000 in notional par value. 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 20-
Year U.S. Treasury Note contract represents $100,000 in notional par value.
The total notional amount and market value are $253,200,000 and
$89,469,788, respectively. The determination of notional amounts and market
value 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.
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. Under normal
interest rate conditions, the fund's duration will be within one-half year of
its benchmark, the Lehman Brothers Three-Year Municipal Bond Index. The fund's
approximate interest rate sensitivity is comparable to that of a three-year
bond.
After a Weak Start, the Municipal Bond Market Strengthened
The municipal bond market outperformed Treasuries during the 12-month
period under review, though both markets came under pressure when rates rose
during the first half of 1996. The average price of a three-year municipal bond
(as calculated from data provided by Municipal Market Data, an independent
municipal market information provider) fell slightly (0.14%), while yields rose
from 4.10% on October 31, 1995 to 4.15% on October 31, 1996.
The municipal bond market began the period under review on a weak note.
Tax reform uncertainty impacted investor demand during November and December
1995, while municipal bond supply was high due to seasonably heavy year-end
issuance. The market environment improved during January and February 1996, when
fading tax reform concerns helped to revive investor interest in the sector and
issuance declined. From March through the end of the period, the market's
technical balance was generally healthy, though occasional spikes in supply
periodically overwhelmed demand and briefly impacted performance. The largest of
these surges occurred in June when supply rose to its highest level since late
1995, but subsequently both new issuance and secondary supply fell dramatically
from July through September.
On the demand side, interest in municipal bonds was generally stable until
late summer and early fall. Demand from individual investors (who control
approximately 65% of municipal bond ownership either through mutual funds or
direct investment) began to decline when interest rates declined and municipal
yields fell below the psychologically significant 6% level. In addition,
property/casualty companies (which control approximately 10% of municipal bond
ownership) also dropped out of the market because the sector had become somewhat
unattractive relative to Treasuries. The supply drought finally abated in
October when many issuers sought to take advantage of lower interest rates, and
a continued weakness in demand caused municipals to underperform taxable bonds
for the month.
Municipal Bond Yield Curve
[LINE GRAPH APPEARS HERE]
The yield curve steepened at the short end and shifted downward at the longer
end.
Performance Review
The performance of the fund's Institutional shares was in line with the
benchmark, the Lehman Brothers Three-Year Municipal Bond Index (the "Index"),
for the 12-month period ended October 31, 1996. The Administration and Service
shares also performed well, but slightly lagged the benchmark.
- --------------------------------------------------------------------------------
15
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1995 - October 31, 1996
- --------------------------------------------------------------------------------
Lehman Brothers
Institu- Adminis- 3-Year
tional tration Service Municipal Bond Index
-------- -------- ------- ---------------------
<S> <C> <C> <C> <C>
Total Return (based on net 4.50% 4.24% 3.98% 4.51%
asset value)
- --------------------------------------------------------------------------------
Return From 4.30% 4.04% 3.78% NA
Monthly
Distributions
- --------------------------------------------------------------------------------
Return From Price 0.20% 0.20% 0.20% NA
Appreciation
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $9.96 $9.96 $9.97 NA
- --------------------------------------------------------------------------------
NAV Change +$0.02 +$0.02 +$0.02 NA
- --------------------------------------------------------------------------------
</TABLE>
The fund's positive performance during the period was primarily due to our
emphasis on higher yielding revenue bonds, as well as successful selection of
specific securities and relative value trades. As always, we did not make any
bets on the direction of interest rates, but rather kept the fund's duration in
line with the Index, occasionally using Treasury futures to actively manage
sector allocation.
In our search for incremental yield, we focused on three types of bonds.
The first category was relatively generic, highly liquid securities; the second
included slightly less liquid issues such as insured hospital bonds and
letter-of-credit-backed debt; and the last area was "story" bonds, such as
uninsured hospital and electric utility issues and multifamily housing revenue
bonds, whose value is often unrecognized by the market because they are unique
or generally not well understood. We identified attractive investment
opportunities for the third category through our extensive credit analysis.
We are pleased to report that the fund's Institutional shares ranked first
out of 26 funds in Lipper Analytical Services, Inc.'s short-intermediate
municipal debt category for the 12-month period ended October 31, 1996 based on
total return. (Lipper did not rank the fund's Administration and Service shares.
Please note that Lipper rankings do not take sales charges into account and that
past performance is not a guarantee of future results.) In addition, as of
October 31, 1996, the fund's Institutional shares were rated "five stars" by
Morningstar, Inc., its highest rating./1/
Portfolio Composition and Investment Strategies:
Revenue Bonds Dramatically Increased
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
General Obligations 3.0%
Variable Rate Demand Notes 4.7%
Insured General Obligations 12.6%
Insured Revenue Bonds 24.2%
Revenue Bonds 55.5%
* 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.
- ----------------------------
1 Source: (C) 1996 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 10/31/96.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and ten-year average annual returns (where applicable) in excess of
90-day Treasury bill returns with appropriate fee and sales charge adjustments
and a risk factor that reflects fund performance below 90-day Treasury bill
returns. The one-year rating is calculated using the same methodology, but is
not a component of the overall rating. The fund's Institutional shares received
five stars and were rated among 1,038 municipal bond funds for the three-year
period. For the one-year period, the Institutional shares received five stars
and were rated among 1,728 municipal bond funds. 10% of the funds receive the
five-star rating. The Morningstar rating applies only to the fund's
Institutional shares; the fund's Administration and Service shares have not been
rated. Administration and Service shares are subject to additional fees that may
have the effect of lowering performance and may affect any future Morningstar
rating. Morningstar rates funds against their peers in the same category. In
all, there are five Morningstar categories (domestic equity, international
equity, fixed income, municipal and hybrid). Morningstar ratings range from five
stars (highest) to one star (lowest). Funds with five-star ratings are in the
top 10% of their category, four-star ratings in the next 22.5%, three stars the
next 35%, two stars the next 22.5% and one star the lowest 10% of their
categories.
- --------------------------------------------------------------------------------
16
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------
.. Revenue Bonds. As of October 31, the portfolio's combined position in
insured and uninsured revenue bonds was significantly overweighted compared with
the Index, 79.7% versus 35.8%. We substantially increased the portfolio's total
revenue bond allocation (from 29.2% a year ago) because our emphasis on credit
analysis enabled us to identify attractive revenue bonds that offered higher
incremental yield than was available from general obligation bonds. (Revenue
bonds pay interest and principal out of a specific revenue stream, such as sales
taxes, hospital charges, tolls, electric rates and airport fees.)
.. General Obligation (GO) Bonds. The fund's allocation in insured and
uninsured GO bonds was dramatically cut during the period to 15.6% of the
portfolio, down from 51.0% a year ago and significantly underweighted versus the
Index's 55.5%. GOs are backed by the general taxing power of a municipality and
are typically higher credit quality but lower yielding than revenue bonds.
.. Variable Rate Demand Notes (VRDNs). VRDNs are high-quality cash
equivalents that we used to manage the portfolio's excess liquidity. VRDNs
were a 4.7% position, down from 10.0% a year ago.
.. Pre-refunded Bonds. Over the course of the year, we trimmed the fund's
holdings in pre-refunded bonds (9.8% as of October 31, 1995). In October, we
sold the fund's remaining position in the sector in favor of revenue bonds that
offered more attractive yields.
.. Duration. As of October 31, the fund's duration was in line with that of
the Index at 2.7 years.
.. Credit Quality. During the year, the fund's credit quality allocations
shifted. We reduced the portfolio's allocation in triple-A-rated GOs in favor of
single-A-rated revenue bonds, which allowed us to maintain the fund's targeted
double-A-rated average credit quality and liquidity while achieving higher
overall yields. We structured the portfolio's credit-quality allocation like a
"barbell," emphasizing higher credit quality securities in the four- to five-
year maturity range and lower relative credit quality securities in the one- to
three-year maturity range. As of October 31, more than half of the portfolio was
invested in triple-A-rated bonds (52.7%), while double-A- and single-A-rated
securities accounted for 20.1% and 27.2%, respectively.
Market Outlook
We have a bullish long-term outlook for municipal bond supply, since new
money issuance (bonds issued for purposes other than refunding older debt) tends
to be stable and grows at the same rate as GDP. In addition, we do not
anticipate a significant increase in refunding unless interest rates drop
substantially. On the demand side, investor interest is likely to remain
healthy, as we believe that two to four more years of divided government (a
Democratic president and a Republican-controlled Congress) should avert any
significant tax reform that would threaten municipal bonds' tax-exempt status.
Distribution Policy
Dividends are declared daily and paid on a monthly basis. During the
12-month period ended October 31, 1996, the fund's Institutional, Administration
and Service shares paid out monthly distributions totaling approximately $0.42,
$0.39 and $0.37 per share, respectively. The fund intends to distribute
substantially all of its investment company tax-exempt income, as required by
tax law.
- --------------------------------------------------------------------------------
17
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
We value your continued confidence in the GS Short Duration Tax-Free Fund
and look forward to reporting on the fund's progress in the coming year.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Elisabeth Schupf Lonsdale
Elisabeth Schupf Lonsdale
Portfolio Managers
GS Short Duration Tax-Free Fund
November 29, 1996
- --------------------------------------------------------------------------------
18
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. 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.
HYPOTHETICAL $50,000 INVESTMENT/(a)/
[GRAPH APPEARS HERE]
Institutional Shares
<TABLE>
<CAPTION>
Institutional Shares 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
10/1/92 50000 50000
- --------------------------------------------------------------------------------
10/31/92 49830 49805
- --------------------------------------------------------------------------------
10/31/93 53333 53102
- --------------------------------------------------------------------------------
10/31/94 53424 53825
- --------------------------------------------------------------------------------
10/31/95 56618 58023
- --------------------------------------------------------------------------------
10/31/96 59172 60646
- --------------------------------------------------------------------------------
</TABLE>
[GRAPH APPEARS HERE]
Administration Shares
<TABLE>
<CAPTION>
Admin 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
6/1/93 50000 50000
- --------------------------------------------------------------------------------
10/31/93 51088 51144
- --------------------------------------------------------------------------------
10/31/94 51031 51840
- --------------------------------------------------------------------------------
10/31/95 53971 55884
- --------------------------------------------------------------------------------
10/31/96 56265 58410
- --------------------------------------------------------------------------------
</TABLE>
[GRAPH APPEARS HERE]
Service Shares
<TABLE>
<CAPTION>
Service 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
10/1/94 50000 50000
- --------------------------------------------------------------------------------
10/31/94 49810 49880
- --------------------------------------------------------------------------------
10/31/95 52594 53771
- --------------------------------------------------------------------------------
10/31/96 54693 56201
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------
Average Annual Total Return
------------------------------------
One Year Since Inception/(b)/
-----------------------------------------------------------
<S> <C> <C>
Institutional Shares 4.50% 4.21%
-----------------------------------------------------------
Administration Shares 4.24% 3.51%
-----------------------------------------------------------
Service Shares 3.98% 4.36%
-----------------------------------------------------------
</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.
- --------------------------------------------------------------------------------
19
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligation--98.2%
Alabama--2.8%
Selma, AL IDA for International Paper Co. PCRB (A-/A3)
$1,000,000 4.15% 07/15/08 $1,000,000
- --------------------------------------------------------------------------------
Arkansas--3.8%
West Memphis, AR Public Utility System RB (MBIA) (NR/Aaa)
$1,310,000 5.25%(e) 12/01/00 $1,344,388
- --------------------------------------------------------------------------------
Colorado--4.2%
Municipal Sub District of Northern Colorado Water Conservation Co.
RB(AMBAC)(AAA/Aaa)
$1,435,000 5.75% 12/01/01 $1,508,845
- --------------------------------------------------------------------------------
Connecticut--4.3%
Connecticut State Resource Recovery Authority Series A RB (AA-/NR)
$1,500,000 5.60% 11/15/99 $1,546,185
- --------------------------------------------------------------------------------
Illinois--4.4%
Chicago, IL GO (MBIA) (AA/Aaa)
$1,500,000 5.40% 10/31/00 $1,547,670
- --------------------------------------------------------------------------------
Kentucky--7.5%
Jefferson County, KY Trust Certificates (A+/NR)RB
$1,145,000 5.25% 03/01/99 $1,163,904
Pendleton County, KY LOC (Self Insurance)(NR/VMIG1)
1,500,000 4.25 07/01/01 1,503,045
- --------------------------------------------------------------------------------
$2,666,949
- --------------------------------------------------------------------------------
Louisiana--7.4%
Louisiana Offshore Deepwater Part Authority Term B RB (A/Baa1)
$1,000,000 5.85% 09/01/00 $1,040,080
Louisiana State Refunding RB, Series A GO (FGIC) (AAA/Aaa)
1,500,000 6.00 08/01/01 1,583,970
- --------------------------------------------------------------------------------
$2,624,050
- --------------------------------------------------------------------------------
New Jersey--4.0%
West Windsor/Plainsboro, NJ Regional School District (FGIC)
(AAA/Aaa)
$1,400,000 5.25% 12/01/99 $1,436,750
- --------------------------------------------------------------------------------
New York--6.8%
Municipal Assistance Corp. Refunding RB (AMBAC) (AAA/Aaa)
$1,000,000 6.00% 07/01/00 $1,051,690
Syracuse, NY IDA RB (AA/NR)
$1,365,000 4.60% 10/15/98 $1,369,491
- --------------------------------------------------------------------------------
$2,421,181
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Oklahoma--13.5%
Enid, OK Hospital Authority RB (Societe Generale LOC) (NR/Aa2)
$2,700,000 6.63%(a) 10/01/15 $2,747,115
Southern Oklahoma Memorial Hospital RB(b) (A/A)
2,000,000 5.60 02/01/00 2,043,680
- -------------------------------------------------------------------------------
$4,790,795
- -------------------------------------------------------------------------------
Oregon--4.2%
Klamath Falls, OR Salt Caves Hydroelectic RB (SP1+/NR)
$1,500,000 4.50% 05/01/23 $1,507,980
- -------------------------------------------------------------------------------
Pennsylvania--9.7%
Pennsylvania Intergovernmental Cooperative Authority Special Tax RB
(FGIC) (AAA/Aaa)
$1,500,000 5.75% 06/15/00 $1,559,730
Philadelphia, PA Gas Works COPS (FSA) (AAA/Aaa)
1,800,000 5.95 04/01/00 1,879,146
- --------------------------------------------------------------------------------
$3,438,876
- --------------------------------------------------------------------------------
Texas--11.4%
Bexar County, TX MFH Finance Corp. RB (CFMG) (NR/A3)
$1,500,000 4.88% 11/01/04 $1,502,220
Houston, TX Water & Sewer RB Series B (A/A)
1,430,000 5.25 12/01/99 1,460,802
Port Neches, TX Independent School District GO (AAA/Aaa)
1,000,000 7.00 02/15/01 1,092,480
- -------------------------------------------------------------------------------
$4,055,502
- -------------------------------------------------------------------------------
Virginia--5.0%
Petersburg, VA Hospital Authority RB (NR/A)
$1,760,000 5.50% 07/01/99 $1,798,157
- -------------------------------------------------------------------------------
Washington--4.6%
Washington State Public Power Supply System RB, Series B (AA-/Aa1)
$1,500,000 7.20% 07/01/02 $1,623,044
- -------------------------------------------------------------------------------
Wyoming--4.6%
Uinta County, WY School District GO, Series A (FSA) (AAA/Aaa)
$1,500,000 6.88% 06/01/00 $1,620,390
- -------------------------------------------------------------------------------
Total Debt Obligations
(Cost $34,727,338) $34,930,762
===============================================================================
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Short-Term Obligations--4.5%
Illinois--0.6%
Illinois Development Finance Authority RB (AA+/A-1)/(c)/
$200,000 3.55% 01/1/96 $200,000
Louisiana--3.9%
East Baton Rouge Parish PCRB (AAA/Aaa)/(c)/
$1,400,000 3.60% 11/1/96 $1,400,000
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $1,600,000) $ 1,600,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $36,328,338)/(d)/ $36,530,762
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 204,715
Gross unrealized loss for investments in which
cost exceeds value (2,291)
- --------------------------------------------------------------------------------
Net unrealized gain $ 202,424
================================================================================
</TABLE>
/(a)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(b)/Portions of these securities are being segregated for when-issued
securities.
/(c)/Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next reset interest dates.
/(d)/The amount stated also represents aggregate cost for federal income tax
purposes.
/(e)/When-issued securities.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
================================================================================
Investment Abbreviations:
AMBAC --Insured by American Municipal Bond Assurance Corp.
CFMG --Credit Lyonnais Line of Credit
COPS --Certificates of Participation
FGIC --Insured by Financial Guaranty Insurance Co.
FSA --Financial Security Assurance Co.
GO --General Obligation
IDA --Industrial Development Authority
LOC --Letter of Credit
MBIA --Insured by Municipal Bond Investors Assurance
NR --Not Rated
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Core Fixed Income Fund seeks to achieve a total return consisting of
capital appreciation and income that exceeds the total return of its benchmark,
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 non-dollar-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. The fund's
approximate interest rate sensitivity is expected to be comparable to that of a
five-year bond.
Performance Review
During the period under review, the fund's Institutional shares outperformed
the Index. The strong performance was primarily due to its investments in
corporate bonds and emerging market debt. In addition, the fund also benefited
from its mortgage-backed and asset-backed holdings when both sectors
strengthened during the period.
The fund fared well relative to its peers. For the 12-month period ended
October 31, 1996, the fund's Institutional shares ranked in the top quartile
(24th out of 96 funds) in Lipper Analytical Services, Inc.'s "corporate debt -
BBB-rated" category based on total return. (Lipper did not rank the fund's
Administration and Service shares for the period because they were in existence
less than 12 months. Please note that Lipper rankings do not take sales charges
into account and that past performance is not a guarantee of future results.)
The fund's Administration and Service shares, which began operations on
February 28, 1996 and March 13, 1996, respectively, achieved positive returns
since their inceptions.
During the period, the net asset value (NAV) of the fund's Institutional
shares fell $0.15 due to the sharp rise in interest rates during the first half
of 1996. Reflecting the fact that rates had already risen significantly, the NAV
of the fund's Administration shares (which opened in February) also declined but
not as significantly, while the NAV of the fund's Service shares (which opened
in March) rose $0.09.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Performance Summary
- -------------------------------------------------------------------------------
Institutional Administration* Service*
(10/31/95- (2/28/96- (3/13/96-
10/31/96) 10/31/96) 10/31/96)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Return (based on 5.98% 3.56% 4.90%
net asset value)
- -------------------------------------------------------------------------------
Return From Monthly 7.48% 4.27% 3.98%
Distributions
- -------------------------------------------------------------------------------
Return From Price -1.50% -0.71% 0.92%
Depreciation/
Appreciation
- -------------------------------------------------------------------------------
Total Return of Lehman 5.83% 3.74% 4.94%
Brothers Aggregate
Bond Index
- -------------------------------------------------------------------------------
NAV (as of 10/31/96) $9.85 $9.84 $9.86
- -------------------------------------------------------------------------------
NAV Change -$0.15 -$0.07 +$0.09
- -------------------------------------------------------------------------------
</TABLE>
*New share class opened during the period.
Portfolio Composition and Investment Strategies
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
Corporate Bonds 26.6%
Fixed Rate Mortgage Pass-Throughs 23.9%
U.S. Treasuries 19.5%
ABSs 12.5%
CMOs 9.8%
Emerging Market Debt 4.5%
Repos/Cash Equivalents 1.7%
Agency Debentures 1.5%
* 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.
- --------------------------------------------------------------------------------
22
<PAGE>
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
.. Corporate Bonds. As of October 31, the fund's largest allocation was in
corporate bonds, overweighted relative to the Index (26.6% versus 17.6%),
which significantly benefited performance. Though corporate bonds began the
period on a weak note due to the economic slowdown during November and December,
the sector improved dramatically when companies reported positive earnings
growth from January 1996 through the end of the period. Within the sector, we
stressed industrial and financial issues. Industrials performed well due to the
strengthening economy, while financials benefited from the relatively steep
yield curve, which enabled issuers to borrow at lower, short-term rates and lend
at higher, long-term rates.
.. Fixed Rate Mortgage Pass-Throughs. Fixed rate mortgage pass-throughs, a
23.9% position as of October 31, were underweighted compared with the Index
(29.7%), with the remainder of the fund's mortgage-backed security allocation
invested in collateralized mortgage obligations (CMOs). We emphasized seasoned
premium mortgages, which have lower prepayment risk than recently issued
mortgages. The sector suffered from high prepayments during November and
December 1995, but conditions improved when interest rates rose sharply during
the first half of 1996 and prepayments declined. Over the course of the year,
these securities positively contributed to the fund's performance.
During the period, we occasionally used mortgage dollar rolls to benefit from
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 -- 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.
.. CMOs. During the period, we increased the portfolio's CMO allocation to
9.8%, up from 2.0% a year earlier. Within the sector, we initiated a
position in sequential-pay/support CMOs (5.1% as of October 31) and increased
the portfolio's position in planned amortization class (PAC) CMOs to 3.5% from
0.9%. These securities were favored for their relative stability and attractive
spreads compared with Treasuries, and they benefited performance during the
period. The remaining CMO positions were inverse floaters, discussed below.
.. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. The fund's
allocation in U.S. Treasuries was reduced to 19.5% from 24.7% a year ago. We
significantly underweighted Treasuries relative to the benchmark (45.2%) to
focus on other sectors that offered more attractive relative value. In addition,
repurchase agreements/cash equivalents accounted for 1.7% of the portfolio, up
from 0.4% a year ago.
.. Asset-Backed Securities (ABSs). We increased the fund's allocation in ABSs to
12.5%, up from 9.9% a year ago. The ABS position consisted of short-term,
high-credit-quality issues primarily backed by credit card loans, as well as
smaller positions in automobile loan debt and other receivables, that offered
incremental yield over similar-duration Treasuries. When the period under review
began, the ABS market was weak due to uncertainty regarding credit card
delinquencies, but those concerns waned and the sector strengthened from January
through October. The supply of ABSs was robust during the period, with a wide
variety of innovative new issues across a range of maturities, collateral types
and structures. Despite the increased issuance, the technical balance of the ABS
market remained favorable due to heavy investor demand from foreign banks,
insurance companies and an increasing number of corporate "crossover" accounts.
- --------------------------------------------------------------------------------
23
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
.. Emerging Market Debt. The portfolio's investments in emerging market debt
(4.5%) performed extremely well during the period. We carefully managed the
fund's exposure in the sector by stressing higher credit-quality, short-duration
bonds. Geographically, we emphasized Latin American countries because we believe
this region has the best risk/reward characteristics. During the period, we
focused on bonds from Chile, Colombia and the Andean region development bank. We
also initiated a new position in investment-grade Mexican bonds.
.. Agency Debentures. Agency debentures, a small position (1.5%), added to the
portfolio's diversification and contributed incremental yield. However, we
underweighted the sector relative to the Index (6.5%) because our analysis
indicated that it did not adequately compensate us given its level of risk.
.. Duration. As of October 31, the fund's duration matched that of the Index at
4.7 years. Rather than attempting to predict the direction of interest rates, we
manage the fund's duration to approximate that of the Index, partly through the
use of financial futures. We seek to add incremental return over the Index
through sector weighting and individual security selection.
.. Credit Quality. More than half of the portfolio was invested in government
and agency securities (51 .1%), with another 12.6% invested in triple-A-rated
securities. The remainder of the portfolio was made up of double-A-rated
securities (2.7%), single-A-rated securities (12.5%), triple-B-rated
securities (19.4%) and cash equivalents
(1.7%).
.. Prudent Use of Derivatives. As noted, the portfolio held positions in asset-
backed securities (12.5%), sequential-pay/support CMOs (5.1%) and PAC CMOs
(3.5%), which are all typically considered to be lower risk derivatives. In
addition, we held a 1.2% position in inverse floaters, which are securities
whose coupons reset in the opposite direction from interest rate movements.
These securities performed well during the period, offering incremental yield
over Treasuries.
Market Outlook
We are somewhat cautious on the corporate bond sector as it has become
expensive relative to Treasuries, but expect the sector to continue to benefit
from strong technical and fundamental factors. We intend to continue to
overweight industrial and financial issues and underweight utilities due to
their regulatory and competitive pressures. In the mortgage pass-through market,
certain segments are attractively valued, and we believe that our current
seasoned holdings should fare well relative to other sectors if interest rates
were to continue to fall and increase the level of prepayments. We are
cautiously optimistic on the ABS market, where we expect the sector's
significant spread premiums relative to comparably rated corporate securities to
continue to buoy investor demand. In addition, Fed surveys indicate that banks
have been tightening their underwriting standards over the last three quarters,
which should help to allay lingering investor concerns surrounding consumer
credit card delinquencies. Finally, we remain optimistic on the prospects for
the relative performance of emerging market debt, which continues to offer good
value compared with other asset classes. Overall, the economic trends in
emerging markets appear to be headed in the right direction and the
globalization of financial markets is likely to increase investor interest in
the sector. During the coming year, we will continue to actively allocate the
portfolio's assets among the various fixed income sectors as their relative
value changes.
Distribution Policy
During the 12-month period under review, the fund's Institutional shares
distributed $0.72 per share. From their inceptions through October 31, the
fund's Administration and Service shares paid out $0.41 and $0.38 per share,
respectively. (The Administration shares' inception date was on February 28,
1996, and the Service shares' inception date was on March 13, 1996.) Dividends
are
- --------------------------------------------------------------------------------
24
<PAGE>
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
declared daily and paid on a monthly basis. As required by tax law, the fund
distributes substantially all of its investment company taxable income.
In closing, we appreciate your investment and look forward to serving you in
the future.
Sincerely,
/s/ Jonathan A Beinner
Jonathan A Beinner
/s/ Richard H. Buckholz
Richard H. Buckholz
/s/ C. Richard Lucy
C. Richard Lucy
/s/ Stephen R. Warren
Stephen R. Warren
Portfolio Managers
GS Core Fixed Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
25
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund
- --------------------------------------------------------------------------------
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. 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
[GRAPH APPEARS HERE] [GRAPH APPEARS HERE] [GRAPH APPEARS HERE]
Institutional Shares/(a)/ Administration Shares Service Shares
1/5/94 50000 2/28/96 50000 3/13/96 50000
10/31/94 48500 10/31/96 51780 10/31/96 52450
10/31/95 56124
10/31/96 59492
Lehman Aggregate Index Lehman Aggregate Index Lehman Aggregate Index
1/5/94 50000 2/28/96 50000 3/13/96 50000
10/31/94 46980 10/31/96 51870 10/31/96 52470
10/31/95 54332
10/31/96 57505
<TABLE>
<CAPTION>
------------------------ -----------------------------------------------------
Average Annual Total Return
------------------------ -----------------------------------------------------
One Year Since Inception/(a)/
<S> <C> <C>
------------------------ ---------------------------- ------------------------
Institutional Shares 5.98% 6.34%
------------------------ ---------------------------- ------------------------
Administration Shares N/A 3.56/(b)/
------------------------ ---------------------------- ------------------------
Service Shares N/A 4.90/(b)/
------------------------ ---------------------------- ------------------------
</TABLE>
(a) The Institutional, Administration and Service shares commenced operations
January 5, 1994, February 28, 1996 and March 13, 1996, respectively
(b) An aggregate total return (not annualized) is shown instead of an average
annual total return since the Administration and Service shares have not
completed a full twelve months of operations.
- --------------------------------------------------------------------------------
26
<PAGE>
Statement of Investments
- ---------------------------------------------------------------------
GS Core Fixed Income Fund
October 31, 1996
- ---------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
=====================================================================
Corporate Bonds--26.8%
Finance Bonds--12.6%
BankAmerica Corp.
$ 20,000 6.03% 05/17/99 $ 201,724
Bear Stearns Mortgage Securities, Inc.
2,045,784 6.50 03/28/09 1,903,048
Capital One Bank
600,000 8.63 01/15/97 603,000
500,000 8.13 02/27/98 511,610
Comdisco Inc.
950,000 9.75 01/15/97 956,717
200,000 7.33 03/06/97 201,112
Conseco Inc.
340,000 10.50 12/15/04 402,688
Continental Bank N.A.
525,000 11.25 07/01/01 565,971
Countrywide Funding Corp.
125,000 6.08 07/14/99 124,166
250,000 8.43 11/16/99 263,653
250,000 7.75 08/10/01 259,800
Ford Capital Corp.
200,000 9.38 01/01/98 207,584
300,000 9.50 07/01/01 333,960
General Motors Acceptance Corp.
275,000 7.63 03/09/98 281,064
200,000 7.13 05/10/00 204,238
375,000 9.63 12/15/01 422,483
Meditrust, Inc.
240,000 7.82 09/10/26 258,144
Security Pacific Corp.
995,000 11.50 11/15/00 1,268,429
Signet Banking Corp.
240,000 9.63 06/01/99 257,527
Washington Real Estate Corp.
120,000 7.13 08/13/03 120,307
- ---------------------------------------------------------------------
$ 9,247,225
- ---------------------------------------------------------------------
Industrial Bonds--13.7%
360 Communications Co.
$ 525,000 7.13% 03/01/03 $ 520,312
Auburn Hills Trust
210,000 12.00 05/01/20 316,730
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
=====================================================================
Corporate Bonds (continued)
Industrial Bonds (continued)
Cablevision Industries Corp.
$ 150,000 10.75% 01/30/02 $ 162,534
Continental Airlines, Inc.
349,679 7.75 07/02/14 364,513
569,776 8.56 07/02/14 620,880
Ford Holdings, Inc.
300,000 9.25 03/01/00 325,581
Mitchell Energy & Development Corp.
400,000 8.00 07/15/99 410,020
News America Holdings, Inc.
350,000 9.13 10/15/99 375,340
150,000 7.50 03/01/00 154,083
Northwest Airlines Corp.
167,795 8.26 03/10/06 179,500
575,000 8.97 01/02/15 605,573
RJR Nabisco Inc.
175,000 8.00 07/15/01 175,334
450,000 8.63 12/01/02 456,467
Tele-Communications, Inc.
50,000 6.46 03/06/00 49,465
300,000 8.25 01/15/03 296,652
1,135,000 6.27 09/15/03 1,132,764
Tenneco Inc.
1,175,000 10.00 08/01/98 1,249,178
Time Warner, Inc.
1,650,000 7.95 02/01/00 1,708,410
400,000 7.98 08/15/04 409,452
U.S. Air Inc.
560,072 6.76 04/15/08 547,711
- ---------------------------------------------------------------------
$10,060,499
- ---------------------------------------------------------------------
Utility Bonds--0.5%
Central Maine Power Co.
$ 330,000 7.45% 08/30/99 $ 329,248
- ---------------------------------------------------------------------
$ 329,248
- ---------------------------------------------------------------------
Total Corporate Bonds
(Cost $19,435,482) $19,636,972
- ---------------------------------------------------------------------
Asset-Backed Securities--12.2%
Airplanes Pass Through Trust Series 1, Class C
$ 155,000 8.15% 03/15/19 $ 159,816
- ---------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
27
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C> <C>
Asset-Backed Securities (continued)
Chevy Chase Auto Receivables Trust Series 1995-2, Class A
$ 232,121 5.80% 06/15/02 $ 231,466
Discover Card Master Trust, Series 1996-4, Class A
1,910,000 5.76 10/16/13 1,926,101
Discover Card Master Trust, Series 1996-4, Class B
1,100,000 5.93 10/16/13 1,100,000
General Motors Acceptance Corp. Series 1995, Class A
99,367 7.15 03/15/00 100,546
Navistar Financial Corp. Owner Trust, Series 1995-A, Class A2
291,994 6.55 11/20/01 293,725
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
314,669 6.85 06/15/01 318,757
Premier Auto Trust Series 1995-1, Class A4
360,000 7.85 09/04/98 362,023
Premier Auto Trust Series 1995-1, Class A5
80,000 7.90 05/04/99 81,150
Sears Credit Account Master Trust, Series 1996-1, Class A
680,000 6.20 02/16/06 675,750
Sears Credit Account Master Trust, Series 1995-2, Class A
550,000 8.10 06/15/04 577,500
Sears Credit Card Master Trust, Series 1995-3, Class A
300,000 7.00 10/15/04 306,561
Standard Credit Card Trust, Series 1990-3, Class A
1,120,000 9.50 07/10/98 1,140,294
Standard Credit Card Trust, Series 1990-6, Class B
900,000 9.63 09/10/98 924,183
Standard Credit Card Trust, Series 1994-4, Class A
680,000 8.25 11/07/03 726,111
- --------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $8,987,847) $8,923,983
- --------------------------------------------------------------------------------
Emerging Market Debt--3.9%
Bancoldex
$ 160,000 8.63% 06/02/00 $ 164,731
Corp. Andina de Fomento
200,000 7.25 04/30/98 202,294
40,000 8.38 07/29/01 40,698
Empresa Col Petroleos
900,000 7.25 07/08/98 904,563
Financiera Energy Nacional
530,000 6.63 12/13/96 534,400
160,000 9.38 06/15/06 165,234
- --------------------------------------------------------------------------------
Emerging Market Debt (continued)
Instituto de Fomento Industrial
$ 80,000 8.38% 07/29/01 $ 81,397
Korea Electric Power
266,952 7.40 04/01/16 269,197
YPF Sociedad Anonima
456,886 7.50 10/26/02 463,036
- --------------------------------------------------------------------------------
Total Emerging Market Debt
(Cost $2,799,425) $2,825,550
- --------------------------------------------------------------------------------
Government Bonds--0.9%
Province of Quebec
$ 520,000 13.25% 09/15/14 $ 630,058
- --------------------------------------------------------------------------------
Total Government Bonds
(Cost $653,628) $ 630,058
- --------------------------------------------------------------------------------
Mortgage Backed Obligations--31.1%
Federal Home Loan Mortgage Corp. (FHLMC((b)
$4,500,000 7.50% TBA-30 Yr(b) $4,515,435
1,208,677 6.00 TBA-30 Yr(b) 1,198,196
Federal National Mortgage Association (FNMA)
1,000,000 7.00 TBA-30 Yr(b) 980,930
1,000,000 8.00 11/15/16 1,020,000
126,229 8.50 06/01/06 131,790
125,861 8.50 09/01/06 131,406
720,814 8.50 03/01/10 752,213
500,000 6.25 07/25/18 492,810
989,360 7.00 02/01/26 970,493
1,000,001 8.50 07/01/26 1,034,681
FNMA Remic Trust, Series 1993-201G
1,000,000 3.50 05/25/19 871,560
GE Capital Mortgage Services, Inc. Series 1994-17, Class A10
2,000,000 7.00 05/25/24 1,842,500
Government National Mortgage Association (GNMA)
1,000,000 7.00 TBA-30 Yr(b) 980,620
1,000,000 7.50 TBA-30 Yr(b) 1,003,120
3,000,000 8.00 TBA-30 Yr(b) 3,067,500
1,000,000 8.50 TBA-30 Yr(b) 1,038,120
342,966 8.00 02/15/17 356,042
850,876 7.50 03/15/23 857,785
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
- ----------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
======================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations(continued)
Government National Mortgage Association (GNMA)--(continued)
$ 512,583 7.00% 08/15/23 $ 505,699
124,369 7.50 08/15/23 125,379
Prudential Home Mortgage Securities Corp., Series 1992-39 A8
1,000,000 7.74 12/25/07 892,270
- ----------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $22,482,170) $22,768,549
- ----------------------------------------------------------------------
Sovereign Credit--1.3%
United Mexican States
$ 650,000 7.69% 08/06/01 $ 658,769
State of Israel
300,000 6.38 12/15/05 286,611
- ----------------------------------------------------------------------
Total Sovereign Credit
(Cost $926,260) $ 945,380
- ----------------------------------------------------------------------
U.S. Government Agency Obligations--1.5%
Federal Home Loan Mortgage Corp. (FHLMC)
$ 300,000 8.20% 01/16/98 $ 301,734
250,000 6.83 09/18/02 249,023
Resolution Funding Corp. Principal-Only Stripped Securities/(c)/
1,790,000 7.08 10/15/20 335,392
1,140,000 7.08 01/15/21 210,136
- ----------------------------------------------------------------------
Total U.S. Government Agency Obligations
(Cost $1,058,170) $ 1,096,285
- ----------------------------------------------------------------------
U.S. Treasury Obligations--19.3%
United States Treasury Bonds
$ 3,900,000 8.75% 05/15/17 $ 4,772,625
30,000 8.88 08/15/17 37,153
150,000 8.75 08/15/20 185,180
120,000 7.88 02/15/21 135,900
United States Treasury Interest-Only Stripped Securities/(d)/
2,250,000 6.69 08/15/09 968,063
350,000 6.75 11/15/10 137,736
United States Treasury Notes
1,200,000 5.88 04/30/98 1,203,744
3,250,000 6.88 08/31/99 3,331,250
100,000 6.13 07/31/00 100,375
2,090,000 7.88 11/15/04 2,293,775
United States Treasury Principal-Only Stripped Securities/(c)/
40,000 5.54 11/15/97 37,792
590,000 6.41 11/15/04 354,885
2,920,000 6.95 05/15/20 581,460
- ----------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $13,792,338) $14,139,938
- ----------------------------------------------------------------------
Repurchase Agreements--19.0%
Joint Repurchase Agreement Account/(a)/
$ 13,900,000 5.58% 11/01/96 $13,900,000
- ----------------------------------------------------------------------
Total Repurchase Agreements
(Cost $13,900,000) $13,900,000
- ----------------------------------------------------------------------
Total Investments
(Cost $84,035,320/(e)/) $84,866,715
======================================================================
</TABLE>
Futures contracts open at October 31, 1996 are as follows:
<TABLE>
<CAPTION>
Number of
Contracts Settlement Unrealized
Type Long (f) Month Gain
- ------------------------- ------------ --------------- ------------
<S> <C> <C> <C>
Euro Dollars 5 December 1996 $5,125
Euro Dollars 5 March 1997 6,875
Euro Dollars 3 September 1997 825
Euro Dollars 5 June 1997 7,500
Euro Dollars 5 June 1998 3,625
5-Year U.S. Treasury
Notes 7 December 1996 8,641
10-Year U.S. Treasury
Notes 18 December 1996 65,625
=====================================================================
$98,216
-----------
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 993,383
Gross unrealized loss for investments in
which cost exceeds value (243,229)
=====================================================================
Net unrealized gain $ 750,154
- ---------------------------------------------------------------------
</TABLE>
/(a)/Portions of these securities are being segregated for open TBA purchases,
mortgage dollar rolls and futures.
/(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 securities represents effective
yields to maturity.
/(d)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(e)/The aggregate cost for federal income tax purposes is $84,116,561.
/(f)/Each Euro Dollar contract represents $1,000,000 in notional par value. Each
5-Year U.S. Treasury Note and, 10-Year U.S. Treasury Note contract
represents $100,000 in notional par value. The total notional amount and
market value are $25,500,000 and $8,144,325, respectively. The
determination of notional amounts and market value 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.
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
==============================================================
<S> <C> <C> <C> <C>
Assets:
Investments in securities, at value (cost $618,544,961, $100,440,420,
$36,328,338 and $84,035,320, respectively) $617,783,125 $1O1,067,616 $36,530,762 $84,866,715
Receivables:
Investment securities sold 9,023,710 -- 2,639,947 4,512,122
Interest 6,238,391 962,570 560,207 981,011
Fund shares sold 93,534 9,761 48,407
Variation margin -- -- -- 5,475
Cash 23,482 85,863 133,870 70,206
Deferred organization expenses, net -- -- 20,748 53,352
Other assets 186,057 127,499 66,001 66,089
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 633,348,299 102,253,309 39,999,942 90,554,970
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Dividends 1,479,757 109,402 20,960 23,483
Investment securities purchased 3,134,490 -- 4,336,434 17,313,687
Fund shares repurchased 732,405 55,958 20,916 6,846
Variation margin 20,125 256 -- --
Investment adviser fees 210,539 34,534 11,033 22,677
Transfer agent fees 46,181 -- 5,254 3,058
Authorized dealer service fees 1,675 -- -- --
Accrued expenses and other liabilities 54,249 35,598 48,693 40,800
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 5,679,421 235,748 4,443,290 17,410,551
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 680,810,713 115,128,671 39,403,964 72,421,889
Accumulated undistributed (distributions in excess of) net
investment income (3,441,783) 770,624 90,133 33,551
Accumulated net realized loss on investment and futures
transactions (49,082,170) (14,541,811) (4,139,869) (240,632)
Net unrealized gain (loss) on investments and futures (617,882) 660,077 202,424 929,611
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets $627,668,878 $102,017,561 $35,556,652 $73,144,419
===================================================================================================================================
Net asset value, offering and redemption price per share
Institutional shares $9.83 $9.83 $9.96 $9.85
Administration shares $9.83 $9.85 $9.96 $9.84
Service shares -- $9.82 $9.97 $9.86
Class A shares(a) $9.83 -- -- --
===================================================================================================================================
Shares Outstanding:
Institutional shares 62,407,407 10,168,881 3,494,408 7,312,322
Administration shares 385,738 25,537 4,845 71,240
Service shares -- 185,492 69,696 38,782
Class A shares 1,091,335 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest outstanding, $.001 par value
(unlimited number of shares authorized) 63,884,480 10,379,910 3,568,949 7,422,344
===================================================================================================================================
</TABLE>
(a) Maximum public offering price per share (NAV per share x 1.0152) for Class A
shares of GS Adjustable Rate Government Fund is $9.97
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Operations
October 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
==========================================================
<S> <C> <C> <C> <C>
Investment income:
Interest, net (a) $39,925,070 $7,068,555 $1,979,825 $4,292,039
- ------------------------------------------------------------------------------------------------------------------------------------
Total income 39,925,070 7,068,555 1,979,825 4,292,039
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 2,535,709 514,200 169,796 246,568
Distribution fees 30,905 -- -- --
Authorized dealer service fees 30,905 -- -- --
Administration share fees 9,833 107 129 751
Service share fees -- 1,222 2,322 422
Transfer agent fees 278,337 -- 16,980 24,657
Custodian fees 136,975 66,180 53,929 81,841
Professional fees 86,751 56,020 54,712 53,340
Registration fees 72,001 37,210 44,701 48,435
Amortization of deferred organization expenses 20,848 -- 22,735 24,562
Trustees' fees 1,899 1,287 760 915
Other 106,857 59,952 65,554 30,136
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 3,311,020 736,178 431,618 511,627
Less--Expenses reimbursable and fees waived by Goldman Sachs (417,768) (272,069) (238,097) (233,065)
- ------------------------------------------------------------------------------------------------------------------------------------
Net expenses 2,893,252 464,109 193,521 278,562
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 37,031,818 6,604,446 1,786,304 4,013,477
- ------------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment and
futures transactions:
Net realized gain (loss) from:
Investment transactions (310,326) (222,458) 367,144 (108,070)
Futures transactions (2,192,298) (345,361) (35,506) (145,350)
Net change in unrealized gain (loss) on:
Investments 6,892,986 661,003 (396,071) (192,910)
Futures 818,120 (41,385) -- 117,560
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment and futures
transactions 5,208,482 51,799 (64,433) (328,770)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $42,240,300 $ 6,656,245 $ 1,721,871 $3,684,707
====================================================================================================================================
(a) Net of $1,314 in foreign withholding tax for the Core Fixed Income Fund.
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
October 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
----------------------------------------------------------
<S> <C> <C> <C> <C>
From Operations:
Net investment income $ 37,031,818 $6,604,446 $1,786,304 $4,013,477
Net realized gain (loss) from investment and futures transactions (2,502,624) (567,819) 331,638 (253,420)
Net change in unrealized gain (loss) on investments and futures 7,711,106 619,618 (396,071) (75,350)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 42,240,300 6,656,245 1,721,871 3,684,707
- ------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (36,233,589) (6,561,519) (1,766,892) (4,019,797)
Administration shares (220,450) (2,548) (2,032) (19,144)
Service shares -- (14,792) (17,380) (5,349)
Class A shares (577,779) -- -- --
In excess of net investment income
Institutional shares (1,304,006) -- -- --
Administration shares (7,930) -- -- --
Class A shares (20,794) -- -- --
Net realized gain (loss) on investment, and future transactions
Institutional shares -- -- -- (450,016)
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (38,364,548) (6,578,859) (1,786,304) (4,494,306)
- ------------------------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 406,586,374 42,019,441 22,248,684 21,976,567
Reinvestment of dividends and distributions 18,181,648 4,153,816 1,401,492 4,315,748
Cost of shares repurchased (477,107,914) (47,993,112) (46,918,400) (7,840,575)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from shares transactions (52,339,892) (1,819,855) (23,268,224) 18,451,740
- ------------------------------------------------------------------------------------------------------------------------------
Total (decrease) increase (48,464,140) (1,742,469) (23,332,657) 17,642,141
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------
Beginning of year $676,133,018 $103,760,030 $58,889,309 $55,502,278
- ------------------------------------------------------------------------------------------------------------------------------
End of year $627,668,878 $102,017,561 $35,556,652 $73,144,419
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated (distributions in excess of) undistributed
net investment income $ (3,441,783) $ 770,624 $ 90,133 $ 33,551
- ------------------------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 41,534,978 4,293,467 2,233,482 2,244,430
Reinvestment of dividends and distributions 1,856,783 424,274 140,950 439,299
Shares repurchased (48,741,470) (4,905,357) (4,727,959) (811,075)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding (5,349,709) (187,616) (2,353,527) 1,872,654
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
32
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GS Adjustable GS Short-Term
Rate Government
Government Agency
Agency Fund Fund
==================================
<S> <C> <C>
From Operations:
Net investment income $ 42,586,453 $ 8,885,667
Net realized gain (loss) from investment and futures transactions (12,000,479) (4,030,174)
Net change in unrealized gain on investments and futures 16,138,367 5,735,691
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 46,724,341 10,591,184
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (42,629,917) (8,684,213)
Administration shares (278,448) (11,164)
Service shares -- --
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)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 456,762,969 49,034,023
Proceeds from reorganizations 37,593,780 --
Reinvestment of dividends and distributions 21,273,685 4,993,443
Cost of shares repurchased (790,211,526) (145,988,674)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from share
transactions (274,581,092) (91,961,208)
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (273,350,262) (90,065,401)
Net Assets:
Beginning of year 949,483,280 193,825,431
- ----------------------------------------------------------------------------------------------------------------
End of year $676,133,018 $103,760,030
================================================================================================================
Accumulated (distributions in excess of) undistributed net investment
income $ (2,129,902) $ 708,450
================================================================================================================
Summary of Share Transactions:
Shares sold 46,809,171 5,072,030
Shares exchanged in reorganizations 3,843,169 --
Reinvestment of dividends and distributions 2,181,117 516,178
Shares repurchased (81,125,615) (15,135,663)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding (28,292,158) (9,547,455)
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
GS Short GS Core
Duration Fixed
Tax-Free Income
Fund Fund
============================
<S> <C> <C>
From Operations:
Net investment income $ 2,814,454 $2,248,195
Net realized gain (loss) from investment and futures transactions (472,312) 921,130
Net change in unrealized gain on investments and futures 1,270,197 1,663,176
- ---------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 3,612,339 4,832,501
- ---------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (2,771,793) (2,253,625)
Administration shares (20,584) --
Service shares (22,077) --
Class A shares -- --
In excess of net investment income
Institutional shares -- --
Administration shares -- --
Class A shares -- --
- ---------------------------------------------------------------------------------------------------------
Total distributions to shareholders (2,814,454) (2,253,625)
- ---------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 36,468,900 30,256,879
Proceeds from reorganizations -- --
Reinvestment of dividends and distributions 1,873,154 2,232,160
Cost of shares repurchased (67,865,169) (4,073,379)
- ---------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from share
transactions (29,523,115) 28,415,660
- ---------------------------------------------------------------------------------------------------------
Total (decrease) increase (28,725,230) 30,994,536
Net Assets:
Beginning of year 87,614,539 24,507,742
- ---------------------------------------------------------------------------------------------------------
End of year $58,889,309 $55,502,278
=========================================================================================================
Accumulated (distributions in excess of) undistributed net investment
income $ 67,398 $ 40,202
=========================================================================================================
Summary of Share Transactions:
Shares sold 3,733,382 3,077,397
Shares exchanged in reorganizations -- --
Reinvestment of dividends and distributions 190,942 230,595
Shares repurchased (6,950,294) (411,156)
- ---------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding (3,025,970) 2,896,836
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial
statements.
33
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
October 31, 1996
- --------------------------------------------------------------------------------
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 Fund, GS Short Duration
Government 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 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. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts.
A. Investment Valuation
-------------------------
Investments in mortgage backed, asset backed and U.S. Treasury obligations
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. Other securities are valued based on yield equivalents, a
pricing matrix or other sources, under valuation procedures established by the
Trust's Board of Trustees. Portfolio securities for which accurate market
quotations are not readily available are valued based on yield equivalents,
pricing matrix or other sources, under valuation procedures established by the
Trust's Board of Trustees. 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 ("OID") 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. OID amortization on
mortgage backed REMIC securities is initially recorded based on estimates of
principal paydowns using the most recent OID factors available from the issuer.
Recorded amortization amounts are adjusted when actual OID factors are received.
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,
34
<PAGE>
coupon and maturity) but not identical securities on a specified future date.
The Fund loses the right to receive principal and interest paid on the
securities sold. However, the Fund benefits to the extent of any price received
for the securities sold and the lower forward price for the future purchase
(often referred to as the "drop") or fee income plus the interest earned on the
cash proceeds of the securities sold until the settlement date of the forward
purchase. The Fund will hold and maintain in a segregated account, until the
settlement date, cash or liquid, high-grade debt securities in an amount equal
to the forward purchase price. For financial reporting and tax 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 in order to hedge against
changes in interest rates, securities prices, currency exchange rates in the
case of GS Core Fixed Income Fund or to seek to increase total return. A Fund
will engage in futures transactions only for bona fide hedging purposes as
defined in regulations of the CFTC or to seek to increase total return to the
extent permitted by such regulations. 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.
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
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.
35
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
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.
At October 31, 1996, 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 Fund $47,923,000 2000-2003
GS Short Duration Government
Fund $13,272,000 2002-2003
GS Short Duration Tax-Free
Fund $4,271,000 2002-2003
GS Core Fixed Income
Fund $77,000 2004
</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 and GS Short Duration Government 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,
GS Short Duration Tax-Free and GS Core Fixed Income Funds and .50% of average
daily net assets of GS Short Duration Government Fund. Until further notice,
GSFM has voluntarily agreed not to impose .10% of its investment advisory fee
for the GS Short Duration Government Fund. For the year ended October 31, 1996,
investment advisory fees of approximately $103,000 were waived for the GS Short
Duration Government Fund.
The adviser has voluntarily agreed to limit certain of the Funds' expenses
(excluding investment advisory fees, taxes, interest, brokerage, litigation,
administrative and service share fees, indemnification and other extraordinary
expenses and with respect to GS Adjustable Rate Government 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, 1996, the amount of reimbursed expenses for the GS
Adjustable Rate Government, GS Short Duration Government, GS Short Duration
Tax-Free and GS Core Fixed Income Funds were approximately $387,000, $169,000,
$238,000 and $233,000, respectively. The amounts reimbursable to the GS
Adjustable Rate Government, GS Short Duration Government, GS Short Duration
Tax-Free and the GS Core Fixed Income Funds at October 31, 1996 were
approximately $29,000, $12,000, $31,000 and $19,000, 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 Fund Class A shares. At October 31,
1996, Goldman Sachs retained approximately $79,000 of sales load related to
Class A shares. Goldman Sachs also serves as Transfer Agent of the Funds for a
fee.
- --------------------------------------------------------------------------------
36
<PAGE>
- --------------------------------------------------------------------------------
The Trust, on behalf of the GS Adjustable Rate Government 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
approximately $31,000.
The Trust, on behalf of the GS Adjustable Rate Government 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 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 year ended October 31, 1996, GS Adjustable Rate Government Fund,
GS Short Duration Government Fund, GS Short Duration Tax-Free Fund and GS Core
Fixed Income Fund incurred commission expenses of approximately $108,000,
$24,000, $1,000 and $4,000, respectively, in connection with futures contracts
entered into with Goldman Sachs. At October 31, 1996, GS Adjustable Rate
Government Fund had approximately $20,000, payable to Goldman Sachs related to
variation margin on futures contracts. Approximately $5,000 relating to
variation margin was due to the GS Core Fixed Income Fund from 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 the year ended
October 31, 1996, 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, 1996, were as follows:
================================================================================
GS GS GS
Adjustable Short Short GS
Rate Duration Duration Core Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
- --------------------------------------------------------------------------------
Purchases of U.S.
Government and
agency obligations $319,204,368 $117,205,724 -- $227,149,602
- --------------------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) -- -- $101,504,852 41,015,852
- --------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 370,448,093 113,784,637 -- 251,512,185
- --------------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and
agency obligations) -- -- 128,041,004 19,684,141
- --------------------------------------------------------------------------------
6. Summary of Share Transactions
Share activity for the year ended October 31, 1996 is as follows:
Fund Dollars Shares
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
Institutional Shares:
Shares sold $391,363,204 39,981,299
Reinvestment of dividends and
distributions 17,432,484 1,780,288
Shares repurchased (456,776,795) (46,666,343)
----------------------------------------
(47,981,107) (4,904,756)
----------------------------------------
Administration Shares:
Shares sold 1,457,872 148,981
Reinvestment of dividends and
distributions 94,420 9,641
Shares repurchased (1,356,764) (138,609)
----------------------------------------
195,528 20,013
----------------------------------------
37
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund: Dollars Shares
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares:
Shares sold $ 13,765,298 1,404,698
Reinvestment of dividends and distributions 654,744 66,854
Shares repurchased (18,974,355) (1,936,518)
-------------------------------------
(4,554,313) (464,966)
-------------------------------------
Total $ (52,339,892) (5,349,709)
=====================================
GS Short Duration Government Fund
Institutional Shares:
Shares sold $ 39,855,638 4,072,082
Reinvestment of dividends and distributions 4,137,041 422,559
Shares repurchased (47,875,174) (4,893,286)
-------------------------------------
(3,882,495) (398,645)
-------------------------------------
Administration Shares:
Shares sold 326,101 33,251
Reinvestment of dividends and distributions 2,032 207
Shares repurchased (77,312) (7,921)
-------------------------------------
250,821 25,537
-------------------------------------
Service Shares:
Shares sold 1,837,702 188,134
Reinvestment of dividends and distributions 14,743 1,508
Shares repurchased (40,626) (4,150)
-------------------------------------
1,811,819 185,492
-------------------------------------
Total $ (1,819,855) (187,616)
=====================================
GS Short Duration Tax-Free Fund
Institutional Shares:
Shares sold $ 20,777,050 2,085,253
Reinvestment of dividends and distributions 1,383,351 139,126
Shares repurchased (45,664,878) (4,601,865)
-------------------------------------
(23,504,477) (2,377,486)
-------------------------------------
Administration Shares:
Shares sold 105,302 10,672
Reinvestment of dividends and distributions 2,017 203
Shares repurchased (105,478) (10,644)
-------------------------------------
1,841 231
-------------------------------------
Service Shares:
Shares sold $ 1,366,332 137,557
Reinvestment of dividends and distributions 16,124 1,621
Shares repurchased (1,148,044) (115,450)
-------------------------------------
234,412 23,728
-------------------------------------
Total $ (23,268,224) (2,353,527)
=====================================
GS Core Fixed Income Fund
Institutional Shares:
Shares sold $ 20,524,422 2,094,833
Reinvestment of dividends and distributions 4,292,533 436,903
Shares repurchased (7,431,360) (769,104)
-------------------------------------
17,385,595 1,762,632
-------------------------------------
Administration Shares:
Shares sold 1,029,912 106,074
Reinvestment of dividends and distributions 17,883 1,847
Shares repurchased (358,284) (36,681)
-------------------------------------
689,511 71,240
-------------------------------------
Service Shares:
Shares sold 422,233 43,525
Reinvestment of dividends and distributions 5,332 549
Shares repurchased (50,931) (5,292)
-------------------------------------
376,634 38,782
-------------------------------------
Total $ 18,451,740 1,872,654
=====================================
</TABLE>
- --------------------------------------------------------------------------------
Share activity for the year ended October 31, 1995 is as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund Dollars Shares
- --------------------------------------------------------------------------------------------
<S> <C> <C>
GS Adjustable Rate Government 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)
-------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund Dollars Shares
============================================================================================
<S> <C> <C>
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
-------------------------------------
Total $(274,581,092) (28,292,158)
=====================================
GS Short Duration Government 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)
-------------------------------------
Total $ (91,961,208) (9,547,455)
=====================================
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
-------------------------------------
Total $(29,523,115) (3,025,970)
=====================================
</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 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, 1996, the GS Adjustable Rate Government, GS Short Duration
Government and GS Core Fixed Income Funds had an .49%, .04% and .52%,
respectively, undivided interest in the repurchase agreements in the following
joint account which equaled $13,000,000, $1,000,000 and $13,900,000,
respectively, in principal amount.
- --------------------------------------------------------------------------------
39
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
As of October 31, 1996, 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:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
Bear Stearns & Co., dated 10/31/96, repurchase price $700,108,500 (FNMA:
$555,290,445, 5.5%--8.50%, 2.1.09-6/1/26; FHLMC: $165,859,789, 5.50%--8.50%,
9/1/98--8/1/26)
$700,000,000 5.58% 11/01/96 $700,000,000
Lehman Brothers, Inc. dated 10/31/96, repurchase price $924,843,329 (U.S. Treasury
Notes: $942,903,967, 4.38%--8.50%, 11/15/96--8/15/03)
924,700,000 5.58 11/01/96 924,700,000
Nomura Securities International, Inc. dated 10/31/96, repurchase price
$700,108,500 (FNMA: $256,600,142, 5.50%--8.00%, 2/1/02-10/1/26; FHLMC:
$464,523,981, 6.00%--9.00%, 9/1/1-10/1/26)
700,000,000 5.58 11/01/96 700,000,000
Smith Barney, Inc. dated 10/31/96, repurchase price $170,026,161 (U.S. Treasury
Interest Only Stripped Securities: $11,653,277, 2/15/98--5/15/02; U.S. Treasury
Notes: $85,997,728, 5.25%--7.75%, 5/15/97-10/15/06; U.S. Treasury Principal
Only Stripped Securities: $33,993,571, 5/15/97--5/15/05; U.S. Treasury Bills:
$41,756,285, 12/12/96--3/20/97)
170,000,000 5.54 11/01/96 170,000,000
Union Bank of Switzerland, Inc. dated 10/31/96, repurchase price
$175,026,979
(Treasury Notes: $178,528,739, 6.88%--7.75%, 8/31/99-1/31/00)
175,000,000 5.55 11/01/96 175,000,000
- --------------------------------------------------------------------------------
Total Joint Repurchase Agreement $2,669,700,000
================================================================================
</TABLE>
9. Administration and Service Plans
The Funds have adopted Administration and Service Plans. These plans allow
for Administration shares and Service shares, respectively, to compensate
service organizations for providing varying levels of account administration and
shareholder liaison services to their customers who are beneficial owners of
such shares. The Administration and Service Plans provide for compensation to
the service organizations in an amount up to .25% and .50% (on an annualized
basis), respectively, of the average daily net asset value of the respective
shares.
10. Other Matters
On April 28, 1995, the GS Adjustable Rate Government 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 Fund and
(ii) the assumption by GS Adjustable Rate Government 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 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
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:
================================================================================
GS Government
Agency
Portfolio
(For Financial GS Adjustable GS Adjustable
Institutions Rate Government Rate Government
(Pre- Fund (Pre- Fund (Post-
Reorganization) Reorganization) Reorganization)
--------------- --------------- ---------------
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
================================================================================
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
- --------------------------------------------------------------------------------
40
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Adjustable Rate Government Fund. GS Adjustable Rate Mortgage Fund's assets were
acquired by GS Adjustable Rate Government Fund in exchange solely for (i) the
issuance of Class A shares of beneficial interest of GS Adjustable Rate
Government Fund and (ii) the assumption by GS Adjustable Rate Government Fund of
the liabilities of GS Adjustable Rate Mortgage Fund. Following this transfer, GS
Adjustable Rate Mortgage Fund was liquidated and GS Adjustable Rate Government
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 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
Rate Mortgage GS Adjustable GS Adjustable
Fund Rate Government Rate Government
(Pre- Fund (Pre- Fund (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
Institutions 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 Fund due to these reorganization was
approximately $3,154,000.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
As of October 31, 1996, the Goldman, Sachs & Co. Employees Profit Sharing
and Retirement Income Plan was beneficial owner of approximately 29% of the
outstanding shares of the GS Short Duration Government Fund.
11. Certain Reclassifications
In accordance with Statement of Position 93-2, the GS Adjustable Rate
Government Fund, GS Short Duration Tax-Free Fund, and GS Core Fixed Income Fund
have reclassified $20,849, $36,587, $22,735, and $24,162, 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 Fund's capital accounts on a tax basis.
- --------------------------------------------------------------------------------
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 ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ $9.77 $0.5759(a) $0.0772(a) -- $0.6531 $ (0.5725) -- $ (0.0206)
1996-Administration
Shares............ 9.77 0.5489(a) 0.0797(a) -- 0.6286 (0.5489) -- (0.0198)
1996-Class A
Shares............ 9.77 0.5481(a) 0.0806(a) -- 0.6287 (0.5489) -- (0.0198)
1995-Institutional
Shares............ 9.74 0.5630(a) 0.0717(a) -- 0.6347 (0.5759) -- (0.0287)
1995-Administration
Shares............ 9.74 0.5366(a) 0.0737(a) -- 0.6103 (0.5528) -- (0.0275)
1995-Class A
Shares(c)......... 9.79 0.2721(a) (0.0090)(a) -- 0.2631 (0.2697) -- (0.0134)
1994-Institutional
Shares............ 10.00 0.4341(a) (0.2455)(a) -- 0.1886 (0.4486) -- --
1994-Administration
Shares............ 10.00 0.4211(a) (0.2572)(a) -- 0.1639 (0.4239) -- --
1993-Institutional
Shares............ 10.04 0.4397 (0.0376)(d) -- 0.4021 (0.4397) -- (0.0024)
1993-Administration
Shares(e)......... 10.02 0.2146 (0.0173)(d) -- 0.1973 (0.2146) -- (0.0027)
1992-Institutional
Shares............ 10.03 0.5599 (0.0029)(d) -- 0.5570 (0.5470) -- --
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ 10.00 0.1531 0.0322(d) -- 0.1853 (0.1553) -- --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
=========================================
In excess of
net realized Net
gain on increase Ratio of
investment, From Total (decrease) Net asset net
option and paid distributions in net value at expenses
futures in to asset end of Total to average
transactions capital shareholders value period return(k) net assets
==============================================================================================================
GS ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ -- -- $(0.5931) $0.0600 $9.83 6.86% 0.45%
1996-Administration
Shares............ -- -- (0.5687) 0.0600 9.83 6.60 0.70
1996-Class A
Shares............ -- -- (0.5687) 0.0600 9.83 6.60 0.70
1995-Institutional
Shares............ -- -- (0.6046) 0.0301 9.77 6.75 0.46
1995-Administration
Shares............ -- -- (0.5803) 0.0300 9.77 6.48 0.71
1995-Class A
Shares(c)......... -- -- (0.2831) (0.0200) 9.77 2.74(f) 0.69(b)
1994-Institutional
Shares............ -- -- (0.4486) (0.2600) 9.74 1.88 0.46
1994-Administration
Shares............ -- -- (0.4239) (0.2600) 9.74 1.63 0.71
1993-Institutional
Shares............ -- -- (0.4421) (0.0400) 10.00 4.13 0.45
1993-Administration
Shares(e)......... -- -- (0.2173) (0.0200) 10.00 2.01(f) 0.70(b)
1992-Institutional
Shares............ -- -- (0.5470) 0.0100 10.04 6.12 0.42
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ -- -- (0.1553) 0.0300 10.03 2.14(f) 0.20(b)
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
=============================
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate(d) (in 000s) net assets net assets
========================================================================
GS ADJUSTABLE RATE GOVERNMENT FUND
------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ 5.85% 52.36% $613,149 0.51% 5.79%
1996-Administration
Shares............ 5.59 52.36 3,792 0.76 5.53
1996-Class A
Shares............ 5.59 52.36 10,728 1.01 5.28
1995-Institutional
Shares............ 5.77 24.12 657,358 0.53 5.70
1995-Administration
Shares............ 5.50 24.12 3,572 0.78 5.43
1995-Class A
Shares(c)......... 5.87(b) 24.12 15,203 1.01(b) 5.55(b)
1994-Institutional
Shares............ 4.38 37.81 942,523 0.49 4.35
1994-Administration
Shares............ 4.27 37.81 6,960 0.74 4.24
1993-Institutional
Shares............ 4.36 103.74 2,760,871 0.48 4.33
1993-Administration
Shares(e)......... 3.81(b) 103.74 5,326 0.73(b) 3.78(b)
1992-Institutional
Shares............ 5.61 286.40 2,145,064 0.55 5.48
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ 7.31(b) 145.67(b) 239,642 1.02(b) 6.49(b)
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
42
<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,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-------------------------------------------------------------------------------------------------------------------
GS SHORT DURATION GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31,
- -------------------------------------------------------
1996-Institutional
Shares ........... $9.82 $0.6290/(a)/ $0.0136/(a)/ -- $0.6426 $(0.6326) --
1996-Administration
Shares/(h)/ ...... 9.86 0.3837/(a)/ 0.0003/(a)/ -- 0.3840 (0.3940) --
1996-Service
Shares/(i)/ ...... 9.72 0.3134/(a)/ 0.1018/(a)/ -- 0.4152 (0.3152) --
1995-Institutional
Shares ........... 9.64 0.6652/(a)/ 0.1666/(a)/ -- 0.8318 (0.6518) --
1995-Administration
Shares ........... 9.64 0.2384/(a)/ (0.0433)/(a)/ -- 0.1951 (0.2051) --
1994-Institutional
Shares ........... 10.14 0.5628/(a)/ (0.4592)/(a)/ -- 0.1036 (0.5598) (0.0438)
1994-Administration
Shares ........... 10.14 0.5329/(a)/ (0.4539)/(a)/ -- 0.0790 (0.5352) (0.0438)
1993-Institutional
Shares ........... 10.16 0.5627 (0.0135)/(d)/ -- 0.5492 (0.5627) --
1993-Administration
Shares/(e)/ ...... 10.23 0.2725 (0.0900)/(d)/ -- 0.1825 (0.2725) --
1992-Institutional
Shares ........... 10.22 0.6703 (0.0600)/(d) -- 0.6103 (0.6703) --
1991-Institutional
Shares ........... 10.00 0.8020 0.2200/(d)/ -- 1.0220 (0.8020) --
1990-Institutional
Shares ........... 10.07 0.8300 (0.0700)/(d) -- 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/(d)/ -- 0.2800 (0.1800) --
<CAPTION>
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of
income transactions capital shareholders value period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31,
1996-Institutional
Shares ............ -- -- -- $(0.6326) $0.0100 $9.83
1996-Administration
Shares/(h)/ ....... -- -- -- (0.3940) (0.0100) 9.85
1996-Service
Shares/(i)/ ....... -- -- -- (0.3152) 0.1000 9.82
1995-Institutional
Shares ............ -- -- -- (0.6518) 0.1800 9.82
1995-Administration
Shares ............ -- -- -- (0.2051) (0.0100) 9.63/(h)/
1994-Institutional
Shares ............ -- -- -- (0.6036) (0.5000) 9.64
1994-Administration
Shares ............ -- -- -- (0.5790) (0.5000) 9.64
1993-Institutional
Shares ............ (0.0065) -- -- (0.5692) (0.0200) 10.14
1993-Administration
Shares/(e)/ ....... -- -- -- (0.2725) (0.9000) 10.14
1992-Institutional
Shares ............ -- -- -- (0.6703) (0.0600) 10.16
1991-Institutional
Shares ............ -- -- -- (0.8020) 0.2200 10.22
1990-Institutional
Shares ............ -- -- -- (0.8300) (0.0700) 10.00
1989-Institutional
Shares ............ -- -- (0.0300) (0.9100) (0.0300) 10.07
For the Period August 15, 1988/(g)/ through October 31,
- -------------------------------------------------------
1988-Institutional
Shares ............ -- -- -- (0.1800) 0.1000 10.10
<CAPTION>
Ratios assuming
not voluntary waiver
of fees or
expense limitations
--------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
Total to average to average turnover period to average to average
return/(k)/ net assets net assets rate/(d)/ (in 000s) net assets net assets
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
1996-Institutional
Shares ............ 6.75% 0.45% 6.44% 115.45% $99,944 0.71% 6.18%
1996-Administration
Shares/(h)/ ....... 4.00/(f)/ 0.70%/(b)/ 5.97/(b)/ 115.45 252 0.96/(b)/ 5.71/(b)/
1996-Service
Shares/(i)/ ....... 4.35/(f)/ 0.95/(b)/ 6.05/(b) 115.45 1,822 1.21/(b)/ 5.79/(b)/
1995-Institutional
Shares ............ 8.97 0.45 6.87 292.56 103,760 0.72 6.60
1995-Administration
Shares ............ 2.10 0.70/(b)/ 7.91/(b)/ 292.56 -- 0.90/(b)/ 7.71/(b)/
1994-Institutional
Shares ............ 0.99 0.45 5.69 289.79 193,095 0.59 5.55
1994-Administration
Shares ............ 0.73 0.70 5.38 289.79 730 0.84 5.24
1993-Institutional
Shares ............ 5.55 0.45 5.46 411.66 359,708 0.64 5.31
1993-Administration
Shares/(e)/ ....... 1.74 0.70/(b)/ 4.84/(b)/ 411.66 16,490 0.80/(b)/ 4.74/(b)/
1992-Institutional
Shares ............ 6.24 0.45 6.60 216.07 277,927 0.69 6.36
1991-Institutional
Shares ............ 10.93 0.45 8.25 155.44 158,948 0.79 7.91
1990-Institutional
Shares ............ 8.23 0.45 8.62 173.21 68,995 0.95 8.12
1989-Institutional
Shares ............ 9.03 0.46 8.71 137.37 31,015 1.39 7.78
For the Period August 15, 1988/(g)/ through October 31,
- -------------------------------------------------------
1988-Institutional
Shares ............ 3.30/(f)/ 0.55/(b)/ 8.55/(b)/ 167.00/(b)/ 39,052 1.42/(b)/ 7.68/(b)/
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<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,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
===============================================================================================
GS SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... $9.94 $0.4192/(a)/ $0.0200/(a)/ -- $0.4392 $(0.4192) --
1996-Administration Shares.......... 9.94 0.3944/(a)/ 0.0200/(a)/ -- 0.4144 (0.3944) --
1996-Service Shares................. 9.95 0.3697/(a)/ 0.0200/(a)/ -- 0.3897 (0.3697) --
1995-Institutional Shares........... 9.79 0.4235/(a)/ 0.1500/(a)/ -- 0.5735 (0.4235) --
1995-Administration Shares.......... 9.79 0.3989/(a)/ 0.1500/(a)/ -- 0.5489 (0.3989) --
1995-Service Shares................. 9.79 0.3744/(a)/ 0.1600/(a)/ -- 0.5344 (0.3744) --
1994-Institutional Shares........... 10.23 0.3787/(a)/ (0.3575)/(a)/ -- 0.0212 (0.3787) (0.0825)
1994-Administration Shares.......... 10.23 0.3537/(a)/ (0.3575)/(a)/ -- (0.0038) (0.3537) (0.0825)
1994-Service Shares/(j)/............ 9.86 0.0475/(a)/ (0.0700)/(a)/ -- (0.0225) (0.0475) --
1993-Institutional Shares........... 9.93 0.3834 0.3000/(d)/ -- 0.6834 (0.3834) --
1993-Administration Shares/(j)/..... 10.16 0.1555 0.0720/(d)/ -- 0.2275 (0.1555) --
For the Period October 1, 1992/(g)/ through October 31,
- ----------------------------------------------------
1992-Institutional Shares........... 10.00 0.0341 (0.0700)/(d)/ -- (0.0359) (0.0341) --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
==================================
In excess of
net realized Net
gain on increase Ratio of
In excess investment, From Total (decrease) Net asset net
of net option and paid distributions in net value at expenses
investment futures in to asset end of Total to average
income transactions capital shareholders value period return/(k)/ net assets
==================================================================================================
GS SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
====================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... -- -- -- $(0.4192) $0.0300 $9.96 4.50% 0.45%
1996-Administration Shares.......... -- -- -- (0.3944) 0.0300 9.96 4.24 0.70
1996-Service Shares................. -- -- -- (0.3697) 0.0200 9.97 3.98 0.95
1995-Institutional Shares........... -- -- -- (0.4235) 0.1500 9.94 5.98 0.45
1995-Administration Shares.......... -- -- -- (0.3989) 0.1500 9.94 5.76 0.70
1995-Service Shares................. -- -- -- (0.3744) 0.1600 9.95 5.59 0.95
1994-Institutional Shares........... -- -- -- (0.4612) (0.4400) 9.79 0.17 0.45
1994-Administration Shares.......... -- -- -- (0.4362) (0.4400) 9.79 (0.11) 0.70
1994-Service Shares/(j)/............ -- -- -- (0.0475) (0.0700) 9.79 (0.32)/(f)/ 0.95/(b)/
1993-Institutional Shares........... -- -- -- (0.3834) 0.3000 10.23 7.03 0.41
1993-Administration Shares/(j)/..... -- -- -- (0.1555) 0.0720 10.23 2.28/(f)/ 0.70/(b)/
For the Period October 1, 1992/(g)/ through October 31,
- -----------------------------------------------------
1992-Institutional Shares........... -- -- -- (0.0341) (0.0700) 9.93 (0.34)/(f)/ 0.05/(b)/
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
==================================
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate/(d)/ (in 000s) net assets net assets
==========================================================
GS SHORT DURATION TAX-FREE FUND
- --------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ---------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996-Institutional Shares........... 4.21% 231.65% $34,814 1.01% 3.65%
1996-Administration Shares.......... 3.96 231.65 48 1.26 3.40
1996-Service Shares................. 3.74 231.65 695 1.51 3.18
1995-Institutional Shares........... 4.31 259.52 58,389 0.77 3.99
1995-Administration Shares.......... 4.14 259.52 46 1.02 3.82
1995-Service Shares................. 3.87 259.52 454 1.27 3.55
1994-Institutional Shares........... 3.74 354.00 83,704 0.61 3.58
1994-Administration Shares.......... 3.51 354.00 3,866 0.86 3.35
1994-Service Shares/(j)/............ 4.30/(b)/ 354.00 440 1.11/(b)/ 4.14/(b)/
1993-Institutional Shares........... 3.70 404.60 115,803 1.06 3.05
1993-Administration Shares/(j)/..... 3.32/(b)/ 404.60 911 1.07/(b)/ 2.95/(b)/
For the Period October 1, 1992/(g)/ through October 31,
- -----------------------------------------------------
1992-Institutional Shares........... 4.58/(b)/ 31.19/(f)/ 14,601 2.68/(b)/ 1.95/(b)/
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
44
<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 From net
and unrealized unrealized Total realized gain
gain (loss) gain (loss) income on
Net asset on investment, on foreign (loss) investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-----------------------------------------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... $10.00 $0.6448 $(0.0704) -- $0.5744 $(0.6438) $(0.0806)
1996-Administrative Shares(l)....... 9.91 0.4083 (0.0703) -- 0.3380 (0.4080) --
1996-Service Shares(l).............. 9.77 0.3756 0.0898 -- 0.4654 (0.3754) --
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) --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
---------------------------------------------------
In excess of
net realized Net
gain on increase Ratio of
In excess investment, From Total (decrease) Net asset net
of net option and paid distributions in net value at expenses
investment futures in to asset end of Total to average
income transactions capital shareholders value period return(k) net assets
--------------------------------------------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... -- -- -- $(0.7244) $(0.1500) $9.85 5.98% 0.45%
1996-Administrative Shares(l)....... -- -- -- (0.4080) (0.0700) 9.84 3.56(f) 0.70(b)
1996-Service Shares(l).............. -- -- -- (0.3754) 0.0900 9.86 4.90(f) 0.95(b)
1995-Institutional Shares........... -- -- -- (0.6433) 0.7600 10.00 15.72 0.45
For the Period January 5, 1994(g)through October 31,
- ----------------------------------------------------
1994-Institutional Shares........... -- -- -- (0.4648) (0.7617) 9.24 (3.00) 0.45(b)
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
-------------------------
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate(d) (in 000s) net assets net assets
------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ---------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996-Institutional Shares........... 6.51% 414.20% $72,061 0.83% 6.13%
1996-Administrative Shares(l)....... 6.41(b) 414.20 702 1.08(b) 6.03(b)
1996-Service Shares(l).............. 6.37(b) 414.20 381 1.33(b) 5.99(b)
1995-Institutional Shares........... 6.56 383.26 55,502 0.96 6.05
For the Period January 5, 1994(g)through October 31,
- ----------------------------------------------------
1994-Institutional Shares........... 6.48(b) 288.25 24,508 1.46(b) 5.47(b)
</TABLE>
- ------------------
(a)Calculated based on the average shares outstanding methodology.
(b)Annualized.
(c)Class A share activity commenced on May 15, 1995.
(d)Includes the effect of mortgage dollar roll transactions.
(e)Administration share activity commenced on April 15, 1993.
(f)Not annualized.
(g)Commencement of operations.
(h)GS Short Duration Government Fund Administration shares were redeemed in
full on February 23, 1995 and re-commenced on February 28, 1996 at $9.86.
(i)Service share activity commenced on April 10, 1996.
(j)Administration and service share activity commenced on May 20, 1993 and
September 20, 1994 respectively.
(k)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 not sales
charges. For Class A shares only, total return would be reduced if a sales
charge were taken into account.
(l)Administration and Service share activity commenced on February 28, 1996 and
March 13, 1996 respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
45
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the GS Adjustable Rate Government
Fund, GS Short Duration Government 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 Fund, GS Short Duration Government 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, 1996, 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, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of the GS Adjustable Rate Government Fund, GS Short Duration Government
Fund, GS Short Duration Tax-Free Fund and GS Core Fixed Income Fund as of
October 31, 1996, 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 12, 1996
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
-------------------------------------------------------------------
Annual Report
October 31, 1996
GS Adjustable Rate Government Fund
GS Short Duration Government Fund
GS Short Duration Tax-Free Fund
GS Core Fixed Income Fund
Goldman
Sachs
GST/AR/1096(INST)
- --------------------------------------------------------------------------------
================================================================================
<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 each Fund's objectives and policies, management, expenses and
other information.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We welcome the opportunity to review the performance and the investment
activity of the Goldman Sachs Fixed Income Funds for the 12-month period ended
October 31, 1996. To help put the portfolios' performance in perspective, we
will also provide a brief overview of the U.S. economy and the bond market
during the period.
We are pleased to report that the Goldman Sachs Fixed Income Funds fared
well relative to their peers during the period.
The Bond Market Sold Off Amid Rising Rates, Then Stabilized
The U.S. fixed income market began the 12-month period under review with a
robust rally, fueled by weak economic data and low inflation. However, in
February 1996, the bond market began to come under pressure when stronger than
expected economic and job growth as well as surging commodity prices aroused
fears of higher inflation on the horizon. Bond market conditions significantly
worsened during March and April, when a sharp rise in interest rates triggered a
sell-off and increased volatility. By early May, long-term bond yields had
climbed above the psychologically important 7.0% level for the first time in
nearly a year. At the end of May, interest rates began to stabilize and Treasury
prices remained in a narrow trading range throughout the summer and fall. During
September and October, however, interest rates retreated and the bond market
strengthened. The rebound was primarily due to evidence of a slowing U.S.
economy and strong demand for Treasury bonds from the central banks of China,
Japan and Germany, which accelerated their purchases dramatically toward the end
of the period. By the end of October, prices of 30-year Treasuries broke out of
the trading range that had persisted for over six months.
After a Weak Start, Economic Growth Rebounded, Then Moderated
In late 1995, the economy was anemic, with weak consumer and capital
spending contributing to a fourth-quarter real Gross Domestic Product (GDP)
growth of only 0.3% (annualized). During the first quarter of 1996, harsh winter
weather and the General Motors strike continued to restrain economic growth.
Despite these adverse conditions, the economy advanced faster than expected,
with first-quarter real GDP growth reported at 2.0% (annualized). Momentum
accelerated more dramatically during the second quarter, as industrial activity,
automobile sales and home sales all showed significant improvement. As a result,
second-quarter GDP rose a robust 4.7% (annualized), its highest rate in two
years.
The economy's torrid growth cooled markedly during the third quarter, with
annualized real GDP at a revised 2.0%, largely due to lackluster consumer
spending and a widening U.S. trade deficit. In October some evidence of a
slowdown continued, with housing starts falling to their lowest level in a year
and U.S. capacity utilization also down. However, consumer confidence remained
high against a backdrop of low unemployment and higher household income. These
indicators led some economists to interpret October's retail sales numbers (up a
scant 0.2%) as a "breather" they expected to be followed by stronger holiday
shopping, while others were concerned about a more prolonged period of
restrained spending. Despite investors' earlier fears of increased inflationary
<TABLE>
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Table of Contents
Market Overview 1 Financial Statements 24
Goldman Sachs Government Income Fund 4 Notes to Financial Statements 28
Goldman Sachs Global Income Fund 11 Financial Highlights 36
Goldman Sachs Municipal Income Fund 17
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
pressures and the fact that in October the producer and consumer price indexes
were up 0.4% and 0.3%, respectively, inflation remained subdued throughout the
period.
The Fed Remained Neutral After Easing in December and January
In response to generally poor year-end 1995 economic conditions, the U.S.
Federal Reserve cut the Federal funds rate by 25 basis points in December 1995
and an additional 25 basis points in January 1996. The Fed then remained neutral
from February through the end of the period, leaving the Federal funds rate at
5.25% as of October 31, 1996.
During the period under review, the yield curve shifted upward everywhere
but at the shortest end, where it steepened. The yield on six-month Treasury
bills fell from 5.55% on October 31, 1995 to approximately 5.26% on October 31,
1996. For the same time period, the yield on the 30-year U.S. Treasury bond rose
from 6.33% a year ago to 6.64%. For the 12-month period ended October 31, 1996,
the total returns of one-year and 30-year Treasuries were 5.84% and 0.72%,
respectively.
Historical Treasury Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Retail Treasury Bar Chart
<S> <C> <C>
10/31/95 10/31/96
3-Month 5.49% 5.13
6-Month 5.55 5.26
1 5.54 5.4
2 5.61 5.73
3 5.68 5.86
5 5.81 6.07
10 6.02 6.34
30 6.33 6.64
</TABLE>
Source: Bloomberg, L.P.
The yield curve steepened on the short end and shifted upward on the longer
end.
The Dollar's Climb Versus the Mark and the Yen
Continued
During the period under review, the U.S. dollar appreciated against both the
Deutsche mark and Japanese yen, rising more against the yen. The dollar
strengthened relative to the mark as the Bundesbank progressively edged rates
lower during the period to stimulate the sluggish German economy, reaching a 15-
month high against the mark in May. By October, the dollar had retreated
slightly as further Bundesbank cuts became less likely. In contrast, the
dollar's climb against the yen continued through the end of October, when it
reached a three-and-a-half-year high. The yen's weakness was primarily due to
the softness in Japan's economic recovery. However, in November the yen rose
against the dollar as Japanese officials made it clear that they believed the
yen had weakened enough.
Outlook: Moderate Economic Growth for the Near Term
The recent economic weakness and the tame third-quarter labor cost report
increase the likelihood that the Fed will defer any changes in monetary policy
until 1997. Although a more extended slowdown is possible, as of this writing,
Goldman Sachs' economists believe a resumption of growth is likely if consumer
spending rebounds by year-end and the trade deficit does not significantly
widen. On the fiscal front, the bond market environment should benefit from the
recent election results with President Clinton balanced by a Republican-
controlled Congress, which points toward continued budgetary restraint.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
We appreciate your confidence in the Goldman Sachs Fixed Income Funds and we
look forward to continuing to serve your investment needs in the future.
Sincerely,
/s/ David B. Ford
David B. Ford
Co-Head, Goldman Sach Asset Management
/s/ John P. McNulty
John P. McNulty
Co-Head, Goldman Sachs Asset Management
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
November 29, 1996
- --------------------------------------------------------------------------------
3
<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 such
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. The fund's interest rate
sensitivity is expected to be comparable to that of a five-year bond.
Mortgage-Backed Securities Strengthened Amid Slowing Prepayments
During the 12-month period under review, the performance of mortgage-backed
securities (MBSs) was closely linked to the changing direction of interest
rates. From November 1995 through February 1996, declining interest rates
spurred homeowners to switch to long-term, fixed rate mortgages, resulting in a
high level of refinancing activity and widening spreads between MBSs and
Treasuries. Long-term interest rates began to rise at the end of January and
prepayments peaked in February. Throughout the spring, the mortgage-backed
securities market strengthened due to declining prepayment fears, and adjustable
rate mortgages (ARMs) and fixed rate mortgage pass-throughs continued to do well
when rates stabilized during the summer. However, the direction of interest
rates reversed course beginning in September, and by the end of October, rates
on 30-year mortgages had slipped below 8%. The decline increased some
homeowners' incentive to refinance, but rates continued to be significantly
above their levels of a year earlier and "seasoned" mortgage-backed securities
(securities backed by older mortgages that typically have lower prepayment risk)
continued to do well. In addition, the market's technical balance remained
strong, with prices supported by healthy investor demand coupled with no
significant new issuance.
Performance Review: Fund Performed Well Due to Mortgage-and Asset-Backed
Securities
During the 12-month period ended October 31, the fund's Class A shares
outperformed the benchmark, the Lehman Brothers Government/Mortgage Index (the
"Index") due to favorable results from the fund's positions in collateralized
mortgage obligations (CMOs) and asset-backed securities (ABSs). The fund's Class
B shares, which opened on May 1, 1996 when interest rates were still rising,
also achieved positive returns.
The fund performed well compared with its peers. The fund's Class A shares
ranked eighth out of 124 intermediate U.S. government income funds based on
total return for the 12 months ended October 31, 1996, according to Lipper
Analytical Services, Inc. (Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results. Class B shares were not ranked for this period because they were in
existence less than 12 months.)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Class A Class B*
(10/31/95- (5/1/96-
10/31/96) 10/31/96)
--------- ---------
<S> <C> <C>
Total Return (based on net asset value) 5.80% 4.85%
- --------------------------------------------------------------------------------
Return From Monthly Distributions 6.56% 3.01%
- --------------------------------------------------------------------------------
Return From Price Depreciation/ -0.76% 1.84%
Appreciation
- --------------------------------------------------------------------------------
Total Return of Lehman Brothers
Government/Mortgage Index 5.74% 5.12%
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.36 $14.37
- --------------------------------------------------------------------------------
NAV Change -$0.11 +$0.26
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
Portfolio Composition and Investment Strategies
During the period under review, we significantly reduced the portfolio's
holdings of U.S. Treasuries in favor of mortgage-backed and asset-backed
securities.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
Agency Debentures 0.4%
Repos/Cash Equivalents 1.1%
U.S. Treasuries 16.2%
Asset-Backed Securities 19.9%
CMOs 22.0%
Fixed Rate Mortgage Pass-Throughs 40.4%
* 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's single largest position as of
October 31, 1996 was in fixed rate mortgage pass-throughs at 40.4% (nearly
unchanged from a year ago), which was overweighted relative to the Index
allocation of 36.4%. Overall, the fund benefited from the sector's incremental
yield compared with similar-duration Treasury securities. Although pass-throughs
suffered from a high rate of mortgage prepayments when the period began, the
sector improved when interest rates began to rise at the end of January.
During the period, we occasionally used mortgage dollar rolls, which helped
the portfolio to benefit from 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 -- 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.
.. CMOs. As of October 31, the fund's allocation in CMOs was 22.0%, up from
7.7% a year ago. These securities included sequential-pay/support CMOs (13.0%),
a position we initiated in February, which offered relative stability and
attractive spreads compared with Treasuries. We cut the portfolio's allocation
in planned amortization class (PAC) CMOs to 5.5% from 6.3% a year ago in favor
of other sectors that offered greater relative value. We also held very small
positions in inverse floaters, interest-only (IO) and principal-only (PO)
securities, discussed below.
.. Asset-Backed Securities. The portfolio's ABS holdings, which were primarily
issues backed by credit card and automobile debt, represented 19.9% of the
portfolio, up from 14.3% a year ago. This position consisted of short-term,
triple-A-rated issues that offered attractive incremental yield over similar-
duration Treasuries. The ABS market began the period on a weak note, as concerns
surrounding credit card delinquencies impacted the sector during November and
December 1995. From January through the end of the period, these uncertainties
faded and the sector strengthened. Spreads between ABSs and Treasuries
tightened, as the ABS market benefited from strong investor demand from a
variety of sources: foreign banks, insurance companies and an increasing number
of corporate and CMO "crossover" accounts. ABS supply was robust as well, with a
wide variety of innovative new issues across a range of maturities, collateral
types and structures, but demand kept pace.
.. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. We reduced the
fund's allocation in U.S. Treasuries and repurchase agreements/cash equivalents
to take advantage of securities in other sectors that offered better relative
value. As of October 31, Treasuries accounted for 16.2% of the portfolio,
significantly
- --------------------------------------------------------------------------------
5
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
underweighted relative to the Index (55.4%), while cash equivalents were a 1.1%
position.
.. Agency Debentures. During the period, we reduced the fund's holdings in
agency debentures (bonds issued by agencies of the U.S. government) to a scant
0.4% because we determined that the sector's tight spreads compared with
Treasuries did not offer attractive return potential.
.. Issuer Composition. The breakdown of the portfolio's mortgage-backed
security holdings by issuer was 23.3% in Federal National Mortgage Association
(FNMA) issues, 14.0% in Government National Mortgage Association (GNMA) issues,
9.8% in Federal Home Loan Mortgage Corporation (FHLMC) issues and 15.3% in
private issues.
.. Credit Quality. As of October 31, U.S. government and agency securities
accounted for 66.6% of the portfolio, triple-A-rated securities were 32.3% of
the portfolio and cash equivalents were 1.1% of the portfolio.
.. Prudent Use of Derivatives. As noted, sequential-pay/ support and PAC CMOs,
which are generally considered to be lower risk derivative instruments,
accounted for 13.0% and 5.5% of the portfolio, respectively. The portfolio also
held inverse floaters (1.3%) for their potential to add incremental yield, as
well as a "combo" consisting of minor positions in interest-only and principal-
only CMOs. When IOs are held along with POs, they can produce a position with a
similar risk profile as a fixed rate mortgage pass-through but with a higher
yield. In addition, we used futures as a tool to help manage the portfolio's
duration.
.. Duration. The fund's duration as of October 31 was 4.5 years, in line with
the Index. We carefully manage the fund's duration to approximate that of the
Index rather than attempting to make interest rate predictions. Instead, we seek
excess return over the Index through our sector weightings and specific security
selection.
Fund Outlook
We have a cautiously optimistic view of the mortgage pass-through market in
general. Certain segments continue to be attractively valued, and we believe
that our current seasoned holdings should fare well relative to other sectors if
interest rates continue to fall and prepayments increase. We have a neutral
outlook for the CMO sector in general, which we believe does not offer
significant value over mortgage pass-throughs. However, we continue to identify
specific CMO securities that present attractive investment opportunities. In the
ABS market, significant spread premiums relative to comparably rated corporate
securities are expected to continue to buoy investor demand. In addition, Fed
surveys indicate that banks have been tightening their underwriting standards
over the last three quarters, which should help to allay lingering investor
concerns surrounding consumer credit card delinquencies. During the coming year,
we will continue to actively allocate the portfolio's assets among the various
fixed income sectors as their relative value changes.
Distribution Policy
The fund's Class A shares paid out monthly distributions of approximately
$0.92 per share during the 12-month period ended October 31, 1996. From their
inception on May 1, 1996 through October 31, 1996, the fund's Class B shares
paid out approximately $0.41 per share. Dividends are declared daily and paid on
a monthly basis. The fund distributes substantially all of its taxable income,
as is required for all investment companies.
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
We thank you for your support and look forward to continuing to serve your
investment needs in the future.
Sincerely,
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Erica Adelberg
Erica Adelberg
/s/ James B. Clark
James B. Clark
Portfolio Managers
Goldman Sachs Government Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
7
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Government Income Fund (assuming both the
maximum sales charge of 4.5% and no sales charge for Class A shares and the
maximum redemption fee of 5% and no redemption fee for the Class B shares), 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
Class A/(a)/
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman Lehman
(no sales (w/sales Gov't/MBS U.S. Gov't
Date charge) charge) Index Index
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
10/31/96 12,392 11,834 12,500 12,395
</TABLE>
Class B
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class B Shares Class B Shares Lehman Lehman
(no redemption (w/redemption Gov't/MBS U.S. Gov't
Date charge) charge) Index Index
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000 $10,000
10/31/96 10,485 9,985 10,512 10,508
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------
Average Annual Total Return
----------------------------------------
One Year Since Inception/(b)/
- -----------------------------------------------------------------------------
<S> <C> <C>
Class A, excluding sales 5.80% 6.72%
charge
- -----------------------------------------------------------------------------
Class A, including sales 1.06% 5.41%
charge
- -----------------------------------------------------------------------------
Class B, excluding
redemption charge N/A 4.85%/(c)/
- -----------------------------------------------------------------------------
Class B, including
redemption charge N/A (0.15%)/(c)/
- -----------------------------------------------------------------------------
</TABLE>
/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/ Class A and Class B shares commenced operations February 10, 1993 and May 1,
1996, respectively.
/c/ An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve months
of operations.
- --------------------------------------------------------------------------------
8
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations--55.5%
Federal Home Loan Mortgage Corp.(FHLMC)--10.3%
$ 3,000,000 7.50% TBA 30-Yr/(a)/ $ 3,010,290
- --------------------------------------------------------------------------------
Federal National Mortgage Association (FNMA)--16.5%
$ 989,360 7.00 02/01/26 $ 970,493
831,317 8.50 07/01/26 860,147
168,683 8.50 09/01/26 174,533
1,000,000 7.00 TBA 30-Yr/(a)/ 1,034,680
2,000,000 8.00 TBA 30-Yr/(a)/ 2,040,000
- --------------------------------------------------------------------------------
$ 5,079,853
- --------------------------------------------------------------------------------
Government National Mortgage Association
(GNMA)--14.1%
$ 939,735 7.00% 08/15/23 $ 927,115
353,966 9.00 TBA 30-Yr/(a)/ 377,748
1,363,733 7.50 TBA 30-Yr/(a)/ 995,228
2,000,000 8.00 TBA 30-Yr/(a)/ 2,045,000
- --------------------------------------------------------------------------------
$ 4,345,091
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations--26.4%
Interest Only--0.7%
FNMA Interest-Only Stripped Security, Series 151, Class 2
$ 712,363/(b)/ 9.50% 07/25/22 $ 225,926
- --------------------------------------------------------------------------------
Inverse Floater--1.3%
FNMA Remic Trust, Series 1992-62, Class S
404,038 10.00%/(c)/ 05/25/99 413,699
- --------------------------------------------------------------------------------
Planned Amortization Class (PAC)--5.4%
FNMA Remic Trust, Series 1993-160, Class PG
1,000,000 6.30% 09/25/18 987,500
GE Capital Mortgage Services, Inc. Series 1994-11, Class A1
693,546 6.50 03/25/24 694,191
- --------------------------------------------------------------------------------
$ 1,681,691
- --------------------------------------------------------------------------------
Principal Only--1.4%
FNMA Remic Trust, Series G-35, Class N
575,000/(e)/ 5.28% 10/25/21 415,369
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--2.9%
Citicorp Mortgage Securities Series 1993-11, Class A6
907,177 6.25% 09/25/08 880,207
- --------------------------------------------------------------------------------
Support--13.2%
Bear Stearns Mortgage Securities, Inc., Series 1996-7, Class AD
$ 988,793 6.50% 11/27/23 900,395
GE Capital Mortgage Services, Inc. Series 1994-10, Class A22
996,703 6.50 03/25/24 874,966
Housing Securities, Inc. Series 1994-1, Class A13
1,455,585 6.50 03/25/09 1,370,928
Prudential Securities Series 1995-2, Class A
916,596 5.76 11/15/15 918,243
- --------------------------------------------------------------------------------
$ 4,064,532
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 7,681,424
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $16,959,996) $17,106,368
- --------------------------------------------------------------------------------
Asset-Backed Securities--16.6%
Chemical Bank Master Credit Card Trust, Series 1995-2, Class A
$ 720,000 6.23% 06/15/03 $ 717,746
Fingerhut Master Trust, Series 1996-1, Class A
590,000 6.45 02/20/02 593,870
Ford Credit Auto Loan Master Trust, Series 1996-1, Class A
650,000 5.50 02/15/03 629,077
MBNA Master Credit Card Trust, Series 1991-1, Class A
245,000 7.75 10/15/98 245,688
Navistar Financial Corp. Owner Trust, Series 1995-A, Class A2
304,971 6.55 11/20/01 306,780
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
540,182 6.85 06/15/01 544,666
Premier Auto Trust, Series 1993-6, Class A2
403,341 4.65 11/02/99 398,675
Premier Auto Trust, Series 1994-1, Class A3
310,533 4.75 02/02/00 308,592
Sears Credit Account Master Trust, Series 1995-2, Class A
460,000 8.10 06/15/04 483,000
Standard Credit Card Trust, Series 1990-3, Class A
860,000 9.50 07/10/98 875,583
- --------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $5,174,476) $ 5,103,677
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
===============================================================================
<S> <C> <C> <C>
U.S. Government Agency Obligations--0.4%
Federal Home Loan Mortgage Corp. (FHLMC)
$ 110,000 8.20% 01/16/98 $ 110,636
- -------------------------------------------------------------------------------
Total Government Agency Obligations
(Cost $113,163) $ 110,636
- -------------------------------------------------------------------------------
U.S. Treasury Obligations--15.9%
United States Treasury Bonds/(d)/
$ 360,000 8.75% 05/15/17 $ 440,550
280,000 8.75 08/15/20 345,668
United States Treasury Notes/(d)/
2,210,000 7.38 11/15/97 2,249,360
700,000 5.88 04/30/98 702,184
700,000 6.88 08/31/99 717,500
United States Treasury Principal-Only Stripped Securities/(e)/
230,000 6.41 11/15/04 138,344
1,550,000 6.95 05/15/20 307,570
- -------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $4,910,644) $ 4,901,176
- -------------------------------------------------------------------------------
Repurchase Agreement--27.0%
Joint Repurchase Agreement Account/(d)/
$8,400,000 5.58% 11/01/96 $ 8,400,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $8,400,000) $ 8,400,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $38,555,545/(f)/) $38,632,147
===============================================================================
Futures contracts open at October 31, 1996 are as follows:
Number of
Contracts Settlement Unrealized
Type Long(/g/) Month Gain
- -------------------------- ------------- ----------------- -----------
Euro Dollars 3 September 1997 $2,850
5 Year U.S. Treasury Notes 4 December 1996 3,000
10 Year U.S. Treasury Notes 2 December 1996 8,313
U.S. Long Term Bond 14 December 1996 60,437
------------
$74,600
===============================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 260,565
Gross unrealized loss for investments in which cost exceeds
value (195,408)
- -------------------------------------------------------------------------------
Net unrealized gain $ 65,157
===============================================================================
</TABLE>
/(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)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(c)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(d)/Portions of these securities are being segregated for open TBA purchases,
open futures contracts and futures margin requirements.
/(e)/The interest rate disclosed for these securities represents effective
yields to maturity.
/(f)/The aggregate cost for federal income tax purposes is $38,566,990.
/(g)/Each 10-Year U.S. Treasury Note, 5-Year 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 notional
amount and market value are $5,000,000 and $2,936,825, respectively. The
determination of notional amounts and market value as presented here are
indicative only of volume of activity and not a measure of market risk.
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.
10
<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
government and other high-quality (double-A or better) fixed income securities
issued in the United States and in foreign markets. The fund has the additional
flexibility to invest in sovereign (government) debt rated single-A (or better)
or deemed to be of comparable quality. The maximum duration of the fund is 7.5
years and its approximate interest rate sensitivity is comparable to that of a
six-year bond. 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 to seek to enhance returns.
European Bond Markets Achieved the Strongest Performance While Treasuries Lagged
During the 12 months ended October 31, 1996, global bonds generally
performed well, particularly during the second half of the period, with a number
of markets achieving extremely strong returns. Most international bond markets
have outperformed the United States, thus illustrating the benefits of
diversification.
The European higher yielding bonds (Italy, Spain and Sweden) were the best
performers of all the major bond markets during the period, while most of the
other European bond markets achieved good, albeit more modest, returns (hedged
into U.S. dollars). In general, European bond markets benefited from an
accommodative environment of sluggish economic growth and low inflation.
European bonds were also buoyed by tighter fiscal policies, as several European
countries attempted to reduce their deficits enough to qualify for European
monetary union. To counter less government spending, several countries (notably
Germany) attempted to stimulate economic growth by lowering their interest
rates.
The total return of Japanese Government Bonds (JGBs) during the period
under review was lower than those of most European bond markets but still
favorable (hedged into U.S. dollars). After lackluster performance during the
first half of the period amid fears of accelerating growth, JGBs experienced a
volatile, halting recovery when Japan's economy showed signs of weakening during
the summer and fall of 1996.
U.S. Treasuries underperformed all of the major bond markets. Though
Treasuries performed well in November and December 1995, accelerating economic
growth triggered a sharp correction from January through May 1996. The U.S. bond
market partially recovered when it rallied during September and October, but it
continued to lag. Within the dollar bloc, Canadian bonds did particularly well
during the period, reflecting a continuing easing of monetary policy by the Bank
of Canada, a strong currency and a relatively weak economy.
Performance Review: Favorable Country Allocations Benefited Fund Performance
During the period under review, the Goldman Sachs Global Income Fund's
Class A and Institutional shares outperformed the fund's benchmark, the J.P.
Morgan Global Government Bond Index (hedged into U.S. dollars) (the "Index").
The Index covers 14 major bond markets and reflects their currency exposures.
That favorable performance relative to the benchmark was primarily due to the
fact that during most of the period the fund was overweighted in European bonds
and moderately underweighted in U.S. Treasuries.
The fund's Class B shares, which began operations on May 1, 1996 while U.S.
interest rates were still rising, underperformed the benchmark.
- --------------------------------------------------------------------------------
11
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Class A Class B* Institutional
(10/31/95- (5/1/96- (10/31/95-
10/31/96) 10/31/96) 10/31/96)
-------- -------- --------
<S> <C> <C> <C>
Total Return (based on net asset 11.05% 6.24% 11.55%
value)
- --------------------------------------------------------------------------------
Return From Monthly 10.50% 2.68% 11.07%
Distributions
- --------------------------------------------------------------------------------
Return From Price Appreciation 0.55% 3.56% 0.48%
- --------------------------------------------------------------------------------
Total Return of J.P. Morgan 10.06% 6.53% 10.06%
Global Government Bond Index
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.53 $14.53 $14.52
- --------------------------------------------------------------------------------
NAV Change +$0.08 +$0.50 +$0.07
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
Though the portfolio is typically fully hedged into U.S. dollars, we
occasionally employed currency strategies during the period. These included the
initiation of a long position in the U.S. dollar against the yen and European
currencies, which helped the fund's performance when the dollar strengthened
during the period.
Portfolio Composition and Investment Strategies
Portfolio Composition as of October 31, 1996*
<TABLE>
<CAPTION>
[PIE CHART APPEARS HERE]
<S> <C>
Sweden 1.9%
Denmark 2.5%
Spain 2.6%
Netherlands 2.6%
Ireland 2.7%
Italy 5.7%
U.K. 6.3%
Japan 9.0%
Germany 15.0%
Cash 15.4%
U.S. 36.3%
</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.
.. Dollar Bloc. As of October 31, 1996, U.S. Treasuries were the fund's sole
allocation in the dollar bloc countries. However, during the period, we
intermittently held positions in Canadian and Australian bonds.
U.S. During most of the period, the portfolio was underweighted in U.S.
Treasuries relative to the benchmark, which worked to its advantage when the
U.S. market was impacted by rising interest rates. In September and October, we
raised the fund's Treasury allocation, and the shift helped performance when the
Treasury market rallied during those months. As of October 31, the portfolio
held a 36.3% Treasury allocation, in line with the benchmark.
Other Dollar Bloc. The fund began the period overweighted in Canada (7.7%
as of October 31, 1995). However, we reduced the position in January and
liquidated the remainder in May on the expectation that Canada's current round
of interest rate easing had run its course, which proved not to be the case. In
July, we reestablished an overweighting in Canada, then sold the position the
following month after the market rallied. During September and October, the
Canadian bond market rose again on weaker economic news, but the fund did not
participate. Though the fund was not invested in Australia as of October 31, it
held an overweighted position at times during the period, which contributed to
performance when the market strengthened in anticipation of easing monetary
policy.
.. Europe. The fund benefited from being overweighted in Europe during much of
the period. After we sold part of the allocation in the region at a profit, the
fund was slightly underweighted in European bonds relative to the Index, 39.3%
versus 43.9%, as of October 31.
Germany. Germany's economic growth was anemic during the first half of the
period, with real GDP declining during the fourth quarter of 1995 and the first
quarter of 1996. To help stimulate growth amid a tight fiscal policy, the
Bundesbank aggressively cut interest rates, which proved only modestly
successful as high unemployment and weak manufacturing activity continued to
persist. To
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
participate in Germany's favorable bond market environment, we significantly
overweighted our holdings at 15.0% (versus 9.6% for the Index), preferring
Germany over France in the core European markets.
Italy, Spain and Sweden. During the period, we increased the fund's
allocation in the higher yielding European markets, then trimmed its exposure
after these markets became less favorably valued. In January, we initiated a
position in Italy, which was attractive due to its tight fiscal policy, expected
interest rate cuts and better than anticipated inflation data. As of October 31,
Italy was overweighted relative to the benchmark, 5.7% versus 5.2%, and it
significantly benefited the fund as it proved to be the best performing bond
market during the period. Spain, another top-performing bond market, was cut to
a 2.6% position as of October 31 after we determined the market fully reflected
expectations that Spain would meet the criteria for European monetary union. We
also benefited by establishing and maintaining an overweighted position in
Sweden during most of the period, then subsequently reduced the position to
1.9%, nearly in line with the benchmark.
U.K. The U.K.'s economy was sluggish during much of the period, but by
September economic activity began to rebound, particularly in the consumer
sector. In anticipation of renewed inflationary pressures, as well as political
uncertainty related to the forthcoming general election, we sold approximately
half of the portfolio's U.K. position during the period. As of October 31, the
portfolio's 6.3% U.K. weighting was in line with the benchmark.
Ireland, the Netherlands and Denmark. Small, new positions added during the
period included Ireland (2.7%), the Netherlands (2.6%) and Denmark (2.5%). Like
the rest of Europe, these countries had attractive bond market environments, and
they contributed to the fund's performance. We believe Ireland is particularly
attractive as it has an exemption on its debt level, enabling it to join
European monetary union (EMU) on the first round.
France. Over the course of the year we reduced the fund's position in
France, finally liquidating our remaining holdings in July, in favor of German
bonds that we believed were more attractively valued. Unfortunately, this
strategy was not successful when France subsequently outperformed Germany.
Belgium. Belgium, a 3.5% allocation last year, performed well and we
trimmed the position over the course of the year. In October, we sold the fund's
remaining holdings in Belgium in favor of the Netherlands, which our analysis
determined offered greater total return potential.
.. Japan. JGBs accounted for 9.0% of the portfolio, significantly
underweighted compared with the benchmark (15.1%), which benefited the fund when
JGBs were weak during the first half of the period, but did not work in its
favor when JGBs rebounded in the second half of the year. However, the fund
partially participated in the Japanese bond rally through a call option on JGBs,
as well as its direct investments.
.. Cash Equivalents. The fund's allocation in cash equivalents was 15.4%,
approximately the same as a year ago (16.4%). We anticipate reducing the
position as we identify attractive investment opportunities.
.. Credit Quality. The portfolio was 100% invested in triple-A-rated
securities as of the end of the period.
.. Duration. As of October 31, the fund's duration of 4.4 years was
approximately a half year lower than that of the benchmark. (Duration is a
measurement of the fund's sensitivity to interest rate movements; the shorter
the duration, the less the fund's net asset value [NAV] should move in relation
to interest rate fluctuations.) The duration difference was primarily due to the
portfolio's cash equivalent position and its underweighting in Japan.
- --------------------------------------------------------------------------------
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
Fund Outlook
Going forward, we expect European bonds to continue to outperform U.S.
Treasuries, in terms of both capital gains and yields. In general, European
economies are weaker than that of the United States, with slow growth, high
unemployment and tight fiscal policies. Germany's economic recovery appears
intact, which makes us somewhat more cautious on German bonds at current low
yield levels. Nevertheless, German bonds still offer excess returns over cash,
provided German monetary policy remains on hold. Longer term, we favor the U.K.
gilt, as we believe the market has overreacted to the U.K.'s lack of
participation in European monetary union and its recent political uncertainty.
We also have a positive longer term view of the higher yielding markets of Italy
and Spain, though they have not offered investors a sufficient risk premium in
recent months. As of this writing, we are neutral on U.S. Treasuries, but we
will be watching for signs that the U.S. Federal Reserve expects to preempt any
potential inflationary pressure with tighter monetary policy in the near future.
Our analysis indicates that after their spectacular run, Canadian bonds do not
offer attractive relative value, but we are considering reestablishing a
position in Australia, which is experiencing slowing growth and waning
inflationary pressures. We expect to remain underweighted in Japan because we
anticipate that its economic recovery will resume despite recent weakness,
opening the possibility for monetary tightening. With JGBs currently yielding
just under 3%, our analysis indicates that we would not be adequately
compensated for their level of risk.
Distribution Policy
During the 12-month period under review, the fund's Class A and
Institutional shares paid out distributions of $1.43 and $1.50 per share,
respectively. From their inception on May 1, 1996 through October 31, 1996, the
fund's Class B shares paid out $0.36 per share. The fund declares and pays
dividends on a monthly basis. The fund distributes substantially all of its
taxable income, as is required for all investment companies.
As always, we will utilize the resources of Goldman, Sachs & Co.'s London-
based Economics Research Group for economic and market trend analysis as we
continue to seek out attractive global bond investment opportunities. We
appreciate your investment in the Goldman Sachs Global Income Fund and look
forward to continuing to help you achieve your investment goals.
Sincerely,
/s/ Stephen C. Fitzgerald
Stephen C. Fitzgerald
Portfolio Manager, Fixed Income Investments
/s/ Andrew F. Wilson
Andrew F. Wilson
Portfolio Manager, Fixed Income Investments
/s/ Gareth I. Evans
Gareth I. Evans
Portfolio Manager, Currency
Goldman Sachs Global Income Fund
London, November 29, 1996
- --------------------------------------------------------------------------------
14
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Global Income Fund (assuming both the maximum
sales charge of 4.5% and no sales charge for the Class A shares, the first year
maximum redemption fee of 5% and no redemption fee for the Class B shares and
net asset value for the Institutional shares) is compared with its benchmark--
the J.P. Morgan Global Government Bond Index hedged to U.S. Dollars ("J.P.
Morgan GGB Index-$ 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.
HYPOTHETICAL $10,000 INVESTMENT
[CHART APPEARS HERE]
Class A Shares (a)
<TABLE>
<CAPTION>
Class A Shares Class A Shares J.P. Morgan GGB Index-
(no sales charge) (w/sales charge) $ Hedged
<S> <C> <C> <C>
09/01/91 $10,000 $9,500 $10,000
10/31/91 $10,145 $9,688 $10,263
10/31/92 $11,034 $10,538 $11,156
10/31/93 $12,220 $11,670 $12,509
10/31/94 $11,672 $11,146 $12,051
10/31/95 $13,432 $12,827 $13,903
10/31/96 $14,921 $14,250 $15,306
</TABLE>
Class B Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class B Shares Class B Shares J.P. Morgan GGB
(no redemption charge) (w/redemption charge) Index-$ Hedged
<S> <C> <C> <C>
05/01/96 $10,000 $10,000 $10,000
10/31/96 $10,624 $10,124 $10,653
</TABLE>
Institutional shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Institutional J.P. Morgan GGB
Shares Index-$ Hedged
<S> <C> <C>
08/01/95 $10,000 $10,000
10/31/95 $10,442 $10,351
10/31/96 $11,651 $11,395
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------
Average Annual Total Return
----------------------------------------------------
One Year Five Year Since Inception(b)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Class A, excluding
sales charge 11.05% 8.01% 8.02%
- ---------------------------------------------------------------------------
Class A, including
sales charge 6.08% 7.02% 7.08%
- ---------------------------------------------------------------------------
Class B, excluding
redemption charge N/A N/A 6.24%(c)
- ---------------------------------------------------------------------------
Class B, including
redemption charge N/A N/A 1.24%(c)
- ---------------------------------------------------------------------------
Institutional Class 11.55% N/A 12.95%
- ---------------------------------------------------------------------------
</TABLE>
(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, Class B and Institutional shares commenced operations August 2,
1991, May 1, 1996 and August 1, 1995, respectively.
(c) An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve months
of operations.
- --------------------------------------------------------------------------------
15
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount (a) Rate Date Value
================================================================================
<S> <C> <C> <C>
Debt Obligations--83.2%
British Pound Sterling--6.2%
United Kingdom Treasury
BPS 9,000,000 8.50% 12/07/05 $ 15,573,120
- --------------------------------------------------------------------------------
Danish Krone--2.5%
Kingdom of Denmark
DKK 33,000,000 9.00% 11/15/00 $ 6,415,484
- --------------------------------------------------------------------------------
Deutschemark--14.8%
Federal Republic of Germany
DEM 8,000,000 7.12% 12/20/02 $ 5,742,980
7,500,000 6.75 07/15/04 5,245,292
33,000,000 6.50 10/14/05 22,549,455
3,500,000 7.38 01/03/05 2,528,510
Treuhandanstalt
2,000,000 6.50 04/23/03 1,388,437
- --------------------------------------------------------------------------------
$ 37,454,674
- --------------------------------------------------------------------------------
Irish Pound--2.7%
Republic of Ireland
IEP 4,000,000 8.00% 10/18/00 $ 6,905,421
- --------------------------------------------------------------------------------
Italian Lira--5.4%
Republic of Italy
ITL 19,000,000,000 10.50% 11/01/00 $ 13,851,419
- --------------------------------------------------------------------------------
Japanese Yen--8.9%
International Bank for Reconstruction &
Development
JPY 700,000,000 6.75% 06/18/01 $ 7,536,474
Japanese Developmental Bank
1,400,000,000 6.50 09/20/01 15,019,116
- --------------------------------------------------------------------------------
$ 22,555,590
- --------------------------------------------------------------------------------
Netherlands Guilder--2.5%
Dutch Government Bond
NLG 10,000,000 7.00% 06/15/05 $ 6,350,937
- --------------------------------------------------------------------------------
Spanish Peseta--2.5%
Government of Spain
ESP 500,000,000 10.30% 06/15/02 $ 4,448,842
Kingdom of Spain
200,000,000 10.15 01/31/06 1,804,930
- --------------------------------------------------------------------------------
$ 6,253,772
- --------------------------------------------------------------------------------
Swedish Krona--1.8%
Kingdom of Sweden
SEK 32,000,000 6.00% 02/09/05 $ 4,489,558
- --------------------------------------------------------------------------------
United States Dollar--35.9%
United States Treasury Notes
USD 10,000,000 6.88% 07/31/99 $ 10,243,700
18,000,000 5.25 01/31/01 17,507,880
17,000,000 6.38 03/31/01 17,196,520
8,200,000 6.25 02/15/03 8,229,438
10,000,000 7.88 11/15/04 10,975,000
12,000,000 6.50 08/15/05 12,125,640
14,000,000 7.00 07/15/06 14,616,840
- --------------------------------------------------------------------------------
$ 90,895,018
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $206,293,080) $210,744,993
- --------------------------------------------------------------------------------
Short-Term Obligations--15.4%
Euro-Time Deposit
USD 38,987,507 5.50% 11/01/96 38,987,507
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $38,987,507) $ 38,987,507
- --------------------------------------------------------------------------------
Total Investments
(Cost $245,280,587/(b)/ ) $249,732,500
================================================================================
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $6,414,087
Gross unrealized loss for investments in which cost
exceeds value (2,188,683)
- --------------------------------------------------------------------------------
Net unrealized gain $4,225,404
================================================================================
</TABLE>
/(a)/ The principal amount of each security is stated in the currency in which
the bond is denominated. See below.
BPS = British Pound Sterling ITL = Italian Lira
NLG = Netherlands Guilder JPY = Japanese Yen
DKK = Danish Krone ESP = Spanish Peseta
DEM = Deutschemark SEK = Swedish Krona
IEP = Irish Pound USD = United States Dollar
/(b)/ The aggregate cost for federal income tax purposes is $245,507,096. 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.
16
<PAGE>
Letter 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 preservation of capital. In pursuit of its objective, the fund invests in a
diversified portfolio of municipal securities with a weighted average credit
quality of double-A or better. The fund buys only investment-grade securities
or, if unrated, deemed to be of comparable quality. Under normal interest rate
conditions, the fund's duration is expected to be within one year of its
benchmark, the Lehman Brothers 15-Year Municipal Bond Index. The fund's
approximate interest rate sensitivity is comparable to that of a 15-year bond.
After a Weak Start, the Municipal Bond Market Strengthened
The municipal bond market outperformed Treasuries during the 12-month
period under review, though both markets came under pressure when rates rose
during the first half of 1996. The average price of a 15-year municipal bond (as
calculated from data provided by Municipal Market Data, an independent municipal
market information provider) rose approximately 0.50%, while yields declined
from 5.35% on October 31, 1995 to 5.30% on October 31, 1996.
The municipal bond market began the period under review on a weak note. Tax
reform uncertainty impacted investor demand during November and December 1995,
while municipal bond supply was high due to seasonably heavy year-end issuance
and relatively low interest rates. The market environment improved during
January and February 1996, when fading tax reform concerns helped to revive
investor interest in the sector and issuance declined. From March through the
end of the period, the market's technical balance was generally healthy, though
occasional spikes in supply periodically overwhelmed demand and briefly impacted
performance. The largest of these surges occurred in June when supply rose to
its highest level since late 1995, but subsequently both new issuance and
secondary supply fell dramatically from July through September.
On the demand side, interest in municipal bonds was generally stable until
late summer and early fall. Demand from individual investors (who control
approximately 65% of municipal bond ownership either through mutual funds or
direct investment) began to decline when interest rates declined and municipal
yields fell below the psychologically significant 6% level. In addition,
property/casualty companies (who control approximately 10% of municipal bond
ownership) also dropped out of the market because the sector had become somewhat
unattractive relative to Treasuries. The supply drought finally abated in
October when many issuers sought to take advantage of lower interest rates, and
a continued weakness in demand caused municipals to underperform taxable bonds
for the month.
Municipal Bond Yield Curve
[YIELD CURVE LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Year of Maturity 10/31/96 10/31/95
---------------- -------- --------
<S> <C> <C>
1997 3.6 3.9
1998 3.9 4.1
1999 4.15 4.2
2000 4.3 4.3
2001 4.4 4.4
2002 4.5 4.5
2003 4.6 4.6
2004 4.7 4.7
2005 4.8 4.8
2006 4.9 4.95
2007 5 5.05
2008 5.1 5.15
2009 5.2 5.25
2010 5.25 5.35
2011 5.3 5.4
2012 5.35 5.45
2013 5.4 5.5
2014 5.4 5.55
2015 5.45 5.55
2016 5.45 5.55
2017 5.45 5.55
2018 5.5 5.55
2019 5.5 5.6
2020 5.5 5.6
2021 5.5 5.6
2022 5.5 5.6
2023 5.5 5.6
2024 5.5 5.6
2025 5.5 5.6
</TABLE>
The yield curve steepened at the short end and shifted downward at the longer
end.
Performance Review: Term Structure, Sector Weightings and Security Selection
Contributed to the Fund's Favorable Performance
During the period under review, the fund's Class A shares outperformed
their benchmark, the Lehman Brothers 15-Year Municipal Bond Index (the "Index").
The fund's Class B shares, which opened on May 1, 1996 while interest rates were
still rising, also performed well but slightly lagged the benchmark.
- --------------------------------------------------------------------------------
17
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
We are pleased to report that the fund's Class A shares outperformed most of
their peers. For the 12 months ended October 31, 1996, Class A shares ranked in
the top 20% of general municipal debt funds (36 out of 228) based on total
return, according to Lipper Analytical Services, Inc. (Please note that Lipper
rankings do not take sales charges into account and that past performance is not
a guarantee of future results. Class B shares were not included because they
were not in existence during the entire 12-month period.)
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B*
(10/31/95- (5/1/96-
10/31/96) 10/31/96)
-------- --------
<S> <C> <C>
Total Return (based on net asset value) 6.13% 4.40%
- --------------------------------------------------------------------------------
Return From Monthly Distributions 4.72% 1.98%
- --------------------------------------------------------------------------------
Return From Price Appreciation 1.41% 2.42%
- --------------------------------------------------------------------------------
Lehman Brothers 15-Year Municipal
Bond Index 5.99% 4.80%
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.37 $14.37
- --------------------------------------------------------------------------------
NAV Change +$0.20 +$0.34
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
The fund's positive performance during the period can be attributed to our
term structure management, sector weightings and specific security selections.
.. The portfolio's neutral term structure is "credit-barbelled," emphasizing
high-quality bonds with maturities of 20 to 30 years on the long end of the
yield curve and lower quality bonds with four to ten year maturities on the
short end of the curve. However, during the period, we regularly adjusted the
term structure to take advantage of changing market conditions. For example,
when the municipal bond yield curve flattened during September and the beginning
of October, we sold securities in the 20- to 30-year range in favor of 15- to
20-year bonds. In mid-October, the yield curve steepened as we anticipated, and
the fund's 15- to 20-year bonds outperformed 20- to 30-year bonds. By the end of
the month, when longer maturity bonds had become more attractively valued, we
reestablished a more evenly distributed maturity structure.
.. In September, we underweighted the fund's municipal bond position relative
to the Index when our analysis indicated that municipal bonds had become
expensive compared with Treasuries. We replaced a small percentage of the fund's
duration with U.S. Treasury bond futures contracts, which we preferred over
buying Treasuries directly because they allowed us to participate in a Treasury
rally without incurring taxable net investment income. This strategy proved
successful when municipal bonds underperformed Treasuries in October, and we
returned the fund to its 100% municipal bond weighting after municipals had
cheapened to an attractive level at the end of the month.
.. The fund's performance also benefited from our extensive credit analysis.
Our research helped us identify specific investment opportunities, such as
"story" bonds. These securities are often misunderstood or incorrectly valued,
but can have unique security structures and attractive yield potential.
Portfolio Composition and Investment Strategies:
Revenue Bonds Were Stressed Over GOs
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Variable Rate Demand Notes 7.6%
General Obligations 5.5%
Insured Revenue Bonds 34.7%
Revenue Bonds 27.9%
Insured General Obligations 24.3%
</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.
- --------------------------------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
.. Revenue Bonds. We emphasized revenue bonds over general obligation bonds
because the sector offers higher yields and better price appreciation potential.
As of October 31, the fund held a 62.6% position in a combination of insured and
uninsured revenue bonds, overweighted compared with the Index (53.9%). (Revenue
bonds pay interest and principal out of a specific revenue stream, such as sales
taxes, hospital charges, tolls, electric rates and airport fees.)
.. General Obligation (GO) Bonds. As of October 31, the fund's GO holdings,
which are backed by the general taxing power of a municipality, were
underweighted relative to the Index, 29.8% versus 45.6%. Though the fund's total
GO allocation was little changed from a year ago, we did increase its weighting
in insured GOs (to 24.3% versus 12.6% last year) and reduced uninsured GOs (to
5.5% versus 16.6% last year) due to security-specific investment opportunities.
.. Variable Rate Demand Notes (VRDNs). VRDNs, which are high-quality cash
equivalents, were used to manage the portfolio's excess liquidity. The position
accounted for 7.6% of the portfolio, nearly unchanged from last year.
.. Credit Quality. During the period, the fund's average credit quality has
remained double-A. However, in contrast to last year's emphasis on triple-A-
rated bonds, this year the fund's credit quality was structured like a
"barbell," with higher quality securities at the long end of the yield curve and
lower quality securities (but still investment grade) at the short end. As of
October 31, 70.5% of the fund was invested in triple-A-rated securities, nearly
the same as a year ago, while double-A- and single-A-rated securities were
reduced to 9.3% and 1.8%, respectively. In the late spring of 1996, we initiated
a new position in triple-B-rated securities (the lowest credit category for
investment-grade securities), which accounted for 18.4% of the portfolio by the
end of the period. We used extensive credit research to identify specific
securities that offered higher yields than average triple-B-rated securities,
but still were of sound credit quality. The triple-B-rated position benefited
the fund's performance during the period by enabling us to lock in above-market
yields and providing greater price appreciation potential relative to the
market. Each of these positions is monitored carefully, and we will remain
vigilant for any changes in their credit quality.
Market Outlook
We have a bullish long-term outlook for municipal bond supply, since new
money issuance (bonds issued for purposes other than refunding older debt) tends
to be stable and grows at the same rate as GDP. In addition, we do not
anticipate a significant increase in refunding unless interest rates drop
substantially. On the demand side, investor interest is likely to remain
healthy, as we believe that two to four more years of divided government (a
Democratic president and a Republican-controlled Congress) should avert any
significant tax reform that would threaten municipal bonds' tax-exempt status.
Distribution Policy
During the period under review, the fund's Class A shares paid out
distributions of $0.65 per share. The fund's Class B shares, which opened on May
1, 1996, paid out $0.27 per share from their inception through October 31, 1996.
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.
- --------------------------------------------------------------------------------
19
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
We value your investment in the Goldman Sachs Municipal Income Fund and we
look forward to reporting on the fund's progress in the coming year.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Elisabeth Schupf Lonsdale
Elisabeth Schupf Lonsdale
Portfolio Managers
Goldman Sachs Municipal Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
20
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Municipal Income Fund (assuming both the
maximum sales charge of 4.5% and no sales charge for Class A shares and the
maximum redemption fee of 5% and no redemption fee for the Class B shares) 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
Class A /(a)/
[LINE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman 15-year
Date (no sales charge) (w/sales charge) Muni Index
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
8/1/93 $10,000 $9,550 $10,000
- --------------------------------------------------------------------------------
10/31/93 $10,455 $9,984 $10,385
- --------------------------------------------------------------------------------
10/31/94 $9,878 $9,434 $9,860
- --------------------------------------------------------------------------------
10/31/95 $11,241 $10,735 $11,414
- --------------------------------------------------------------------------------
10/31/96 $11,933 $11,395 $12,100
- --------------------------------------------------------------------------------
</TABLE>
Class B
[LINE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman
(no redemption (w/redemption 15-year
Date charge) charge) Muni Index
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/96 10,000 10,000 10,000
- --------------------------------------------------------------------------------
Oct 31, 96 10,440 9,940 10,480
- --------------------------------------------------------------------------------
</TABLE>
-----------------------------------
Average Annual Total Return
-----------------------------------
One Year Since Inception/(b)/
--------------------------------------------------------
Class A, excluding
sales charge 6.13% 5.27%
--------------------------------------------------------
Class A, including
sales charge 1.35% 3.80%
--------------------------------------------------------
Class B, excluding
redemption charge N/A 4.40%/(c)/
--------------------------------------------------------
Class B, including
redemption charge N/A (0.60%)/(c)/
--------------------------------------------------------
/(a)/For comparative purposes, Class A initial investment is assumed to be made
on the first day of the month following the Fund's commencement of
operations.
/(b)/Class A and Class B commenced operations July 20, 1993 and May 1, 1996,
respectively.
/(c)/An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
21
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Debt Obligations--102.2%
Arizona--5.1%
Maricopa County, AZ Unified School District No. 41 GO
(FSA)(AAA/Aaa)
$2,500,000 6.25% 07/01/15 $ 2,653,300
- --------------------------------------------------------------------------------
California--8.1%
Contra Costa, CA Water District Series G RB (MBIA)
(AAA/Aaa)
$2,000,000 5.75% 10/01/14 $ 2,022,980
San Buenaventura, CA Sewer Revenue RB (FGIC)
(AAA/Aaa)
2,255,000 5.50 03/01/15 2,231,435
- --------------------------------------------------------------------------------
$ 4,254,415
- --------------------------------------------------------------------------------
Colorado--4.8%
Englewood MFH RB (BBB)
$2,500,000 6.65% 12/01/26 $ 2,499,750
- --------------------------------------------------------------------------------
Connecticut--3.9%
Mashantucket Western Pequot Tribe RB (BBB/Baa)
$2,000,000 6.50% 09/01/05 $ 2,072,220
- --------------------------------------------------------------------------------
Florida--2.8%
Escambia County, FL Housing Authority, Single Family
(GNMA/FNMA)(Aaa)
$1,390,000 6.80% 10/01/15 $ 1,464,949
- --------------------------------------------------------------------------------
Illinois--19.1%
Chicago, IL GO Series A-2 (AMBAC) (AAA/Aaa) (e)
$1,750,000 6.25% 01/01/14 $ 1,877,873
Cook County, IL GO(FGIC) (AAA/Aaa)
2,000,000 5.75 11/15/12 2,015,720
Lake County, IL Unified School District No. 116 GO (FSA) (AAA/Aaa)
2,000,000 7.60 02/01/14 2,428,340
1,525,000 6.10 02/01/16 1,588,089
O'Hare International Airport RB (MBIA)(AAA/Aaa)
2,000,000 6.38 01/01/15 2,109,780
- --------------------------------------------------------------------------------
$10,019,802
- --------------------------------------------------------------------------------
Indiana--9.5%
East Allen, IN Elementary School Building Corp. RB (FSA)
(AAA/Aaa)
$3,115,000 5.88% 07/01/12 $ 3,178,079
Indiana Transportation Finance Authority RB Series A
(MBIA) (AAA/Aaa)
1,500,000 7.25 06/01/15 1,789,305
- --------------------------------------------------------------------------------
$ 4,967,384
================================================================================
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Kentucky--2.0%
Nelson County, KY Industrial Building RB for Mabex
Universal Corp. Project AMT (A3)
$1,000,000 6.50% 04/01/05 $ 1,066,790
- --------------------------------------------------------------------------------
Maine--1.5%
Maine Educational Loan Authority RB Series A-1 (Aaa)
$ 725,000 6.80% 12/01/07 $ 765,462
- --------------------------------------------------------------------------------
Michigan--3.6%
Detroit, MI GO (BBB-)
$1,885,000 5.70% 05/01/02 $ 1,907,714
- --------------------------------------------------------------------------------
New York--9.0%
New York State Municipal Bond Agency RB, Series A (BBB+)
$1,610,000 6.60% 03/15/01 $ 1,699,854
New York State Thruway Authority Highway & Bridges RB
(BBB/Baa1)
1,000,000 5.25 04/01/03 1,004,630
Syracuse, NY IDA RB (AA)
2,000,000 5.13 10/15/02 2,005,600
- --------------------------------------------------------------------------------
$ 4,710,084
- --------------------------------------------------------------------------------
North Dakota--3.8%
Mercer County, ND PCRB for Basin Electric Power 2nd
Series (AMBAC) (AAA/Aaa) (e)
$2,000,000 6.05% 01/01/19 $ 2,055,380
- --------------------------------------------------------------------------------
Ohio--8.9% Akron, OH COPs (a) (BBB) (c)
$2,000,000 6.90% 12/01/16 $ 1,438,500
Kent State University RB (MBIA) (AAA/Aaa)
2,280,000 5.50 05/01/28 2,181,504
Trumbull County, OH GO (AMBAC) (AAA/Aaa)
1,000,000 5.75 12/01/03 1,061,870
- --------------------------------------------------------------------------------
$ 4,681,874
- --------------------------------------------------------------------------------
Texas--8.8%
Denison, TX Waterworks & Sewer RB (AAA/Aaa)
$1,250,000 5.50% 09/01/08 $ 1,258,525
1,250,000 5.40 09/01/09 $ 1,258,475
East Texas Criminal Justice Facilities Financing Corp. RB
(AMBAC) (AAA/Aaa)
$2,000,000 5.75 11/01/09 $ 2,032,560
Fort Bend, TX Independent School District RB (AAA/Aaa)
50,000 5.00 02/15/18 46,226
- --------------------------------------------------------------------------------
$ 4,595,786
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
22
22
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Debt Obligations(continued)
Washington--7.1%
Chelan County, WA Public Utility RB (AAA/Aaa)/c/
$2,500,000 6.35% 07/01/28 $ 2,540,125
Washington State Series C GO (AA/Aa)
1,155,000 6.50 07/01/00 1,232,373
- --------------------------------------------------------------------------------
$ 3,772,498
- --------------------------------------------------------------------------------
Wisconsin--4.2%
Wisconsin Housing & Economic Development Authority RB,
Series B (AA/Aa)/e/
$2,060,000 7.10% 09/01/15 $ 2,181,623
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $52,677,902) $53,669,031
- --------------------------------------------------------------------------------
Short-Term Obligations--8.4%
Alabama--6.5%
Columbia County, AL IDB/b/ (A/A2)
$1,200,000 3.65% 11/01/96 $ 1,200,000
Parrish, AL IDB/b/ (A/A1)
2,200,000 3.65 11/01/96 2,200,000
- --------------------------------------------------------------------------------
$ 3,400,000
- --------------------------------------------------------------------------------
Wyoming--1.9%
Converse, WY PCRB/b/ (AAA)
$1,000,000 3.65% 11/01/96 $ 1,000,000
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $4,400,000) $ 4,400,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $57,077,902/d/) $58,069,031
================================================================================
- --------------------------------------------------------------------------------
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $ 1,018,643
Gross unrealized loss for investments in which cost
exceeds value (27,514)
- --------------------------------------------------------------------------------
Net unrealized gain $ 991,129
================================================================================
/a/The interest rate disclosed for these securities represents effective
yields to maturity.
/b/Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next interest reset dates.
/c/When-issued security.
/d/The amount stated also represents aggregate cost for federal income tax
purposes.
/e/Portions of these securities are being segregated for when-issued securities.
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.
COPS --Certificates of Participation
FGIC --Insured by Financial Guaranty
Insurance Co.
FSA --Financial Security Assurance Co.
GO --General Obligation
IDA --Industrial Development Authority
IDB --Industrial Development Bond
MBIA --Insured by Municipal Bond Investors
Assurance
MFH --Multi-Family Housing
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
================================================================================
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
23
23
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
========================================
<S> <C> <C> <C>
Assets:
Investments in securities, at value (cost $38,555,545, $245,280,587
and $57,077,902) $38,632,147 $249,732,500 $58,069,031
Receivables:
Investment securities sold 3,011,458 -- --
Interest 255,950 4,572,733 688,717
Forward foreign currency exchange contracts -- 1,073,237 --
Fund shares sold 38,729 23,757 12,145
Foreign tax withheld -- 100,251 --
Cash 17,149 248 48,127
Variation margin 6,788 -- --
Deferred organization expenses, net 23,998 -- 30,090
Other assets 65,284 31,883 29,773
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets 42,051,503 255,534,609 58,877,883
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased 11,129,422 -- 6,076,685
Forward foreign currency exchange contracts -- 1,816,332 --
Fund shares repurchased 14,381 124,500 128,184
Investment adviser fees 6,423 94,713 18,124
Administration fees -- 32,334 6,857
Authorized dealer service fees 6,166 44,409 9,224
Distribution fees 151 35,488 154
Accrued expenses and other liabilities 57,538 211,388 116,255
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 11,214,081 2,359,164 6,355,483
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets:
Paid in capital 30,678,648 247,410,169 52,495,830
Accumulated undistributed net investment income 53,331 6,704,225 60,331
Accumulated net realized loss on investment transactions (45,759) (4,636,687) (1,024,890)
Accumulated net realized foreign currency gain -- 43,634 --
Net unrealized gain on investments and futures 151,202 4,864,862 991,129
Net unrealized loss on translation of assets and liabilities denominated in foreign
currencies -- (1,210,758) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets $30,837,422 $253,175,445 $52,522,400
==================================================================================================================================
Net asset value, offering /(a)/ and redemption price per share
Class A $14.36 $14.53 $14.37
Class B $14.37 $14.53 $14.37
Institutional -- $14.52 --
==================================================================================================================================
Shares Outstanding
Class A 2,131,467 13,670,270 3,637,437
Class B 16,317 17,603 17,778
Institutional -- 3,735,251 --
- ----------------------------------------------------------------------------------------------------------------------------------
Total shares outstanding, $.001 par value (unlimited number of shares authorized) 2,147,784 17,423,124 3,655,215
==================================================================================================================================
</TABLE>
/(a)/Maximum public offering price per share (NAV per share x 1.0471) for Class
A shares is $15.04, $15.21 and $15.05 for Government Income, Global Income
and Municipal Income, respectively. At redemption, Class B shares are
subject to a contingent deferred sales charge, assessed on the amount equal
to the lesser of the current net asset value or the original purchase price
of the shares.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Goldman Sachs Trust
- ------------------------------------------------------------------------------
Statements of Operations
For the Year Ended October 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
======================================
<S> <C> <C> <C>
Investment income:
Interest/(a)/ $2,048,891 $18,287,214 $2,869,729
- ------------------------------------------------------------------------------
Total income 2,048,891 18,287,214 2,869,729
- ------------------------------------------------------------------------------
Expenses:
Investment adviser fees 148,120 1,965,605 211,283
Administration fees 44,433 393,263 79,231
Authorized dealer service fees 74,171 549,289 132,051
Distribution fees 74,281 549,538 132,304
Custodian fees 44,987 210,420 36,172
Transfer agent fees 72,237 121,212 90,284
Professional fees 58,897 92,538 60,094
Registration fees 14,992 63,673 32,549
Amortization of deferred organization
expenses 18,848 46,256 17,593
Trustee fees 478 3,073 707
Other 8,763 78,430 27,214
- ------------------------------------------------------------------------------
Total expenses 560,207 4,073,297 819,482
Less--expenses reimbursable and fees
waived by Goldman Sachs (411,644) (1,241,452) (370,128)
- ------------------------------------------------------------------------------
Net expenses 148,563 2,831,845 449,354
- ------------------------------------------------------------------------------
Net investment income 1,900,328 15,455,369 2,420,375
- ------------------------------------------------------------------------------
Realized and unrealized gain (loss)
on investment, options, futures and
foreign currency transactions:
Net realized gain (loss) from:
Investment transactions 115,970 9,268,666 1,390,846
Futures transactions (68,389) -- (151,156)
Foreign currency related transactions -- (2,192,328) --
Net change in unrealized gain (loss) on:
Investments and options (332,205) 54,149 (513,085)
Futures 74,600 -- --
Translation of assets and liabilities
denominated in foreign currencies -- 4,948,769 --
- ------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investment, options, futures and
foreign currency transactions (210,024) 12,079,256 726,605
- ------------------------------------------------------------------------------
Net increase in net assets resulting
from operations $1,690,304 $27,534,625 $3,146,980
==============================================================================
</TABLE>
/(a)/Net of $96,252 in foreign withholding tax for the Global Income
Fund.
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
=============================================
<S> <C> <C> <C>
From operations:
Net investment income $ 1,900,328 $ 15,455,369 $ 2,420,375
Net realized gain from investment transactions 47,581 9,268,666 1,239,690
Net realized loss from foreign currency related transactions -- (2,192,328) --
Net change in unrealized gain (loss) on investments, futures and options (257,605) 54,149 (513,085)
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- 4,948,769 --
- ------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,690,304 27,534,625 3,146,980
- ------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (1,898,372) (22,455,377) (2,418,570)
Class B (3,324) (3,052) (1,805)
Institutional Class -- (4,050,770) --
- ------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,901,696) (26,509,199) (2,420,375)
- ------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 8,922,548 39,747,372 6,389,765
Reinvestment of dividends and distributions 1,614,587 16,968,046 1,484,778
Cost of shares repurchased (8,990,920) (82,019,748) (9,875,982)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 1,546,215 (25,304,330) (2,001,439)
- ------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 1,334,823 (24,278,904) (1,274,834)
Net assets:
Beginning of year 29,502,599 277,454,349 53,797,234
- ------------------------------------------------------------------------------------------------------------------------
End of year $ 30,837,422 $ 253,175,445 $ 52,522,400
========================================================================================================================
Accumulated undistributed net investment income $ 53,331 $ 6,704,225 $ 60,331
========================================================================================================================
Summary of share transactions:
Shares sold 624,626 2,811,314 449,496
Reinvestment of dividends and distributions 112,977 1,198,568 104,201
Shares repurchased (628,175) (5,784,097) (694,794)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 109,428 (1,774,215) (141,097)
========================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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.
27
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
October 31, 1996
- --------------------------------------------------------------------------------
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 non-diversified portfolio. As of October 31, 1996, the Funds offer
Class A and Class B shares. In addition, Global Income offers Institutional and
Service shares. As of October 31, 1996, there outstanding no Service 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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that may affect the reported amounts.
A. Investment Valuation
- -----------------------
Investments in debt securities, other than money market instruments, held by the
Funds 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 Government Income and Municipal
Income 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 Government Income and Municipal
Income, 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. Security Transactions and Investment Income
- ----------------------------------------------
Security transactions are recorded on the trade date. Realized gains and losses
on sales of portfolio securities are calculated on the identified cost basis.
Interest income is recorded on the basis of interest accrued. Premiums on
interest-only securities and on collateralized mortgage obligations with nominal
- --------------------------------------------------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 for
distribution and are classified as interest income in the accompanying
Statements of Operations. Original issue discounts ("OID") 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. OID amortization on
mortgage backed REMIC securities is initially recorded based on estimates of
principal paydowns using the most recent OID factors available from the issuer.
Recorded amortization amounts are adjusted when actual OID factors are received.
For Municipal Income, market premiums on other long-term debt securities are
amortized to interest income while for Global Income, 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
- ----------------------------------------------
Global Income 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. Global Income may also purchase and sell forward contracts to seek to
increase total return. 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
- ------------------------
Government Income and Global Income 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.
- --------------------------------------------------------------------------------
29
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
F. Option Accounting Principles
- -------------------------------
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 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.
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.
G. Futures Contracts
- --------------------
The Funds may enter into futures transactions in order to hedge against changes
in interest rates, securities prices, currency exchange rates in the case of
Global Income or to seek to increase total return. A Fund will engage in futures
transactions only for bona fide hedging purposes as defined in regulations of
the CFTC or to seek to increase total return to the extent permitted by such
regulations. 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.
Payments for futures contracts ("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. The predominant
risk is that changes in the value of the futures contract that may not directly
correlate with changes in the value of the underlying securities. The risk may
decrease the effectiveness of the Funds' hedging strategies and may also result
in a loss to the Funds.
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.
- --------------------------------------------------------------------------------
30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
At October 31, 1996, the Funds had approximately the following amounts of
capital loss carryforward for U.S. Federal tax purposes:
<TABLE>
<CAPTION>
Year of
Fund Amount Expiration
- ----------------------------------- ------------ ----------------
<S> <C> <C>
Global Income $4,471,734 2002
Municipal Income $1,534,884 2002
</TABLE>
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 and Class B shareholders of the Funds bear all expenses and fees
relating to their respective distribution and authorized dealer service plans as
well as other expenses which are directly attributable to such shares. Transfer
agent fees are subject to separate arrangements for each class.
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 Global Income. 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 Government Income, Global
Income and Municipal Income, respectively. As compensation for the services
rendered pursuant to the Subadvisory Agreement, GSAM International is entitled
to a subadvisory fee from Global Income of .50% of the average daily net assets.
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.
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 Global Income, transfer agent fees) to the extent
such expenses exceed .00%, .06% and .05% per annum of Government Income, Global
Income and Municipal Income, respectively.
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, 1996,
Goldman Sachs retained approximately $17,300, $52,600 and $24,900 of sales loads
related to Government Income, Global Income and Municipal Income, 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% and .75% of each Fund's average
daily net assets attributable to Class A and Class B shares, respectively.
- --------------------------------------------------------------------------------
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
The Trust, on behalf of each Fund, has 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, on an annual basis, up to .25% of the
average daily net assets attributable to the Class A and Class B shares. Goldman
Sachs also serves as the Transfer Agent of the Funds for a fee.
For the year ended October 31, 1996, the advisors, administrators and
distributor have voluntarily agreed to waive certain fees and reimburse other
expenses as follows (in thousands):
<TABLE>
<CAPTION>
Waivers
--------------------------------------
Reimburse-
Admin- Class A Reimburse- ment
Fund Advisor istrator 12b-1 ment Outstanding
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Government
Income 74 44 74 220 27
Global
Income 848 -- 56 337 7
Municipal
Income -- -- 132 238 30
</TABLE>
The Investment Advisors and Administrator may discontinue or modify such waivers
and limitations in the future at their discretion.
For the year ended October 31, 1996, Government Income and Municipal Income
incurred commissions expense of approximately $1,200 and $2,750 respectively, in
connection with futures contracts entered into with Goldman Sachs. At October
31, 1996, Goldman Sachs owes approximately $7,000 to Government Income related
to variation margin on futures contracts.
4. Line of Credit Facility
The Funds participate in a $100,000,000 uncommitted, unsecured revolving line of
credit facility. In addition, Global Income participates in a $50,000,000
committed, unsecured revolving line of credit facility. Both facilities are 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 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, 1996, 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, 1996, were as follows:
<TABLE>
<CAPTION>
================================================================================
Government Global Municipal
Fund Income Income Income
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchases of U.S.
Government and
agency obligations $133,097,699 $117,740,548 $ --
- --------------------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) 9,741,716 410,144,747 184,788,273
- --------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 136,922,990 102,151,633 --
- --------------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and
agency obligations) 3,909,735 446,269,068 189,391,870
================================================================================
</TABLE>
For the year ended October 31, 1996, option transactions in Global Income were
as follows:
<TABLE>
<CAPTION>
Options Purchased Cost
- --------------------------------------------------------------------------------
<S> <C>
Balance outstanding, beginning of period $ --
Options purchased 202,160
Options expired (202,160)
- --------------------------------------------------------------------------------
Balance outstanding, end of period $ --
================================================================================
</TABLE>
32
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
At October 31, 1996, Global Income had outstanding forward foreign currency
exchange contracts to sell foreign currencies as follows:
<TABLE>
<CAPTION>
===============================================================================
Value on
Foreign Currency Settlement Current Unrealized
Sale Contracts Date Value Gain/(Loss)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Danish Krone
Expiring 1/22/97 $ 6,348,652 $ 6,443,676 $ (95,024)
Deutschemark
Expiring 11/27/96 37,735,809 38,044,516 (308,707)
Expiring 2/27/97 12,671,000 12,775,513 (104,513)
British Pound Sterling
Expiring 11/14/96 15,423,575 16,184,359 (760,784)
Irish Pound
Expiring 1/8/97 6,842,743 6,964,425 (121,682)
Italian Lira
Expiring 1/29/97 1,326,853 1,335,737 (8,884)
Japanese Yen
Expiring 1/24/97 23,059,781 22,755,697 304,084
Netherlands Guilder
Expiring 1/9/97 6,442,727 6,510,658 (67,931)
Spanish Peseta
Expiring 1/16/97 6,543,897 6,612,046 (68,149)
Swedish Krona
Expiring 1/28/97 4,708,899 4,736,457 (27,558)
Swiss Franc
Expiring 1/29/97 12,952,107 12,453,735 498,372
Expiring 1/29/97 12,083,214 12,109,196 (25,982)
- -------------------------------------------------------------------------------
Total Foreign Currency
Sale Contracts $146,139,257 $146,926,015 $(786,758)
===============================================================================
</TABLE>
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, 1996, Global Income had sufficient cash and/or securities to
cover any commitments under these contracts.
Global Income 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 $1,073,237 and $1,816,332 respectively, in the accompanying
Statement of Assets and Liabilities. Included in the "Receivable and Payable for
forward foreign currency exchange contracts" are $270,781 and $227,118
respectively, related to forward contracts closed but not settled as of
October 31, 1996.
6. Summary of Share Transactions
Share activity for the year ended October 31, 1996 is as follows:
<TABLE>
<CAPTION>
Government Income Fund Dollars Shares
===============================================================================
<S> <C> <C>
Class A Shares:
Shares sold $8,675,868 607,156
Reinvestment of dividends and
distributions 1,611,387 112,752
Shares repurchased (8,971,389) (626,797)
----------------------------------
1,315,866 93,111
----------------------------------
Class B Shares
Shares sold 246,680 17,470
Reinvestment of dividends
and distributions 3,200 225
Shares repurchased (19,531) (1,378)
----------------------------------
230,349 16,317
- -------------------------------------------------------------------------------
$1,546,215 109,428
===============================================================================
<CAPTION>
Global Income Fund Dollars Shares
===============================================================================
<S> <C> <C>
Class A Shares:
Shares sold $ 15,545,777 1,089,521
Reinvestment of dividends
and distributions 13,419,614 947,846
Shares repurchased (76,216,894) (5,376,065)
----------------------------------
(47,251,503) (3,338,698)
----------------------------------
Class B Shares
Shares sold 265,053 18,628
Reinvestment of dividends
and distributions 1,708 119
Shares repurchased (16,373) (1,144)
----------------------------------
250,388 17,603
----------------------------------
Institutional Shares:
Shares sold 23,936,542 1,703,165
Reinvestment of dividends
and distributions 3,546,724 250,603
Shares repurchased (5,786,481) (406,888)
----------------------------------
21,696,785 1,546,880
- -------------------------------------------------------------------------------
$(25,304,330) (1,774,215)
================================================================================
</TABLE>
33
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Municipal Income Fund Dollars Shares
================================================================================
<S> <C> <C>
Class A Shares:
Shares sold $ 6,139,212 431,736
Reinvestment of dividends
and distributions 1,482,976 104,074
Shares repurchased (9,874,431) (694,685)
------------------------------------
(2,252,243) (158,875)
------------------------------------
Class B Shares
Shares sold 250,553 17,760
Reinvestment of dividends
and distributions 1,802 127
Shares repurchased (1,551) (109)
------------------------------------
250,804 17,778
- --------------------------------------------------------------------------------
$ (2,001,439) (141,097)
================================================================================
</TABLE>
Share activity for the year ended October 31, 1995 is as follows:
<TABLE>
<CAPTION>
Global Income Fund Dollars Shares
================================================================================
<S> <C> <C>
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
- -------------------------------------------------------------------------------
$(141,736,340) (10,321,532)
===============================================================================
</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 Funds' custodian, or at subcustodians. GSAM monitors the
market value of the underlying securities by pricing them daily.
8. Joint Repurchase Agreement Account
Government Income, 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, 1996, Government Income had a 0.3% undivided interest in the
repurchase agreement in the joint account which equaled $8,400,000 in principal
amount. As of October 31, 1996, 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:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
===============================================================================
<S> <C> <C> <C>
Bear Stearns & Co., dated 10/31/96, repurchase price $700,108,500 (FNMA:
$555,686,102, 5.50%-8.50%, 2/1/09-6/1/26; FHLMC: $166,359,033, 5.50%-8.50%,
9/1/98-8/1/26)
$700,000,000 5.58% 11/01/96 $700,000,000
Lehman Brothers, Inc. dated 10/31/96, repurchase price $924,843,329 (Treasury
Notes: $942,903,967, 4.38%-8.50%, 11/15/96-8/15/03)
924,700,00 5.58 11/01/96 924,700,000
Nomura Securities International, Inc. dated 10/31/96, repurchase price
$700,108,500 (FNMA: $256,658,433, 5.50%-8.00%, 6/1/03-10/1/26; FHLMC:
$465,441,174, 6.00%-9.00%, 9/1/1-10/1/26)
700,000,000 5.58 11/01/96 700,000,000
Smith Barney, Inc. dated 10/31/96, repurchase price $170,026,161 (U.S
Treasury Interest Only Stripped Securities: $11,653,277, 2/15/98-5/15/02; U.S.
Treasury Notes: $85,997,728, 5.25%-7.75%, 5/15/97-10/15/06; U.S. Treasury
Principal Only Stripped Securities: $33,993,571, 5/15/97-5/15/05; U.S.
Treasury Bills: $41,756,285, 12/12/96-3/20/97)
170,000,000 5.54 11/01/96 170,000,000
Union Bank of Switzerland, Inc. dated 10/31/96, repurchase price $175,026,979
(U.S. Treasury Notes: $178,694,649, 6.88%-7.75%, 8/31/99-1/31/00)
175,000,000 5.55 11/01/96 175,000,000
- -------------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $2,669,700,000
===============================================================================
</TABLE>
34
<PAGE>
- --------------------------------------------------------------------------------
9. Certain Reclassifications
In accordance with Statement of Position 93-2, the Government Income, Global
Income and Municipal Income Funds have reclassified $18,448, $46,256 and
$17,593, respectively, from paid-in capital to accumulated undistributed net
investment income. Additionally, the Global Income Fund has reclassified
$862,007, $207,585 and $380 from accumulated net realized gain, accumulated net
realized foreign currency gain and paid in capital, respectively to accumulated
undistributed net investment income. These reclassifications have no impact on
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, 1996, the Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 14% of the
outstanding shares of Global Income.
- --------------------------------------------------------------------------------
35
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(a)/ 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 and of net
beginning investment futures related investment investment futures investment
of period income transactions transactions operations income transactions income
GOVERNMENT INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares $14.47 $0.92 $(0.11) -- $0.81 $(0.92) -- --
1996-Class B shares/(c)/ 14.11 0.41 0.26 -- 0.67 (0.41) -- --
1995-Class A shares 13.47 0.94 1.00 -- 1.94 (0.94) -- --
1994-Class A shares 14.90 0.85 (1.28) -- (0.43) (0.85) (0.12) (0.02)
For the Period February 10, 1993/(d)/ through October 31,
=========================================================
1993-Class A shares 14.32 0.56 0.58 -- 1.14 (0.56) -- --
GLOBAL INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended October 31,
=========================================================
1996-Class A shares $14.45 $0.71 $0.62 $0.18 $1.51 $(1.43) -- --
1996-Class B shares/(c)/ 14.03 0.34 0.41 0.11 0.86 (0.36) -- --
1996-Institutional
shares 14.45 1.15 0.32 0.10 1.57 (1.50) -- --
1995-Class A shares 13.43 0.89 0.92 0.15 1.96 (0.94) -- --
1995- Institutional
shares/(f)/ 14.09 0.22 0.34 0.06 0.62 (0.26) -- --
1994-Class A shares 15.07 0.84 (1.37) (0.12) (0.65) (0.22) (0.16) --
1993-Class A shares 14.69 0.85 1.07 (0.42) 1.50 (0.85) (0.27) --
1992-Class A shares 14.60 1.14 0.45 (0.36) 1.23 (1.14) -- --
For the Period August 2, 1991/(d)/ through October 31,
=========================================================
1991-Class A shares 14.55 0.25 0.23 (0.19) 0.29 (0.24) -- --
<CAPTION>
In excess of
net realized Net
gain on increase
investment, From Total (decrease) Net asset
option and paid distributions in net value at
futures in to asset end of
transactions capital shareholders value period
- -----------------------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares -- -- $(0.92) $(0.11) $14.36
1996-Class B shares/(c)/ -- -- (0.41) 0.26 14.37
1995-Class A shares -- -- (0.94) 1.00 14.47
1994-Class A shares (0.01) -- (1.00) (1.43) 13.47
For the Period February 10, 1993 /(d)/ through October 31,
==========================================================
1993-Class A shares -- -- (0.56) 0.58 14.90
GLOBAL INCOME FUND
- -----------------------------------------------------------------------------------------------------
For the Years Ended October 31,
===========================================================
1996-Class A shares -- -- $(1.43) $0.08 $14.53
1996-Class B shares/(c)/ -- -- (0.36) 0.50 14.53
1996-Institutional
shares -- -- (1.50) 0.07 14.52
1995-Class A shares -- -- (0.94) 1.02 14.45
1995-Institutional
shares/(f)/ -- -- (0.26) 0.36 14.45
1994-Class A shares -- (0.61) (0.99) (1.64) 13.43
1993-Class A shares -- -- (1.12) 0.38 15.07
1992-Class A shares -- -- (1.14) 0.09 14.69
For the Period August 2, 1991 (d) through October 31,
============================================================
1991-Class A shares -- -- (0.24) 0.05 14.60
<CAPTION>
Ratio of Net
Ratio of net assets
net investment at end
expenses income Portfolio of
Total to average to average turnover period
return /(b/) net assets net assets rate /(h)/ (in 000s)
===================================================================================================
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares 5.80% 0.50% 6.42% 485.09% $30,603
1996-Class B shares/(c)/ 4.85/(g)/ 1.25/(e)/ 5.65/(e)/ 485.09 234
1995-Class A shares 14.90 0.47 6.67 449.53 29,503
1994-Class A shares (2.98) 0.11 6.06 654.90 14,452
For the Period February 10, 1993/(d)/ through October 31,
=========================================================
1993-Class A shares 8.03/(g)/ 0.00/(e)/ 4.87/(e)/ 725.41/(g/ 12,860
- ---------------------------------------------------------------------------------------------------
For the Years Ended October 31,
=========================================================
1996-Class A shares 11.05% 1.16% 5.81% 232.15% $198,665
1996-Class B shares/(c)/ 6.24/(g)/ 1.70/(e)/ 5.16/(e)/ 232.15 256
1996-Institutional
shares 11.55 0.65 6.35 232.15 54,254
1995-Class A shares 15.08 1.29 6.23 265.86 245,835
1995-Institutional
shares/(f)/ 4.42/(g)/ 0.65/(e)/ 6.01/(e)/ 265.86 31,619
1994-Class A shares (4.49) 1.28 5.73 343.74 396,584
1993-Class A shares 10.75 1.30 5.78 313.88 675,662
1992-Class A shares 8.77 1.37 7.85 270.75 588,893
For the Period August 2, 1991 (d) through October 31,
=========================================================
1991- Class A shares 2.00 0.38 /(g)/ 1.72 /(g)/ 34.22 /(g)/ 388,744
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
------------------------------
Ratio of
net
Ratio of investment
expenses income
to average to average
net assets net assets
==============================================================
- --------------------------------------------------------------
<S> <C> <C>
For the Years Ended October 31,
==========================================================
1996-Class A shares 1.89% 5.03%
1996-Class B shares/(c)/ 2.39/(e)/ 4 .51/(e)/
1995-Class A shares 2.34 4.80
1994-Class A shares 2.86 3.31
For the Period February 10, 1993 /(d)/ through October 31,
==========================================================
1993-Class A shares 4.00/(e)/ 0.87/(e)/
- ------------------------------------------------------------
For the Years Ended October 31,
==========================================================
1996-Class A shares 1.64% 5.33%
1996-Class B shares/(c)/ 2.14 /(e)/ 4.72/(e)/
1996-Institutional
shares 1.11 5.89
1995-Class A shares 1.58 5.94
1995-Institutional
shares/(f)/ 1.08/(e)/ 5.58/(e)/
1994-Class A shares 1.53 5.48
1993-Class A shares 1.55 5.53
1992-Class A shares 1.62 7.60
For the Period August 2, 1991 (d) through October 31,
==========================================================
1991-Class A shares 0.44/(g)/ 1.66/(g)/
- ------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations (a) 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 and of net
beginning investment futures related investment investment futures investment
of period income transactions transactions operations income transactions income
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares $14.17 $0.65 $0.20 -- $0.85 $(0.65) -- --
1996- Class B shares /(c)/ 14.03 0.27 0.34 -- 0.61 (0.27) -- --
1995- Class A shares 13.08 0.67 1.09 -- 1.76 (0.67) -- --
1994- Class A shares 14.64 0.73 (1.51) -- (0.78) (0.73) (0.05) --
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 14.32 0.22 0.32 -- 0.54 (0.22) -- --
<CAPTION>
Distributions to shareholders
----------------------------------------
In excess of
net realized Net
gain on increase
investment, From Total (decrease) Net asset
option and paid distributions in net value at
futures in to asset end of
transactions capital shareholders value period
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares -- -- $(0.65) $0.20 $14.37
1996- Class B shares /(c)/ -- -- (0.27) 0.34 14.37
1995- Class A shares -- -- (0.67) 1.09 14.17
1994- Class A shares -- -- (0.78) (1.56) 13.08
For the Period July 20, 1993
1993- Class A shares -- -- (0.22) 0.32 14.64
<CAPTION>
Ratio of
Ratio of net
net investment
expenses income Portfolio
Total to average to average turnover
return /(b/) net assets net assets rate /(h)/
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares 6.13% 0.85% 4.58% 344.13%
1996- Class B shares /(c)/ 4.40 /(g)/ 1.60 /(e)/ 3.55 /(e)/ 344.13
1995- Class A shares 13.79 0.76 4.93 335.55
1994- Class A shares (5.51) 0.45 5.28 357.54
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 3.73 /(g)/ 0.00 /(e)/ 5.15 /(e)/ 99.99 /(g)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
---------------------
Net Ratio of
assets net
at end Ratio of investment
of expenses income
period to average to average
(in 000s) net assets net assets
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares $52,267 1.55% 3.88%
1996- Class B shares /(c)/ 255 2.05 /(e)/ 3.10 /(e)/
1995- Class A shares 53,797 1.49 4.20
1994- Class A shares 47,373 1.55 4.18
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 30,166 2.42 /(e)/ 2.73 /(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 distributions, a complete redemption of the investment
at the net asset value at the end of period and no sales charge. Total
return would be reduced if a sales charge for Class A shares or a contingent
deferred sales charge for Class B shares were taken into account.
(c) Class B shares commenced operations on May 1, 1996.
(d) Commencement of operations.
(e) Annualized.
(f) Institutional shares commenced operations on June 1, 1995.
(g) Not annualized.
(h) Includes the effect of mortgage dollar roll transactions for the Government
Income Fund.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
37
<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, 1996, 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, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of the
Goldman Sachs Government Income Fund, Goldman Sachs Global Income Fund and
Goldman Sachs Municipal Income Fund as of October 31, 1996, 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 12, 1996
- --------------------------------------------------------------------------------
38
<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.
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
- -------------------------------------
Annual Report
October 31, 1996
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
[LOGO OF GOLDMAN SACHS APPEARS HERE]
================================================================================
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
- -------------------------
Annual Report
October 31, 1996
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
[GOLDMAN SACHS LOGO APPEARS HERE]
================================================================================
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS, INCLUDING MUNICIPAL BONDS/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 edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than 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.
BA: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
- ----------
/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 do not
necessarily represent ratings which will be given to these securities on the
date of a Fund's fiscal year end.
1-A
<PAGE>
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
CA: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
UNRATED: 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 or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issuer 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 judgment to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designed by the symbols
Aa1, A1, Baa1 and B1.
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.
2-A
<PAGE>
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 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.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
STANDARD & POOR'S RATINGS GROUP
AAA: Bonds and debt rated AAA have the highest rating assigned by Standard
& Poor's. Capacity to pay interest and repay principal is extremely strong.
3-A
<PAGE>
AA: Bonds and debt 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 and debt 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 and debt 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.
BB, B, CCC, CC, C: Bonds and debt rated BB, B, CCC, CC and C are regarded,
on balance, as predominately speculative with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and
C the highest. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
BB: Bonds and debt rated BB have less near-term vulnerability to default
than other speculative issues. However, such securities face major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for bonds that are subordinated
to senior debt assigned an actual or implied BBB- rating.
B: Bonds and debt rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal.
The B rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied BB or BB-rating.
CCC: Bonds and debt rated CCC have currently identifiable vulnerability to
default, and are dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, such
securities are not likely to have the capacity to pay interest and repay
principal.
The CCC rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied B or B-rating.
4-A
<PAGE>
CC: The rating CC is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC rating.
C: The rating C is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC-debt rating. The
C rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
C1: The rating C1 is reserved for income bonds on which no interest is
being paid.
D: Bonds and debt rated D are in default and payment of interest and/or
repayment of principal is in arrears. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
N.R.: Not rated.
Notes: Bonds which are unrated expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative obligations. The Fund is dependent on the Investment
Adviser's judgment, analysis and experience in the evaluation of such bonds.
Investors should note that credit factors affecting high yield, fixed
income securities change quickly and the assignment of a rating to a particular
bond by a rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
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 plus sign (+) 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.
5-A
<PAGE>
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.
A-3: Issued carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable t the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B: Issues rated B are regarded as having only speculative capacity
for timely payment.
C: This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D: Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes such
payments will be made during such grace period.
FITCH INVESTORS SERVICE, L.P.
Bond Ratings
- ------------
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings
take into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA: Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA: Bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories
6-A
<PAGE>
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.
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified, which
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Bonds have certain identifiable characteristics that, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or reorganization of the
obligor. DDD represents the highest potential for recovery on these bonds, and D
represents the lowest potential for recovery.
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, DDD, DD, or D Categories.
7-A
<PAGE>
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+.
F-2: Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned F-1+ and F-1 ratings.
F-3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is
adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
F-S: Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D: Default. Issues assigned this rating are in actual or imminent
payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
8-A
<PAGE>
DUFF & PHELPS
-------------
Long-Term Debt and Preferred Stock
- ----------------------------------
AAA: Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong.
Risk is modest but may vary slightly from time to time because of economic
conditions.
BBB+, BBB, BBB-: Below average protection factors but still
considered sufficient for prudent investment. Considerable variability in risk
during economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that
obligations will not be met when due. Financial protection factors will
fluctuate widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable
uncertainty exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable company
developments.
Commercial Paper/Certificates of Deposits
- -----------------------------------------
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.
DUFF 1 MINUS: High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
9-A
<PAGE>
DUFF 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets
is good. Risk factors are small.
DUFF 3: Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
DUFF 4: Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
DUFF 5: Issuer failed to meet scheduled principal and/or interest
payments.
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 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.
10-A
<PAGE>
MIG-2/VMIG-2: This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG-3/VMIG-3: This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG-4/VMIG-4: This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
SG: This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
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 three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
- - Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
- - Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3: Speculative capacity to pay principal and interest.
11-A
<PAGE>
APPENDIX B
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 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-B
<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
partners' capital of approximately $5.3 billion as of November 29, 1996.
.. Thirty-four offices worldwide where professionals focus on identifying
financial opportunities.
.. The number one underwriter of all international equity issues for 1993,
1994 and 1995.*
.. Premier lead manager of negotiated municipal bond offerings over the past
six years (1990-1995).
.. The number one lead manager of U.S. common stock offerings from (1989-
1995).*
* Source: Securities Data Corporation. Ranking excludes REITS, Trusts and
-----------------------------------
Rights.
2-B
<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
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1991 Provides advisory services for the largest privatization in the region
of the sale of Telefonos de Mexico
1995 Dow Jones Industrial Average breaks 5000
1996 Goldman Sachs takes Deutsche Telekom public
Dow Jones Industrial Average breaks 6000
1997 Dow Jones Industrial Average breaks 7000
3-B
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY STATE.
SUBJECT TO COMPLETION -- JUNE 13, 1997
PART B
STATEMENT OF ADDITIONAL INFORMATION
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
GOLDMAN SACHS ADJUSTABLE RATE GOVERNMENT FUND
GOLDMAN SACHS SHORT DURATION GOVERNMENT FUND
GOLDMAN SACHS SHORT DURATION TAX-FREE FUND
GOLDMAN SACHS GOVERNMENT INCOME FUND
GOLDMAN SACHS MUNICIPAL INCOME FUND
GOLDMAN SACHS CORE FIXED INCOME FUND
GOLDMAN SACHS GLOBAL INCOME FUND
GOLDMAN SACHS HIGH YIELD 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, Class B and Class C Shares of Goldman Sachs
Adjustable Rate Government Fund, Goldman Sachs Short Duration Government Fund,
Goldman Sachs Short Duration Tax-Free Fund, Goldman Sachs Government Income
Fund, Goldman Sachs Municipal Income Fund, Goldman Sachs Core Fixed Income Fund,
Goldman Sachs Global Income Fund and Goldman Sachs High Yield Fund dated ____,
1997, 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 or Class C Shares.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Introduction B-3
Other Investments and Practices B-10
Investment Restrictions B-53
Management B-70
Portfolio Transactions B-86
Shares of the Trust B-87
Net Asset Value B-91
Taxation B-92
Performance Information B-104
Other Information B-116
Financial Statements B-118
Other Information Regarding Purchases, Redemptions,
Exchanges and Dividends B-119
Distribution and Authorized Dealer Service Plans B-122
Appendix A 1-A
Appendix B 1-B
</TABLE>
The date of this Additional Statement is ____, 1997.
<PAGE>
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 GOVERNMENT INCOME FUND
GOLDMAN SACHS SHORT DURATION TAX FREE
FUND
GOLDMAN SACHS CORE FIXED INCOME FUND
GOLDMAN SACHS HIGH YIELD 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 4900 SEARS TOWER
ADJUSTABLE RATE GOVERNMENT FUND CHICAGO, ILLINOIS 60606
AND SHORT DURATION GOVERNMENT FUND
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS ASSET MANAGEMENT
INTERNATIONAL
ADVISER TO GOLDMAN SACHS
GLOBAL INCOME FUND
133 PETERBOROUGH COURT
LONDON EC4A 2BB ENGLAND
TOLL FREE .......800-526-7384
<PAGE>
INTRODUCTION
Goldman Sachs Trust (the "Trust") was formed under the laws of the
state of Delaware on January 28, 1997. The Trust is a successor to a
Massachusetts business trust that was merged with the Trust on April 30, 1997.
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 the following series, among others: Goldman Sachs
Adjustable Rate Government Fund ("Adjustable Rate Fund"), Goldman Sachs 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"), Goldman Sachs
Short Duration Tax-Free Fund ("Short Duration Tax-Free Fund"), Goldman Sachs
Short Duration Government Fund ("Short Duration Government Fund") and Goldman
Sachs High Yield Fund ("High Yield Fund") and 27 other series of shares.
Adjustable Rate Fund, Core Fund, Global Income Fund, Government Income Fund,
Municipal Income Fund, Short Duration Tax-Free Fund, Short Duration Government
Fund and High Yield 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 six classes of shares:
Institutional Shares, Administration Shares, Service Shares, Class A Shares,
Class B Shares and Class C Shares. Adjustable Rate Fund is authorized to issue
four classes of shares: Institutional Shares, Administration Shares, Service
Shares and Class A Shares. Government Income Fund, Municipal Income Fund,
Global Income Fund and High Yield Fund are authorized to issue five classes of
shares: Institutional Shares, Service Shares, Class A Shares, Class B Shares and
Class C Shares. Additional series may be added in the future from time to time.
Goldman Sachs Asset Management ("GSAM"), a separate operating division
of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the investment adviser to
Core Fund, Government Income Fund, Municipal Income Fund, Short Duration Tax-
Free Fund and High Yield Fund. Goldman Sachs Asset Management International
("GSAMI"), an affiliate of Goldman Sachs, serves as investment adviser to the
Global Income Fund. Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate
of Goldman Sachs, serves as the investment adviser to Adjustable Rate Fund and
Short Duration Government Fund. GSAM, GSAMI and GSFM 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,
B-3
<PAGE>
unlike certificates of deposits, shares of the Funds are not insured by the
Federal Deposit Insurance Corporation.
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
B-4
<PAGE>
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, 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
three years. The duration target of the Short Duration Government Fund is that
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. 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 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
B-5
<PAGE>
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 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
B-6
<PAGE>
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 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.
B-7
<PAGE>
Core Fund's overall returns are generally likely to move in the
opposite direction from interest rates. Therefore, when interest rates decline,
Core Fund's return is likely to increase. Conversely, when interest rates
increase, Core Fund's return is likely to decline. However, the Adviser
believes that, given the flexibility of managers to invest in a diversified
portfolio of securities, Core Fund's return is not likely to decline as quickly
as that of other fixed-income funds with a comparable average portfolio
duration. In exchange for accepting a higher degree of potential share price
fluctuation, investors have the opportunity 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 will attempt to control
----------------------------------
its exposure to interest rate risk, including overall market exposure and the
spread risk of particular sectors and securities, 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
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access to input from Goldman Sachs' economists, fixed-income analysts and
mortgage specialists.
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 prospects 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
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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 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 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.
HIGH YIELD FUND
High Yield Fund's Investment Process. GSAM starts the investment
-------------------------------------
process with economic analysis based on research generated by the Goldman Sachs
Global Economic Research Group and others to determine broad growth trends,
industry-specific events and market forecasts. The market value of non-
investment grade fixed income securities tends to reflect individual
developments within a company to a greater extent than higher rated corporate
debt or Treasury bonds that react primarily to fluctuations in interest rates.
Therefore, determining the creditworthiness of issuers is critical. To that
end, the High Yield Fund's portfolio managers have access to Goldman, Sachs &
Co.'s highly regarded Credit Research and Global Investment Research
Departments, as well as analysis from the firm's High Yield Research Group, a
dedicated group of 14 professionals in the high yield and emerging market
corporate bond research area, consisting of industry and regional market
specialists. In addition, the Fund's portfolio managers may review the opinions
of the two largest independent credit rating agencies, Standard & Poor's Ratings
Group and Moody's Investors Services, Inc. High Yield Fund's portfolio managers
and credit analysts also conduct their own in-depth analysis of each issue
considered for inclusion in the Fund's portfolio. The portfolio managers and
credit analysts evaluate such factors as a company's competitive position, the
strength of its balance sheet, its ability to withstand economic downturns and
its potential to generate ample cash flow to service its debt. The ability to
accurately analyze a company's future cash flow by correctly anticipating the
impact of economic, industry-wide and specific events are critical to successful
high yield investing. GSAM's goal is to identify companies with the potential
to strengthen their balance sheets by increasing their earnings, reducing their
debt or effecting a turnaround. GSAM analyzes trends in a company's debt
picture (i.e., the level of its interest coverage) as well as new developments
in its capital structure on an ongoing basis. GSAM believes that this constant
reassessment is more
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valuable than relying on a "snapshot" view of a company's ability to service
debt at one or two points in time.
High Yield Fund's portfolio is diversified among different sectors and
industries on a global basis in an effort to reduce overall risk. While GSAM
will avoid excessive concentration in any one industry, the Fund's specific
industry weightings are the result of individual security selection. Emerging
market debt considered for the High Yield Fund's portfolio will be selected by
specialists knowledgeable about the political and economic structure of those
economies.
Return on and Risks of High Yield Securities. Over the past decade,
---------------------------------------------
high yield bonds have delivered consistently higher yields and total return (and
higher volatility) than either investment grade corporate bonds or U.S. Treasury
bonds. However, because these non-investment grade securities involve higher
risks in return for higher income, they are best suited to long-term investors
who are financially secure enough to withstand volatility and the risks
associated with such investments. See "Other Investments and Practices."
Different types of fixed income securities may react differently to changes in
the economy. High yield bonds, like stocks, tend to perform best when the
economy is strong, inflation is low and companies experience healthy profits,
which can lead to higher stock prices and higher credit ratings. Government
bonds are likely to appreciate more in a weaker economy when interest rates are
declining. In certain types of markets, adding some diversification in the high
yield asset class may help to increase returns and decrease overall portfolio
risk.
For high yield, non-investment grade securities, as for most
investments, there is a direct relationship between risk and return. Along with
their potential to deliver higher yields and greater capital appreciation than
most other types of fixed income securities, high yield securities are subject
to higher risk of loss, greater volatility and are considered speculative by
traditional investment standards. The most significant risk associated with
high yield securities is credit risk: the risk that the company issuing a high
yield security may have difficulty in meeting its principal and/or interest
payments on a timely basis. As a result, extensive credit research and
diversification are essential factors in managing risk in the high yield arena.
To a lesser extent, high yield bonds are also subject to interest rate risk:
when interest rates increase, the value of fixed income securities tends to
decline.
OTHER INVESTMENTS AND PRACTICES
OBLIGATIONS OF THE UNITED STATES, ITS AGENCIES, INSTRUMENTALITIES AND SPONSORED
ENTERPRISES
Each Fund may invest in U.S. government securities ("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
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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, or 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 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
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Adjustable Rate, Short Duration Government, Core, Global Income, High
Yield and Government Income Funds (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. 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
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<PAGE>
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 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
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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, 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
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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.
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
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primarily conventional Mortgage Loans. The lenders originating and servicing
the Mortgage Loans are subject to certain eligibility requirements established
by Fannie Mae.
Fannie Mae has certain contractual responsibilities. With respect to each
Pool, Fannie Mae is obligated to distribute scheduled monthly installments of
principal and interest after Fannie Mae's servicing and guaranty fee, whether or
not received, to Certificate holders. Fannie Mae also is obligated to
distribute to holders of Certificates an amount equal to the full principal
balance of any foreclosed Mortgage Loan, whether or not such principal balance
is actually recovered. The obligations of Fannie Mae under its guaranty of the
Fannie Mae Certificates are obligations solely of Fannie Mae.
FREDDIE MAC CERTIFICATES. The Federal Home Loan Corporation ("Freddie
------------------------
Mac") is a publicly held U.S. government sponsored enterprise. The principal
activity of Freddie Mac currently is the purchase of first lien, conventional,
residential mortgage loans and participation interests in such mortgage loans
and their resale in the form of mortgage securities, primarily Freddie Mac
Certificates. A Freddie Mac Certificate represents a pro rata interest in a
group of mortgage loans or participations in mortgage loans (a "Freddie Mac
Certificate group") purchased by Freddie Mac.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest at the rate provided for by such
Freddie Mac Certificate (whether or not received on the underlying loans).
Freddie Mac also guarantees to each registered Certificate holder ultimate
collection of all principal of the related mortgage loans, without any offset or
deduction, but does not, generally, guarantee the timely payment of scheduled
principal. The obligations of Freddie Mac under its guaranty of Freddie Mac
Certificates are obligations solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed-rate mortgage 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
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group may include whole loans, participation interests in whole loans, undivided
interests in 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 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
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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, Global and
Government Income Funds, 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 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
B-19
<PAGE>
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 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
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<PAGE>
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
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
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<PAGE>
Pass-Throughs, one or more classes of certificates may be subordinate
certificates which provide that the rights of the subordinate certificate-
holders to receive any or a specified portion of distributions with respect to
the underlying mortgage loans may be subordinated to the rights of the senior
certificate-holders. If so structured, the subordination feature may be
enhanced by distributing to the senior certificate-holders on certain
distribution dates, as payment of principal, a specified percentage (which
generally declines over time) of all principal payments received during the
preceding prepayment period ("shifting interest credit enhancement"). This will
have the effect of accelerating the amortization of the senior certificates
while increasing the interest in the trust fund evidenced by the subordinate
certificates. Increasing the interest of the subordinate certificates relative
to that of the senior certificates is intended to preserve the availability of
the subordination provided by the subordinate certificates. In addition,
because the senior certificate-holders in a shifting interest credit enhancement
structure are entitled to receive a percentage of principal prepayments which is
greater than their proportionate interest in the trust fund, the rate of
principal prepayments on the mortgage loans will have an even greater effect on
the rate of principal payments and the amount of interest payments on, and the
yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a
reserve fund may be established relating to such certificates (the "Reserve
Fund"). The Reserve Fund may be created with an initial cash deposit by the
originator or servicer and augmented by the retention of distributions otherwise
available to the subordinate certificate-holders or by excess servicing fees
until the Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate-holders of the full
amount of scheduled monthly payments of principal and interest due to 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 that 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
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<PAGE>
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.
ASSET-BACKED SECURITIES
Core, Government Income, High Yield and Global Income Funds 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
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<PAGE>
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, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS
Each Fund may invest in zero coupon bonds, deferred interest and capital
appreciation bonds and pay-in-kind ("PIK") securities. 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, capital appreciation bonds and PIK securities
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.
PIK securities may be debt obligations or preferred shares that provide the
issuer with the option of paying interest or dividends on such obligations in
cash or in the form of additional securities rather than cash. Similar to zero
coupon bonds and deferred interest bonds, PIK securities are designed to give an
issuer flexibility in managing cash flow. PIK securities that are debt
securities can either be senior or subordinated debt and generally trade flat
(i.e., without accrued interest). The trading price of PIK debt securities
generally reflects the market value of the underlying debt plus an amount
representing accrued interest since the last interest payment.
Zero coupon, deferred interest, capital appreciation and PIK 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 for each taxable year and generally are required to distribute
such accrued amounts (net of deductible expenses, if any) to avoid being subject
to tax. Because no cash is generally received at the time of the accrual, a
Fund may be required to liquidate other portfolio securities to
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<PAGE>
obtain sufficient cash 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, Global Income, Government Income and High Yield Funds 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 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.
High Yield Securities. Bonds rated BB or below by Standard & Poor's
---------------------
Ratings Group (Standard & Poor's) or Ba or below by Moody's Investor Service,
Inc. ("Moody's") (or comparable rated and unrated securities) are commonly
referred to as "junk bonds" and are considered speculative; the ability of their
issuers to make principal and interest payments may be questionable. In some
cases, such bonds may be highly speculative, have poor prospects
B-25
<PAGE>
for reaching investment grade standing and be in default. As a result,
investment in such bonds will entail greater risks than those associated with
investment grade bonds (i.e., bonds rated AAA, AA, A or BBB by Standard and
Poor's or Aaa, Aa, A or Baa by Moody's). Analysis of the creditworthiness of
issuers of high yield securities may be more complex than for issuers of higher
quality debt securities, and the ability of a Fund to achieve its investment
objective may, to the extent of its investments in high yield securities, be
more dependent upon such creditworthiness analysis than would be the case if the
Fund were investing in higher quality securities. See Appendix B for a
description of the corporate bond and preferred stock ratings by Standard &
Poor's, Moody's, Fitch Investors Service Corp. and Duff & Phelps.
The amount of high yield, fixed income securities proliferated in the 1980s
and early 1990s as a result of increased merger and acquisition and leveraged
buyout activity. Such securities are also issued by less-established
corporations desiring to expand. Risks associated with acquiring the securities
of such issuers generally are greater than is the case with higher rated
securities because such issuers are often less creditworthy companies or are
highly leveraged and generally less able than more established or less leveraged
entities to make scheduled payments of principal and interest.
The market values of high yield, fixed income securities tends to reflect
those individual corporate developments to a greater extent than do those of
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. Issuers of such high yield securities may not be able
to make use of more traditional methods of financing and their ability to
service debt obligations may be more adversely affected than issuers of higher
rated securities by economic downturns, specific corporate developments or the
issuers' inability to meet specific projected business forecasts. These non-
investment grade securities also tend to be more sensitive to economic
conditions than higher-rated securities. Negative publicity about the junk bond
market and investor perceptions regarding lower-rated securities, whether or not
based on fundamental analysis, may depress the prices for such securities.
Since investors generally perceive that there are greater risks associated
with non-investment grade securities of the type in which High Yield Fund
invests, the yields and prices of such securities may tend to fluctuate more
than those for higher-rated securities. In the lower quality segments of the
fixed-income securities market, changes in perceptions of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
than do changes in higher quality segments of the fixed-income securities
market, resulting in greater yield and price volatility.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In
addition, the prices of fixed-income
B-26
<PAGE>
securities fluctuate in response to the general level of interest rates.
Fluctuations in the prices of portfolio securities subsequent to their
acquisition will not affect cash income from such securities but will be
reflected in the High Yield Fund's net asset value.
The risk of loss from default for the holders of high yield, fixed-income
securities is significantly greater than is the case for holders of other debt
securities because such high yield, fixed-income securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities. Investment by the High Yield Fund in already
defaulted securities poses an additional risk of loss should nonpayment of
principal and interest continue in respect of such securities. Even if such
securities are held to maturity, recovery by the High Yield Fund of its initial
investment and any anticipated income or appreciation is uncertain. The High
Yield Fund may be required to liquidate other portfolio securities to satisfy
the High Yield Fund's annual distribution obligations in respect of accrued
interest income on securities which are subsequently written off, even though
the High Yield Fund has not received any cash payments of such interest.
The secondary market for high yield, fixed-income securities is
concentrated in relatively few markets and is dominated by institutional
investors, including mutual funds, insurance companies and other financial
institutions. Accordingly, the secondary market for such securities is not as
liquid as and is more volatile than the secondary market for higher-rated
securities. In addition, the trading volume for high-yield, fixed-income
securities is generally lower than that of higher rated securities and the
secondary market for high yield, fixed-income securities could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the High Yield Fund's ability to dispose of particular
portfolio investments. Prices realized upon the sale of such lower rated or
unrated securities, under these circumstances, may be less than the prices used
in calculating the High Yield Fund's net asset value. A less liquid secondary
market also may make it more difficult for the High Yield Fund to obtain precise
valuations of the high yield securities in its portfolio.
Certain proposed and recently enacted federal laws could adversely affect
the secondary market for high yield securities and the financial condition of
issuers of these securities. The form of proposed legislation and the
probability of such legislation being enacted is uncertain.
Non-investment grade or high-yield, fixed-income securities also present
risks based on payment expectations. High yield, fixed-income securities
frequently contain "call" or buy-back features which permit the issuer to call
or repurchase the security from its holder. If an issuer exercises such a "call
option" and redeems the security, the High Yield Fund may have to replace such
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<PAGE>
security with a lower-yielding security, resulting in a decreased return for
investors. In addition, if the High Yield Fund experiences unexpected net
redemptions of the High Yield Fund's shares, it may be forced to sell its
higher-rated securities, resulting in a decline in the overall credit quality of
the High Yield Fund's portfolio and increasing the exposure of the High Yield
Fund to the risks of high yield securities. The High Yield Fund may also incur
additional expenses to the extent that it is required to seek recovery upon a
default in the payment of principal or interest on a portfolio security.
Credit ratings issued by credit rating agencies are designed to evaluate
the safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the conditions of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in non-investment
grade and comparable unrated obligations will be more dependent on the Adviser's
credit analysis than would be the case with investments in investment-grade debt
obligations. The Adviser employs its own credit research and analysis, which
includes a study of existing debt, capital structure, ability to service debt
and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. The Adviser continually
monitors the investments in the High Yield Fund's portfolio and evaluates
whether to dispose of or to retain non-investment grade and comparable unrated
securities whose credit ratings or credit quality may have changed.
BANK OBLIGATIONS
Government Income, Global Income, High Yield and Core Funds may each invest
in obligations issued or guaranteed by United States and foreign banks
(Government Income Fund may only invest in U.S. dollar denominated securities).
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 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
generally permitted to engage in a wider variety of 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.
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<PAGE>
MUNICIPAL SECURITIES
Core, Municipal Income, High Yield and Short Duration Tax-Free Funds 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 or counsel selected by the Adviser,
excluded from gross income for federal income tax purposes. The Core, Municipal
Income, High Yield and Short Duration Tax-Free Funds 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 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
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<PAGE>
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, Municipal
Income, High Yield and Core Funds. 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 may be readily marketable.
The obligations of the issuer to pay the principal of and interest on a
Municipal Security are subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Act, and laws, if any, that may be enacted by Congress or state
legislatures extending the time for payment of principal or interest or imposing
other constraints upon the enforcement of such obligations. There is also the
possibility that, as a result of litigation or other conditions, the power or
ability of the issuer to pay when due principal of or interest on a Municipal
Security may be materially affected.
Municipal Leases, Certificates of Participation and Other Participation
-----------------------------------------------------------------------
Interests. The Core, High Yield, 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
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<PAGE>
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 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, High Yield, 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
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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 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
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usually purchased at a price which represents a premium over their face value.
Private Activity Bonds. Short Duration Tax-Free, Municipal Income, High
----------------------
Yield, and Core Funds 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. A Tax Exempt Fund's distributions of its interest income from private
activity bonds may subject certain investors to the federal alternative minimum
tax whereas Core Fund's distributions of any tax-exempt interest it receives
from any source will be taxable for regular federal income tax purposes.
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
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 and the bond would not otherwise be readily
marketable. 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
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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, High Yield, 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 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 to 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
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premium and meeting the insurer's underwriting standards, the bond issuer is
able to obtain a high credit rating (usually, Aaa from Moody's or AAA from
Standard & Poor's) for the issued security. Such insurance is likely to
increase the purchase price and resale value of the security. New issue
insurance policies are non-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. The Municipal Securities
invested in by the High Yield Fund will not be subject to this requirement.
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 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
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<PAGE>
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.
FOREIGN INVESTMENTS
Core, High Yield 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, High Yield and Global Income Funds may
temporarily hold funds in bank deposits in foreign currencies during completion
of investment programs, Core, High Yield and Global Income Funds 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
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<PAGE>
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, High Yield Fund or Global
Income Fund is uninvested and no return is earned thereon. The inability of
Core Fund, High Yield 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, High Yield Fund
or Global Income Fund due to subsequent declines in value of the portfolio
securities, or, if Core Fund, High Yield 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 adversely affect Core, High
Yield or Global Income Funds' 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.
INVESTING IN EMERGING COUNTRIES
Market Characteristics. Debt securities of most emerging markets issuers
----------------------
may be less liquid and are generally subject to greater price volatility than
securities of issuers in the U.S. and other developed countries. The markets
for securities of emerging markets may have substantially less volume than the
market for similar securities in the U.S. and may not be able to absorb, without
price disruptions, a significant increase in trading volume or trade size.
Additionally, market making and arbitrage activities are generally less
extensive in such markets, which may contribute to increased volatility and
reduced liquidity of such markets. The less liquid the market, the more
difficult it may be for the Fund to accurately price its portfolio securities or
to
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<PAGE>
dispose of such securities at the times determined to be appropriate. The risks
associated with reduced liquidity may be particularly acute to the extent that a
Fund needs cash to meet redemption requests, to pay dividends and other
distributions or to pay its expenses.
Securities markets of emerging markets may also have less efficient
clearance and settlement procedures than U.S. markets, making it difficult to
conduct and complete transactions. Delays in the settlement could result in
temporary periods when a portion of a Fund's assets is uninvested and settlement
could result in temporary periods when a portion of the Fund's assets is
uninvested and no return is earned thereon. Inability to make intended security
purchases could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities could result either in losses to
the Fund due to subsequent declines in value of the portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability of the Fund to the purchaser.
Transaction costs, including brokerage commissions and dealer mark-ups, in
emerging markets may be higher than in the U.S. and other developed securities
markets. As legal systems in emerging markets develop, foreign investors may be
adversely affected by new or amended laws and regulations. In circumstances
where adequate laws exist, it may not be possible to obtain swift and equitable
enforcement of the law.
Economic, Political and Social Factors. Emerging markets may be subject to
--------------------------------------
a greater degree of economic, political and social instability than the U.S.,
Japan and most Western European countries. Such instability may result from,
among other things: (i) authoritarian governments or military involvement in
political and economic decision-making, including changes or attempted changes
in government through extra-constitutional means; (ii) popular unrest associated
with demands for improved economic, political and social conditions; (iii)
internal insurgencies; (iv) hostile relations with neighboring countries; and
(v) ethnic, religious and racial disaffection and conflict. Many emerging
markets have experienced in the past, and continue to experience, high rates of
inflation. In certain countries inflation has at times accelerated rapidly to
hyperinflationary levels, creating a negative interest rate environment and
sharply eroding the value of outstanding financial assets in those countries.
The economies of many emerging markets are heavily dependent upon international
trade and are accordingly affected by protective trade barriers and the economic
conditions of their trading partners. In addition, the economies of some
emerging markets may differ unfavorably from the U.S. economy in such respects
as growth of gross domestic product, rate of inflation, capital reinvestment,
resources, self-sufficiency and balance of payments position.
Restrictions on Investment and Repatriation. Certain emerging markets
-------------------------------------------
require governmental approval prior to investments by
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<PAGE>
foreign persons or limit investments by foreign persons to only a specified
percentage of an issuer's outstanding securities or a specific class of
securities which may have less advantageous terms (including price) than
securities of the issuer available for purchase by nationals. Repatriation of
investment income and capital from certain emerging markets is subject to
certain governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect the operation
of a Fund.
SOVEREIGN DEBT OBLIGATIONS
Investments in sovereign debt obligations involves special risks not
present in corporate debt obligations. The issuer of the sovereign debt or the
governmental authorities that control the repayment of the debt may be unable or
unwilling to repay principal or interest when due, and a Fund may have limited
recourse in the event of a default. During periods of economic uncertainty, the
market prices of sovereign debt, and a Fund's net asset value, may be more
volatile than prices of debt obligations of U.S. issuers. In the past, the
governments of certain emerging markets have encountered difficulties in
servicing their debt obligations, withheld payments of principal and interest
and declared moratoria on the payment of principal and interest on their
sovereign debts.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from foreign governments, multinational agencies and other
entities to reduce principal and interest arrearages on their debt. The failure
of a sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of the third parties' commitments to lend funds to the sovereign
debtor, which may further impair such debtor's ability or willingness to timely
service its debts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Core, High Yield and Global
Income Funds 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.
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<PAGE>
At the maturity of a forward contract, Global Income Fund, High Yield 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, High Yield or Core Funds may enter into forward foreign
currency exchange contracts in several circumstances. First, when Global
Income, High Yield or Core Funds enter into a contract for the purchase or sale
of a security quoted or denominated in a foreign currency, or when Global
Income, High Yield or Core Funds anticipate the receipt in a foreign currency of
a dividend or interest payment on such a security which it holds, Global Income,
High Yield or Core Funds 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, High Yield or Core Funds will
attempt to protect themselves 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 U.S. 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 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 U.S. dollar value of only a portion of a Fund's foreign
assets.
Global Income, High Yield and Core Funds 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
Advisers determine that there is a pattern of correlation between the two
currencies. The Global Income, High Yield and Core Funds may also purchase and
sell
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<PAGE>
forward contracts to seek to increase total return when the Advisers anticipate
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 a Fund's portfolio.
Global Income, High Yield and Core Funds' custodian will place cash or
liquid assets, 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 and forward contracts entered into to seek 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 accounts will be marked-to-
market on a daily basis. Although the contracts are not presently regulated by
the Commodity Trading Futures Commission ("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, Core and High Yield Funds will not enter into a forward contract
with a term of greater than one year.
While Global Income, Core and High Yield Funds 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, Core and
High Yield Funds 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 quoted or
denominated in a particular currency and forward contracts entered into by
Global Income, Core and High Yield Funds. 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.
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<PAGE>
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, Adjustable Rate, Government Income, Short Duration Government,
Global Income and High Yield Funds may enter into mortgage swaps and Core, High
Yield and Global Income Funds may also enter into currency swaps. Each Fund may
enter into swap transactions for hedging purposes or 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, cap, floor and collar positions.
A Fund will enter into interest rate and mortgage swaps only on a net
basis, which means that the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate and mortgage swaps do not involve the delivery of
securities, other underlying assets or principal. Accordingly, the risk of loss
with respect to interest rate and mortgage swaps is limited to the net amount of
payments that a Fund is contractually obligated to make. If the other party to
an interest rate swap defaults, a Fund's risk of loss consists of the net amount
of payments that such Fund is contractually entitled to receive, if any. In
contrast, currency swaps usually involve the delivery of the entire principal
amount of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. 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 assets, 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. Inasmuch as these
transactions are entered into
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for hedging purposes or are offset by cash or liquid assets, as permitted by
applicable law, 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.
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 exchanges
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
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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 assets, as
permitted by applicable law, either of which, in the case of Global Income Fund,
Core Fund or High Yield 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
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 assets, as permitted
by applicable law, 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 composed of
securities in which it may invest. A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
options it had purchased.
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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 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, Global Income
----------------------------------------------------
and High Yield Funds may write covered put and call options and purchase put and
call options on foreign currencies in
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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, Core and High Yield Funds 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, Core and High Yield Funds
may purchase call options on currency to seek to increase total return when the
Advisers anticipate 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 included in the Fund's portfolios.
A call option written by Core, Global Income and High Yield Funds 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.
Core, Global Income and High Yield Funds would normally purchase call
options in anticipation of an increase in the U.S. 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, Global Income and High Yield Funds would normally purchase put
options in anticipation of a decline in the U.S. 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, Global Income and High Yield
Funds, 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 U.S. 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
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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,
Core, Global Income and High Yield Funds may use options on currency to seek to
increase total return. Global Income Fund, High Yield Fund and Core 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, High Yield and Core Funds may forego the opportunity to
profit from an increase in the market value of the underlying currency. Also,
when writing put options, Global Income, High Yield and Core Funds accept, 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, High Yield and Core Funds 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, High Yield and Core Funds 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, High Yield and Core Funds would
realize either no gain or a loss on the purchase of the call option. Put
options may be purchased by the Global Income, High Yield and Core Funds for
the purpose of benefiting from a decline in the value of currencies which it
does not own. Global Income, High Yield and Core Funds 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 Global Income, High Yield and Core Funds 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
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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 purposes (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 assets, as permitted by applicable law, 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 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
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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 to hedge against changes in interest
rates or securities prices or, in the case of Core, High Yield and Global Income
Funds, 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 various securities (such as U.S. Government
Securities), securities indices, foreign currencies in the case of Global
Income, Core and High Yield Funds and any other financial instruments and
indices. A Fund will engage in futures and related options transactions 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 traded 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).
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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, Global Income and High
Yield Funds 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 to seek to hedge
against an anticipated rise in interest rates or a decline in market prices or
foreign currency rates that would adversely affect the U.S. 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. Similarly,
Core Fund, High Yield 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 seek 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 Advisers, 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
Funds 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
a Fund enter into a greater or lesser number of futures contracts or by
attempting to achieve only a partial hedge against price changes affecting a
Fund's portfolio securities. When hedging of this character is successful, any
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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, a 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 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 financial
instrument. 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 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
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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
Internal Revenue Code of 1986, as amended (the "Code") for maintaining their
qualifications as regulated investment companies for federal income tax
purposes. See "Taxation."
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
establish with the custodian a segregated account consisting of cash or liquid
assets, as permitted by applicable law, 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 the
value of
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securities 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.
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 a Fund's portfolio are various futures on
U.S. Government Securities, securities indices and foreign currencies.
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 Fund. Each Fund will hold and
maintain in a segregated account until the settlement date cash or liquid
assets, as permitted by applicable law, 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, a Fund's
right to purchase or repurchase the mortgage-related securities subject to the
mortgage dollar roll may be restricted and the instrument which a Fund is
required to repurchase may be worth less than an instrument which a Fund
originally held. Successful use of mortgage dollar rolls will depend upon the
Adviser's ability to manage a Fund's interest rate and mortgage prepayments
exposure. For these reasons, there is no assurance that mortgage dollar rolls
can be successfully employed.
CONVERTIBLE SECURITIES
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Convertible securities include corporate notes or preferred stock but are
ordinarily 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 and High Yield Fund invest 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 a Fund would call the loan in anticipation of an important vote
to be taken among holders of the securities or the giving or withholding of
their consent on a material matter affecting the investment. As with other
extensions of credit there are risks of delay in recovering, or even loss of
rights in, the collateral should the borrower of 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.
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<PAGE>
However, a Fund will not invest more than 15% of its net 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
1933 Act 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 the Funds' portfolio 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 the 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.
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,
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<PAGE>
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 assets, 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 of 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 management fees payable
by the Fund to the Adviser will be reduced by an amount equal to the Fund's
proportionate share of the management fees paid by such money market fund to the
Adviser or any of its affiliates.
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 a Fund
or as being collateral for a loan by a 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
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<PAGE>
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 management agreements with the Advisers or their affiliates, may transfer
uninvested cash balances into a single joint account, the daily aggregate
balance of which will be invested in one or more repurchase agreements.
INVESTMENT RESTRICTIONS
The Trust has adopted the following investment restrictions on behalf of
the Funds, none of which may be changed without the approval of the holders of a
majority of the outstanding voting securities of the affected 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
Municipal Securities, are considered by the Trust not to be fundamental and
accordingly may be changed without shareholder approval. See "INVESTMENT
OBJECTIVES 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 asset coverage
requirement with respect to borrowings), any limitation which involves a maximum
percentage shall not be considered
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<PAGE>
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, A FUND MAY NOT:
(1) make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act of 1940, as
amended (the "Act"). This restriction does not, however, apply to
any Fund classified as a non-diversified company under the Act.
(2) invest more than 25% of its total assets in the securities of one or
more issuers conducting their principal business activities in the
same industry (excluding the U.S. government or its agencies or
instrumentalities). (For the purposes of this restriction, state and
municipal governments and their agencies, authorities and
instrumentalities are not deemed to be industries; telephone
companies are considered to be a separate industry from water, gas
or electric utilities; personal credit finance companies and
business credit finance companies are deemed to be separate
industries; and wholly-owned finance companies are considered to be
in the industry of their parents if their activities are primarily
related to financing the activities of their parents). This
restriction does not apply to investments in municipal securities
which have been pre-refunded by the use of obligations of the U.S.
government or any of its agencies or instrumentalities. Each of the
Municipal Income and Short Duration Tax-Free Funds 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. These municipal securities
include (a) municipal securities, the interest on which is paid
solely from revenues of similar projects such as hospitals, electric
utility systems, multi-family housing, nursing homes, commercial
facilities (including hotels), steel companies or life care
facilities, (b) municipal securities whose issuers are in the same
state and (c) industrial development obligations.
(3) borrow money, except (a) the Fund may borrow from banks (as defined
in the Act) or through reverse repurchase agreements in amounts up
to 33 1/3% or its total assets (including the amount borrowed), (b)
the Fund may, to
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<PAGE>
the extent permitted by applicable law borrow up to an additional 5%
of its total assets for temporary purposes, (c) the Fund may obtain
such short-term credits as may be necessary for the clearance of
purchases and sales of portfolio securities, (d) the Fund may
purchase securities on margin to the extent permitted by applicable
law and (e) the Fund may engage in transactions in mortgage dollar
rolls which are accounted for as financings.
(4) make loans, except through (a) the purchase of debt obligations 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 as permitted by
applicable law.
(5) underwrite securities issued by others, except to the extent that
the sale of portfolio securities by the Fund may be deemed to be an
underwriting.
(6)(a) for each Fund other than Core Fund, purchase, hold or deal in real
estate, although a Fund may purchase and sell securities that are
secured by real estate or interests therein, securities of real
estate investment trusts and mortgage-related securities and may
hold and sell real estate acquired by a Fund as a result of the
ownership of securities.
(6)(b) in the case of the Core Fund, 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.
(7) invest in commodities or commodity contracts, except that the Fund
may invest in currency and financial instruments and contracts that
are commodities or commodity contracts.
(8) issue senior securities to the extent such issuance would violate
applicable law.
Each Fund may, notwithstanding any other fundamental investment restriction
or policy, invest some or all of its assets in a single open-end investment
company or series thereof with substantially the same fundamental investment
objectives, restrictions and policies as the Fund.
In addition, as non-fundamental policies, a Fund may not:
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<PAGE>
(1) Invest in companies for the purpose of exercising control or
management.
(2) Invest 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.
(3) Purchase additional securities if the Fund's borrowings exceed
(excluding covered mortgage dollar rolls) 5% of its net assets.
(4) Make short sales of securities, except short sales against the box.
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 and Officers
deemed to be "interested persons" of the Trust for purposes of the Act are
indicated by an asterisk.
Ashok N. Bakhru, Age 53, 1325 Avenue of the Americas, 34th Floor, New York, New
York 10019. Chairman and Trustee. Executive Vice President-Finance and
--------------------
Administration and Chief Financial Officer, Coty Inc. (since April 1996);
President, ABN Associates, Inc. (June 1994 through March 1996); Senior Vice
President, Scott Paper Company (until June 1994); Director, Arkwright Mutual
Insurance Company; Trustee, International House of Philadelphia; Member of
Cornell University Council; Trustee of Walnut Street Theater.
David B. Ford,* Age 51, One New York Plaza, New York, New York 10004. Trustee.
-------
Managing Director, Goldman Sachs (since 1996); General Partner, Goldman Sachs,
(1986-1996); Co-Head of GSAM since December 1994.
Douglas C. Grip,* Age 35, One New York Plaza, New York, New York 10004.
President and Trustee. Vice President, Goldman Sachs since May 1996; President,
- ---------------------
MFS Retirement Services Inc., of Massachusetts Financial Services prior thereto.
John P. McNulty,* Age 44, One New York Plaza, New York, New York 10004.
Trustee. Managing Director, Goldman Sachs since 1996; General Partner of
- -------
Goldman Sachs from 1990 to 1994 and 1995-1996; Co-Head of GSAM since November
1996; Limited Partner of Goldman Sachs from 1994 to November 1995.
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<PAGE>
Mary P. McPherson, Age 60, Taylor Hall, Bryn Mawr College, Bryn Mawr, PA 19010.
Trustee. President of Bryn Mawr College since 1978; Director of Josiah Macy,
- -------
Jr. Foundation since 1977; Director of the Philadelphia Contributionship since
1985; Director of Amherst College since 1986; Director of Dayton Hudson
Corporation since 1988; Director of the Spencer Foundation since 1993; and
member of PNC Advisory Board since 1993.
Alan A. Shuch,* Age 48, One New York Plaza, New York, New York 10004. Trustee.
-------
Limited Partner, Goldman Sachs (since 1994); 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 66, One Northfield Plaza, #218, Northfield, Illinois
60093. Trustee. Chairman, Executive Committee, First Commonwealth, Inc. (a
-------
managed dental care company, since January 1996); Chairman and Chief Executive
Officer, MSP Communications Inc. (a company engaged in radio broadcasting) since
November 1988; Director, Federal Express Corporation since 1976; Evanston
Hospital Corporation (since 1980) and First Commonwealth,Inc. (since 1988) and
North American Private Equity Group (a venture capital fund).
William H. Springer, Age 67, 701 Morningside Drive, Lake Forest, Illinois 60045.
Trustee. Vice Chairman and Chief Financial and Administrative Officer,
- -------
Ameritech (a telecommunications holding company) from February 1987 to
retirement in June 1992; Director, Walgreen Co. (a retail drugstore business);
and Baker, Fentress & Co. (a closed-end non-diversified management investment
company) April 1992 to present.
Richard P. Strubel, Age 57, 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) from January 1984 to October
1994.
Pauline Taylor,* Age 50, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs since June 1992; Director of
- ---------
Shareholder Servicing since June 1992.
Nancy L. Mucker,* Age 47, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
John W. Mosior,* Age 58, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
Scott M. Gilman,* Age 37, One New York Plaza, New York, New York 10004.
Treasurer. Director, Mutual Funds Administration, GSAM since April 1994.
- ---------
Assistant Treasurer of Goldman Sachs Funds
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<PAGE>
Management, Inc. since March 1993. Vice President, Goldman Sachs since March,
1990.
John M. Perlowski,* Age 32, One New York Plaza, New York, New York 10004.
Assistant Treasurer. Vice President, Goldman, Sachs & Co., since July 1995.
- -------------------
Director/Fund Accounting & Custody, Investors Bank & Trust Co., November 1993 to
July 1995. Formerly, Manager, Audit Division, Arthur Andersen, September 1986 to
November 1993.
Michael J. Richman,* Age 36, 85 Broad Street, New York, New York 10004.
Secretary. Associate General Counsel of GSAM since February 1994; Vice
- ---------
President and Assistant General Counsel of Goldman Sachs; Counsel to the Funds
Group, GSAM since June 1992; Partner, Hale and Dorr from September 1991 to June
1992.
Howard B. Surloff,* Age 31, 85 Broad Street, New York, New York 10004. Assistant
---------
Secretary. Vice President and Assistant General 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, LLP prior
thereto.
Valerie A. Zondorak,* Age 31, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Vice President, Goldman Sachs (since March 1997); Counsel
- --------------------
to the Funds Group, GSAM (since March 1997); Associate of Shereff, Friedman,
Hoffman & Goodman, LLP (prior thereto).
Steven E. Hartstein*, Age 33, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Legal Products Analyst, Goldman Sachs since June 1993;
- -------------------
Funds Compliance Officer, Citibank Global Asset Management from August 1991 to
June 1993); Legal Assistant, Brown & Wood prior thereto.
Deborah A. Farrell*, Age 25, 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 36, One New York Plaza, New York, New York 10004.
Assistant Secretary. Vice President and Senior Portfolio Manager, GSAM since
- -------------------
1988.
Elizabeth D. Anderson*, Age 27, One New York Plaza, New York, New York 10004.
Assistant Secretary. Portfolio Manager, GSAM since April 1996; Junior Portfolio
- -------------------
Manager, Goldman Sachs 1995-1996. Funds Trading Assistant, GSAM 1993-1995.
Compliance Analyst, Prudential Insurance, from 1991 to 1993.
The Trustees and officers of the Trust hold comparable positions with
certain other investment companies of which Goldman Sachs, GSAM or GSFM is the
investment adviser, administrator and/or distributor. As of _______, 1997, the
Trustees and officers as a
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group owned less than 1% of the outstanding shares of beneficial interest of
each Fund.
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<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the one-year period ended October
31, 1996:
<TABLE>
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement from Goldman
Compensation Benefits Accrued Sachs Funds
from the as of Part of (including
Funds/1/ Trust's Expenses the Funds)/2/
------------ ---------------- --------------
<S> <C> <C> <C>
Name of Trustees
Ashok N. Bakhru $4,109 $0 $77,375
Marcia L. Beck/3/ $0 $0 $0
David B. Ford $0 $0 $0
Douglas C. Grip $0 $0 $0
Paul C. Nagel, Jr./4/ $2,525 $0 $50,500
Alan A. Shuch $0 $0 $0
Jackson W. Smart $3,169 $0 $65,750
William H. Springer $3,169 $0 $65,750
Richard P. Strubel $3,169 $0 $65,750
</TABLE>
/1/ Reflects amount paid by Goldman Sachs Trust, a Massachusetts business
trust, during fiscal year ended October 31, 1996.
/2/ The Goldman Sachs Funds consisted of 29 mutual funds, including the seven
series of the Trust, on October 31, 1996.
/3/ Resigned as of May 1, 1996.
/4/ Retired as of June 30, 1996.
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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, Short Duration Tax-Free Fund, High Yield Fund and
Core Fund pursuant to a management agreement. GSFM, 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 a management agreement. GSFM, a
Delaware limited partnership, is an affiliate of Goldman Sachs. GSAMI, 133
Peterborough Court, London EC4A 2BB, England, serves as investment adviser to
Global Income Fund pursuant to a management agreement. 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.
See "MANAGEMENT" in the Funds' Prospectuses for a description of the applicable
Adviser's duties as investment adviser.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
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, Brazil, Frankfurt, George Town, Hong Kong, London, Madrid, Mexico,
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. The Advisers manage money for
some of the world's largest institutional investors.
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
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<PAGE>
surveys conducted in the U.S. and abroad. Goldman Sachs is also among the
leading investment firms using quantitative analytics (now used by a growing
number of investors) to structure and evaluate portfolios. For example, Goldman
Sachs' options evaluation model analyzes each security's term, coupon and call
option, providing an overall analysis of the security's value 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 within 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 1996, has assembled an experienced team of
professionals for selection of the Tax Exempt Funds' portfolio securities.
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, High Yield Fund and Core Fund, the applicable Adviser
expects to utilize Goldman Sachs' sophisticated option-adjusted analytics to
help make strategic asset allocations within the markets for U.S. government,
Mortgage-Backed and other securities and to employ this technology periodically
to re-evaluate the Funds' investments as market conditions change. Goldman
Sachs has also developed a prepayment model designed to estimate mortgage
prepayments and cash flows under different interest rate scenarios. Because a
Mortgage-Backed Security incorporates the borrower's right to prepay the
mortgage, the Advisers use a sophisticated option-adjusted spread (OAS) model to
measure expected returns. A security's OAS is a function of the level and shape
of the yield curve, volatility and the applicable Adviser's expectation of how a
change in interest rates will affect prepayment levels. Since the OAS model
assumes a relationship between prepayments and interest rates, the Advisers
consider it a better way to measure a security's expected return and absolute
and relative values than yield to maturity. In using OAS
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<PAGE>
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 customers. Use of these services by the Advisers
with respect to a Fund does not preclude Goldman Sachs from providing these
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<PAGE>
services to third parties or using such services as a basis for trading for its
own account or the account of others.
The fixed-income research capabilities of Goldman Sachs 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 Adviser 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
Adviser 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 management agreement, (the "Management Agreements"), was most
recently approved by the Trustees of the Trust, including a majority of the
Trustees of the Trust who are not parties to such agreements or "interested
persons" (as such term is defined in the Act) of any party thereto (the "non-
interested Trustees"), on April 23, 1997. The applicable Fund's
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<PAGE>
Management 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 sole initial shareholder of Short Duration Tax-Free Fund on
September 25, 1992, the sole initial shareholder of Core Fund on October 29,
1993, and the shareholders of each other Fund on April 21, 1997. Each
Management Agreement will remain in effect until June 30, 1998 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 Management Agreement will terminate automatically if assigned (as
defined in the Act). Each Management 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 on 60 days' written notice of the Trust.
The Management Agreements provide that GSAM, GSFM and GSAMI, in their
capacity as advisers may each render similar services to others so long as the
services under the Management Agreements are not impaired thereby. Pursuant to
the Management Agreements, the Advisers are entitled to receive the fee set
forth below and the Advisers are currently limiting the fee to the rate set
forth below:
<TABLE>
<CAPTION>
Contractual Current
Fund Rate* Rate
- ---- ---- ----
<S> <C> <C>
GSAM
Municipal Income .55% .55%
Government Income .65% .25%
Short Duration Tax-Free .55% .40%
Core Fixed Income .55% .40%
High Yield .70% .65%
GSFM
Short Duration Government .65% .40%
Adjustable Rate Government .55% .40%
GSAMI
Global Income .90% .59%
- ----------------------------
</TABLE>
* The Contractual Rate is identical to the aggregate advisory and
administration fee rates payable by each Fund under the previous separate
advisory (including subadvisory in the case of Global Income Fund) and
administration agreements. For the fiscal year ended October 31, 1996, the
annual rate expressed is the combined advisory and administration fees paid
(after fee waivers). Such reduction or limits, if any, are calculated
B-69
<PAGE>
monthly on a cumulative basis and may be discontinued or modified by the
applicable Adviser at its discretion at any time, although they have no
current intention to do so.
For the fiscal years ended October 31, 1996, 1995 and 1994, the amounts of
the investment advisory and administration fees incurred by each Fund then in
existence were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Adjustable Rate Fund $2,535,709 $2,947,492 $6,798,185
Short Duration Government 411,360 517,091 1,063,867
Fund/(1)/
Short Duration Tax-Free Fund 169,796 260,970 468,868
Core Fund/(2)/ 246,568 137,158 56,255
Global Income Fund/(3)(6)/ 1,117,226 706,460 1,518,814
Government Income Fund/(4)(6)/ 74,060 44,037 0
Municipal Income Fund/(5)(6)/ 211,283 154,707 35,494
</TABLE>
_________________________
/(1)/ Had expense limitations not been in effect, Short Duration Government Fund
would have paid advisory fees of $514,200, $646,364 and $1,329,834,
respectively, for such years.
/(2)/ Core Fund commenced operations January 5, 1994.
/(3)/ For the same periods, Global Income Fund paid GSAMI subadvisory fees of
$837,920, $1,412,921 and $3,037,627, respectively. If expense limitations
had not been in effect, Global Income Fund would have paid advisory and
subadvisory fees of $1,474,204 and $491,401, respectively, for the year
ended October 31, 1996 and $789,127 and $1,578,254, respectively, for the
year ended October 31, 1995.
/(4)/ Had expense limitations not been in effect, Government Income Fund would
have paid advisory fees of $148,120, $101,737 and $65,604, respectively,
for such years.
/(5)/ Had expense limitations not been in effect for the years ended October 31,
1995 and 1994, Municipal Income Fund would have paid advisory fees of
$200,207 and $174,161, respectively, for such years.
/(6)/ Reflects combined fees under separate investment advisory and
administration agreements which were combined in a Management Agreement
effective May 1, 1997.
The fees and services under the Investment Advisory and Administration
Agreements are identical to the fees and services under the Management
Agreement.
Each Adviser performs administrative services for the applicable Funds
under the Management Agreement. Such
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<PAGE>
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 the agreement with the Trust's custodian, transfer and
dividend disbursing agent or agreements with other institutions, with personnel
to perform such executive, administrative and clerical services as are
reasonably necessary to provide effective administration of the Funds, (c)
arranging, to the extent not provided pursuant to such agreements, for the
preparation, at the Funds' expense, of each Fund's tax returns, reports to
shareholders, periodic updating of the Funds' prospectuses and statements of
additional information, and reports filed with the SEC and other regulatory
authorities, (d) providing the Funds, to the extent not provided pursuant to
such agreements, with adequate office space and certain related office equipment
and services, and (e) maintaining all of the Funds' records other than those
maintained pursuant to such agreements.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED
-------------------------------------------------------------------------
BY GOLDMAN SACHS. The involvement of the Advisers and Goldman Sachs and their
- ----------------
affiliates, in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect to
the Funds or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Advisers and their advisory affiliates have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
objectives similar to those of the Funds and/or which engage in transactions in
the same types of securities, 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 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.
B-71
<PAGE>
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 the Funds, the Advisers may have
access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf of the Funds in
accordance with such analysis and models. In addition, neither Goldman Sachs
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Funds. The proprietary activities or portfolio strategies of Goldman Sachs and
its affiliates or the activities or strategies used for accounts managed by them
or other customer accounts could conflict with the transactions and strategies
employed by the Advisers in 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
B-72
<PAGE>
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, High Yield and Core Funds, 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. At times, these activities may cause
departments of the Firm to give advice to clients that may cause these clients
to take actions adverse to the interest of the client. To the extent affiliated
transactions are permitted, the Funds will deal with Goldman Sachs and its
affiliates on an arm's-length basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of a Fund in order to increase the assets
of the Fund. Increasing a Fund's assets may enhance investment flexibility and
diversification and may contribute to economies of scale that tend to reduce a
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 a 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.
B-73
<PAGE>
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. 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, Class B and Class C Shares of each of the Funds that
offer such classes of shares. Goldman Sachs receives 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 and Class C Shares, of such Fund shares. No Class B Shares were
outstanding during the fiscal years ended October 31, 1994 and 1995. No Class C
Shares were outstanding during the fiscal years ended October 31, 1994, 1995 and
1996. Goldman Sachs retained approximately the following combined commissions
on sales of Class A and B shares during the following periods:
<TABLE>
<CAPTION>
1996** 1995* 1994
------- -------- --------
<S> <C> <C> <C>
Adjustable Rate Fund* $79,000 $40,000 N/A
Municipal Income Fund $24,900 $48,000 $ 76,000
Government Income Fund $17,300 $22,000 $ 5,000
Global Income Fund $52,600 $15,000 $350,000
- ---------------------
</TABLE>
* Prior to May 15, 1995 Adjustable Rate Fund did not offer Class A Shares.
** Prior to May 1, 1997, the Municipal, Government Income and Global Income
Funds did not offer Class B 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
B-74
<PAGE>
assumption by Goldman Sachs of the expenses related thereto, Goldman Sachs
received fees for the fiscal years ended October 31, 1996, 1995 and 1994 by each
Fund then in existence as follows:
Fund 1996 1995 1994
- ---- ------- ------- -------
Adjustable Rate Fund 278,337 306,662 679,819
Short Duration Government Fund 0 0 0
Short Duration Tax-Free Fund 16,980 26,098 46,887
Core Fund/(1)/ 24,657 13,716 5,637
Global Income Fund 121,212 106,764 132,123
Municipal Income Fund 90,284 63,695 70,811
Government Income Fund 72,237 94,095 57,960
- ------------------------
/(1)/ Core Fund commenced operations on January 5, 1994.
The foregoing distribution and transfer agency agreements each provide
that Goldman Sachs may render similar services to others so long as the services
each provides thereunder to the Funds are not impaired thereby. Each such
agreement also provides that the Trust will indemnify Goldman Sachs against
certain liabilities.
EXPENSES
- --------
Except as set forth in the Prospectuses under "MANAGEMENT" 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, 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-75
<PAGE>
The Advisers voluntarily have agreed to reduce or otherwise limit certain
Other Expenses (excluding management fees, fees payable under administration,
distribution, service and authorized dealer service plans, taxes, interest,
brokerage fees and litigation, indemnification, transfer agency fees (in the
case of Global Income Fund and High Yield Fund) 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%
High Yield Fund 0.01%
Such reductions or limits are calculated monthly on a cumulative
basis. Although the Advisers have no current intention of modifying or
discontinuing such expense limitations or the limitations on the management
fees, described above under "Management -- Investment Advisers," each may do so
in the future at its discretion. For the fiscal year ended October 31, 1996,
October 31, 1995 and October 31, 1994, Other Expenses of each Fund were reduced
by the Advisers in the following amounts:
1996 1995 1994
------- ------- -------
Adjustable Rate Fund 386,863 551,405 442,880
Short Duration
Government Fund 169,069 219,994 115,389
Short Duration
Tax-Free Fund 238,097 213,139 192,696
Core Fund* 233,065 176,469 141,815
Municipal Income Fund 238,203 196,265 198,806
Government Income Fund 219,091 242,036 224,285
Global Income Fund** 337,079 70,195 0
- ----------------------
* Core Fund commenced operations on January 5, 1994.
** For the fiscal year ended October 31, 1994, there was no expense
limitation.
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
- ----------------------------
B-76
<PAGE>
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, Core Fund
and High Yield Fund may invest are traded on exchanges at fixed commission
rates. In connection with portfolio transactions, the Management Agreement
provides that the Advisers shall attempt to obtain the best net price and the
most favorable execution. The Management Agreement provides that, on occasions
when an Adviser deems 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 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. The Management Agreement permits each Adviser, in its
discretion, to purchase and sell portfolio securities to and from dealers who
provide the Trust with brokerage or research services in which dealers may
execute brokerage transactions at a higher cost to the Fund. Brokerage and
research services furnished by firms through which the Fund's effect their
securities transactions may be used by the Advisers in servicing other accounts
and not all of these services may be used by the Adviser in connection with the
specific Fund generating the brokerage credits. The fees received under the
Management Agreement
B-77
<PAGE>
are not reduced by reason of the Adviser receiving such brokerage and research
services. In addition, in selecting brokers and dealers, the Advisers may take
into account sales of shares of the Funds and other funds in the Goldman Sachs
Group of Funds by such brokers and dealers.
For the fiscal years ended October 31, 1995 and 1994, the Funds then in
existence paid no brokerage commissions.
B-78
<PAGE>
For the fiscal year ended October 31, 1996, the Funds then in existence paid
brokerage commissions as follows:
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons Paid/3/ Research
=========== ================= ======================= ==========
<S> <C> <C> <C> <C>
Fiscal Year Ended
October 31, 1996:
Adjustable Rate Fund $108,000 $108,000(100%)/1/ $2,121,317,579(100%)/2/ $N/A
Short Duration Government Fund 24,000 24,000(100%)/1/ 447,205,928(100%)/2/ N/A
Short Duration Tax-Free Fund 1,000 1,000(100%)/1/ 8,559,280(100%)/2/ N/A
Core Fixed Income Fund 4,000 4,000(100%)/1/ 43,548,299(100%)/2/ N/A
Government Income Fund 1,200 1,200(100%)/1/ 24,437,288(100%)/2/ N/A
Municipal Income Fund 2,750 2,750(100%)/1/ 51,101,625(100%)/2/ N/A
</TABLE>
_______________________________
1 Percentage of total commissions paid.
2 Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
3 Refers to Market Value of Futures Contracts.
B-79
<PAGE>
During the fiscal year ended October 31, 1996, the Funds acquired and
sold securities of their regular broker-dealers: Chase Securities, Inc., Lehman
Brothers, Inc., Salomon Brothers, Inc., Merrill Lynch, Robert W. Baird, Daiwa
Securities, J.P. Morgan & Co., Inc., Donaldson, Lufkin, Jenrette, Nomura
Securities and Morgan Stanley & Co.
At October 31, 1996, Short Duration Tax-Free Fund, Global Income Fund
and Municipal Income Fund held no securities of their regular broker-dealers.
As of the same date, Short Duration Government Fund, Adjustable Rate Fund,
Government Income Fund and Core Fund held the following amounts of securities of
their regular broker-dealers, as defined in Rule 10b-1 under the 1940 Act, or
their parents ($ in thousands): Short Duration Government Fund: Lehman
Brothers, Inc. ($370), Nomura Securities ($280) and Bear Stearns ($280);
Adjustable Rate Fund: Lehman Brothers, Inc. ($4,531), Bear Stearns ($3,430) and
Nomura Securities ($3,430); Government Income Fund: Lehman Brothers, Inc.
($2,774), Nomura Securities (2,774) and Bear Stearns ($2,100); Nomura Securities
(2,774); Core Fund: Lehman Brothers, Inc. ($4,808), Nomura Securities ($3,640)
and Bear Stearns ($3,640).
SHARES OF THE TRUST
The Funds were reorganized from series of a Massachusetts business
trust as part of Goldman Sachs Trust, a Delaware business trust, by a
Declaration of Trust dated January 28, 1997 on April 30, 1997.
The Act requires that where more than one class or series of shares
exists, each class or series must be preferred over all other classes or series
in respect of assets specifically allocated to such class or series. The
Trustees have authority to classify and reclassify any series of shares into one
or more classes of shares. As of the date of this Additional Statement, the
Trustees have authorized: (i) the issuance of six classes of shares of Short
Duration Government Fund, Short Duration Tax-Free Fund and Core Fund:
Institutional Shares, Administration Shares, Service Shares, Class A Shares,
Class B Shares and Class C Shares; (ii) the issuance of four classes of shares
of Adjustable Rate Fund: Institutional Shares, Administration Shares, Service
Shares and Class A Shares; and (iii) the issuance of five classes of shares of
Global Income Fund, Government Income Fund, Municipal Income Fund and High Yield
Fund: Institutional Shares, Service Shares, Class A Shares, Class B Shares and
Class C Shares. As of October 31, 1996, no Service Shares of the Adjustable
Rate Fund were outstanding; no Class A, Class B or Class C Shares of Short
Duration Government Fund, Short Duration Tax-Free Fund and Core Fund were
outstanding; no Class C Shares of Government Income Fund and Municipal Income
Fund were outstanding; and no shares of High Yield Fund were outstanding.
B-80
<PAGE>
Each Institutional Share, Administration Share, Service Share, Class A
Share, Class B Share and Class C Share of a Fund represents a proportionate
interest in the assets belonging to the applicable class of the Fund. All
expenses of a Fund are borne at the same rate by each class of shares, except
that fees under Administration and Service Plans are borne exclusively by
Administration and Service Shares, fees under Distribution and Authorized Dealer
Service Plans are borne exclusively by Class A, Class B or Class C Shares and
transfer agency fees are borne at different rates by Class A, Class B or Class C
Shares than Institutional, Administration and Service Shares. The Trustees may
determine in the future that it is appropriate to allocate other expenses
differently between classes of shares and may do so to the extent consistent
with the rules of the SEC and positions of the Internal Revenue Service. Each
class of shares may have different minimum investment requirements and be
entitled to different shareholder services. Currently, shares of a class may
only be exchanged for shares of the same or an equivalent class of another fund.
See "Exchange Privilege" in the Prospectus.
Institutional Shares may be purchased at net asset value without a
sales charge 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 at net asset value without a sales
charge for accounts held in the name of an institution that, directly or
indirectly, provides certain account administration and shareholder liaison
services to its customers, including maintenance of account records and
processing orders to purchase, redeem and exchange Service Shares. Service
Shares bear the cost of account administration fees at the annual rate of up to
0.50% of the average daily net assets of the Fund attributable to Service
Shares.
Class A Shares are sold, with an initial sales charge, 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.
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Class B Shares of the Funds are sold subject to a contingent deferred
sales charge 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.
Class C Shares of the Funds are sold subject to a contingent deferred
sales charge of up to 1.0% 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 C 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 C Shares. Class C
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 C Shares.
It is possible that an institution or its affiliate may offer
different classes of shares (i.e., Institutional, Administration, Service, Class
A, Class B and Class C Shares) to its customers and thus receive different
compensation with respect to different classes of shares of each Fund.
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 share, are freely transferable and have no preemptive, subscription or
conversion rights.
As of July 15, 1997, the following entities and persons beneficially
owned 5% or more of the outstanding shares of the following Funds: Adjustable
Rate Fund:
Short Duration Government Fund:
Short Duration Tax-Free Fund:
Government Income Fund:
Core Fund:
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Rule 18f-2 under the Act provides that any matter required to be
submitted by the provisions of the Act, applicable state law or otherwise to the
holders of the outstanding voting securities of an investment company (such as
the Trust) shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each class or
series affected by such matter. Rule 18f-2 further provides that a class or
series shall be deemed to be affected by a matter unless the interests of each
class or series in the matter are substantially identical or the matter does not
affect any interest of such class or series. However, Rule 18f-2 exempts the
selection of independent public accountants, the approval of principal
distribution contracts and the election of Trustees from the separate voting
requirements of Rule 18f-2.
The Trust is not required to hold annual meetings of shareholders and
does not intend to hold such meetings. In the event that a meeting of
shareholders is held, each share of the Trust will be entitled, as determined by
the Trustees, either to one vote for each share or to one vote for each dollar
of net asset value represented by such shares on all matters presented to
shareholders including the election of Trustees (this method of voting being
referred to at "dollar based voting"). However, to the extent required by the
Act or otherwise determined by the Trustees, series and classes of the Trust
will vote separately from each other. Shareholders of the Trust do not have
cumulative voting rights in the election of Trustees. Meetings of shareholders
of the Trust, or any series or class thereof, may be called by the Trustees,
certain officers or upon the written request of holders of 10% or more of the
shares entitled to vote at such meetings. The shareholders of the Trust will
have voting rights only with respect to the limited number of matters specified
in the Declaration of Trust and such other matters as the Trustees may determine
or may be required by law.
The Declaration of Trust provides for indemnification of Trustees,
officers and agents of the Trust unless the recipient is adjudicated (i) to be
liable by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such person's office or (ii)
not to have acted in good faith in the reasonable belief that such person's
actions were in the best interest of the Trust. The Declaration of Trust
provides that, if any shareholder or former shareholder of any series is held
personally liable solely by reason of being or having been a shareholder and not
because of the shareholder's acts or omissions or for some other reason, the
shareholder or former shareholder (or heirs, executors, administrators, legal
representatives or general successors) shall be held harmless from and
indemnified against all loss and expense arising from such liability. The
Trust, acting on behalf of any affected series, must, upon request by such
shareholder, assume the defense of any claim made against such shareholder for
any act or obligation of the series and satisfy any judgment thereon from the
assets of the series.
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The Declaration of Trust permits the termination of the Trust or of
any series or class of the Trust (i) by a majority of the affected shareholders
at a meeting of shareholders of the Trust, series or class; or (ii) by a
majority of the Trustees without shareholder approval if the Trustees determine
that such action is in the best interest of the Trust or its shareholders. The
factors and events that the Trustees may take into account in making such
determination include (i) the inability of the Trust or any successor series or
class to maintain its assets at an appropriate size; (ii) changes in laws or
regulations governing the Trust, series or class or affecting assets of the type
in which it invests; or (iii) economic developments or trends having a
significant adverse impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder
approval to cause the Trust, or any series thereof, to merge or consolidate with
any corporation, association, trust or other organization or sell or exchange
all or substantially all of the property belonging to the Trust or any series
thereof. In addition, the Trustees, without shareholder approval, may adopt a
master-feeder structure by investing all or a portion of the assets of a series
of the Trust in the securities of another open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration
of Trust without a shareholder vote. However, shareholders of the Trust have
the right to vote on any amendment (i) that would affect the voting rights of
shareholders; (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). Series
Trustees may, but are not required to, serve as Trustees of the Trust or any
other series or class of the Trust. The Series Trustees have, to the exclusion
of any other Trustees of the Delaware Trust, all the powers and authorities of
Trustees under the Trust Instrument with respect to any other series or class.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Delaware law, the shareholders of the Funds are not generally
subject to liability for the debts or obligations of the Trust. Similarly,
Delaware law provides that a series of the Trust will not be liable for the
debts or obligations of any other series of the Trust. However, no similar
statutory or other authority limiting business trust shareholder liability
exists in other states. As a result, to the extent that a Delaware business
trust or a shareholder is subject to the jurisdiction of courts of such other
states, the courts may not apply Delaware law and may thereby subject the
Delaware business trust shareholders to liability. To guard against this risk,
the Declaration of Trust contains an express disclaimer of shareholder liability
for acts or obligations
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of a Fund. Notice of such disclaimer will normally be given in each agreement,
obligation or instrument entered into or executed by a series or the Trustees.
The Declaration of Trust provides for indemnification by the relevant Fund for
all loss suffered by a shareholder as a result of a obligation of the series.
The Declaration of Trust also provides that a series shall, upon request, assume
the defense of any claim made against any shareholder for any act or obligation
of the series and satisfy any judgment thereon. In view of the above, the risk
of personal liability of shareholders is remote.
In addition to the requirement under Delaware law, the Declaration of
Trust provides that shareholders of a series may bring a derivative action on
behalf of the series only if the following conditions are met: (a) shareholders
eligible to bring such derivative action under Delaware law who hold at least
10% of the outstanding shares of the series, or 10% of the outstanding shares of
the series or class to which such action relates, shall join in the request for
the Trustees to commence such action; and (b) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and to
investigate the basis of other advisers in considering the merits of the request
and shall require an undertaking by the shareholders making such request to
reimburse the Fund for the expense of any such advisers in the event that the
Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not
be liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason or willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
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 are valued under valuation procedures established by the Trustees.
Portfolio securities, other than money market instruments and with the exception
of Global Income Fund, for which accurate market quotations are readily
available are valued as follows: (a) via electronic feeds to the custodian bank
containing dealer-supplied bid quotations or bid quotations
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from a nationally recognized pricing service; (b) securities for which the
custodian bank is unable to obtain an external price or with respect to which
the Adviser believes an external price does not reflect accurate market values,
will be valued by the Adviser in good faith based on valuation models that take
into account daily spread and yield changes on U.S. Treasury securities (i.e.,
matrix pricing); (c) overnight repurchase agreements will be valued by the
Adviser at cost; (d) term repurchase agreements (i.e., those whose maturity
exceeds seven days) and interest rate swaps, caps, collars and floors will be
valued at the average of the bid quotations obtained daily from at least two
dealers or, for term repurchase agreements, recognized counterparties; (e) debt
securities with a remaining maturity of 60 days or less are valued by the
Adviser at amortized cost, which the Trustees have determined to approximate
fair value; (f) spot and forward foreign currency exchange contracts will be
valued using a pricing service such as Reuters then calculating then mean
between the last bid and asked quotations supplied by certain independent
dealers in such contracts; (g) exchange-traded options and futures contracts
will be valued by the custodian bank at the last sale price on the exchange
where such contracts and options are principally traded; and (h) over-the-
counter options will be valued by an independent unaffiliated broker identified
by the portfolio manager/trader and contacted by the custodian bank.
Portfolio securities of the Global Income Fund for which accurate
market quotations are available are valued as follows: (a) securities listed on
any U.S. or foreign stock exchange or on the National Association of Securities
Dealers Automated Quotations System ("NASDAQ") will be valued at the last sale
price on the exchange or system in which they are principally traded, on the
valuation date. If there is no sale on the valuation day, securities traded
principally: (i) on a U.S. exchange or NASDAQ will be valued at the mean between
the closing bid and asked prices, and (ii) on a foreign exchange will be valued
at the official bid price. The last sale price and official bid price for
securities traded principally on a foreign exchange will be determined as of the
close of the London Foreign Exchange; (b) over-the-counter securities not quoted
on NASDAQ will be valued at the last sale price on the valuation day or, if no
sale occurs, at the mean between the last bid and asked prices; (c) options and
futures contracts will be valued at the last sale price in the market where such
contract is principally traded; and (d) forward foreign currency exchange
contracts will be valued at the mean between the last bid and asked quotations
supplied by a dealer in such contracts.
All other securities, including those for which a pricing service
supplies no exchange quotation or a quotation that is believed by the portfolio
manager/trader to be inaccurate; will be valued at fair value as stated in the
valuation procedures which were approved 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
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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, Core and High
Yield Funds calculate their net asset value. 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
may 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 or intends to qualify and elect 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 gross
income (including tax-exempt interest) for its taxable year 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
gross income for its taxable year from the sale or other disposition of any of
the following which was held for less than three months: (i) stock or
securities,
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(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 stocks or securities (the "short-short
test"); and (c) a Fund diversify its holdings so that, at the close of each
quarter of its taxable year, (i) at least 50% of the market value of its total
(gross) assets is comprised of cash, cash items, United States Government
Securities, securities of other regulated investment companies and other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the value of the Fund's total assets and to not more than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total (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 a
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 and other 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, certain net realized foreign exchange gains, 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
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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,
that 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 that Fund against their U.S. federal income tax liabilities, if any,
and to claim refunds to the extent the credit exceeds such liabilities. For
U.S. federal income tax purposes, the tax basis of shares owned by a shareholder
of the Fund will be increased by an amount equal under current law to 65% of the
amount of undistributed net capital gain included in the shareholder's gross
income. Each Fund intends to distribute for each taxable year 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 or Core Fund and may therefore make it more
difficult for Global Income Fund or Core Fund to satisfy the distribution
requirements described above, as well as the excise tax distribution
requirements described below. However, Global Income Fund and Core Fund
generally expect 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 (if any) 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 capital gains, if any,
during the eight years following the year of the loss. At October 31, 1996, the
Funds had approximately the following amounts of capital loss carry forwards:
Years of
Amount Expiration
----------- ----------
Adjustable Rate Fund $47,923,000 2000-2003
Short Duration
Government Fund $13,272,000 2002-2003
Short Duration
Tax-Free Fund $ 4,271,000 2002-2003
Core Fixed Income Fund $ 77,000 2004
Global Income Fund $ 4,472,000 2002
Municipal Income Fund $ 1,535,000 2002
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These amounts are available to be carried forward to offset future capital
gains to the extent permitted by the Code and applicable tax 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
capital gains over its 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 capital gains over capital losses for the
prior year that were not distributed during such year and on which the Fund did
not pay federal income tax. The Funds anticipate that they will generally make
timely distributions of income and capital gains in compliance with these
requirements so that they will generally not be required to pay the excise tax.
For federal income tax purposes, dividends declared by a Fund in October,
November or December as of a record date in such a month which are actually paid
in January of the following year will be treated as if they were 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. Each of the Tax Exempt Funds intends to take
the position that it
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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 these
Funds, 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 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.
These provisions may require a Fund to recognize income or gains without a
concurrent receipt of cash. Any gain or loss recognized on actual or deemed
sales of these futures contracts, forward 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, that
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 and instruments 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
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(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,
High Yield 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 and Global Income, and High Yield Funds 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 in some cases. 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 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 by such shareholders, 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 the amounts they are
required to distribute.
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
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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 may not be able to
claim a credit for the full amount of their proportionate shares of the foreign
taxes paid by the 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, or Global Income or High Yield Funds acquire stock (including,
under proposed regulations, an option to acquire stock such as is inherent in a
convertible bond) in certain foreign corporations that receive at least 75% of
their annual gross income from passive sources (such as interest, dividends,
rents, royalties or capital gain) or hold at least 50% of their assets in
investments producing such passive income ("passive foreign investment
companies") Core, Global Income or High Yield Funds 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, Global Income or High Yield
Funds is timely distributed to its shareholders. Core, Global Income or High
Yield Funds would not be able to pass through to their 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, Global
Income or High Yield Funds to recognize taxable income or gain without the
concurrent receipt of cash. Core, Global Income or High Yield Funds may limit
and/or manage their 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 obtain cash to enable it 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.
B-93
<PAGE>
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 applicable 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 compliance with federal tax requirements.
Tax laws not only limit the purposes for which tax-exempt bonds may be issued
and the supply of such bonds, but also contain numerous and complex 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 a 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
B-94
<PAGE>
"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 such 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 a 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 a corporate shareholder's
liability, if any, for corporate alternative minimum tax, and will be taken into
account in determining the extent to which a shareholder's Social Security or
certain railroad retirement benefits are taxable.
ALL FUNDS. Distributions from 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 in limited instances, including
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
B-95
<PAGE>
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.
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 in
a transaction that is treated as a sale for tax purposes, 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, 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, subject to the rules
described below. Shareholders should consult their own tax advisers with
reference to their particular circumstances to determine whether a redemption
(including an exchange) or other disposition of Fund Shares is properly treated
as a sale for tax purposes, as is assumed in this discussion. 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
B-96
<PAGE>
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 Tax-Free or Municipal Income Funds 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, each of 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 such 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 Short Duration Tax-Free Fund or Municipal
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
B-97
<PAGE>
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 the
applicable Fund reasonably estimates that at least 95% of its distributions will
be exempt-interest dividends. A Fund may refuse to accept an application that
does not contain any required taxpayer identification number or certification
that the number provided is correct. If the backup withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in shares, will be reduced by the amounts required to be withheld.
Any amounts withheld may be credited against a shareholder's U.S. federal income
tax liability. Investors should consult their tax advisers about the
applicability of the backup withholding provisions.
NON-U.S. SHAREHOLDERS
The foregoing discussion relates solely to U.S. federal income tax law as
it applies to "U.S. persons" (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates) subject to tax under
such law. Dividends from investment company taxable income distributed by a
Fund to a shareholder who is not a U.S. person will be subject to U.S.
withholding tax at the rate of 30% (or a lower rate provided by an applicable
tax treaty) unless the dividends are effectively connected with a U.S. trade or
business of the shareholder, in which case the dividends will be subject to tax
on a net income basis at the graduated rates applicable to U.S. individuals or
domestic corporations. Distributions of net capital gain, including amounts
retained by a Fund which are designated as undistributed capital gains, to a
shareholder who is not a U.S. person will not be subject to U.S. federal 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 capital 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
B-98
<PAGE>
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 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.
B-99
<PAGE>
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 and Class C 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 each Fund is subject to different fees and expenses and
may have different returns for the same period. Any performance data for Class
A, Class B or Class C Shares which is based upon a Fund's net asset value per
share would be reduced if a sales charge were taken into account.
B-100
<PAGE>
YIELD
<TABLE>
<CAPTION>
Investment SEC 30-Day Pro-Forma
Fund Period Yield Yield/1/
- -------------------------------- ----------- ----------- ---------
<S> <C> <C> <C>
30-Days
ended
10/31/96
ADJUSTABLE RATE FUND
Institutional Shares 6.00% 5.94%
Administration Shares 5.75% 5.69%
Service Shares/2/
Class A Shares
- Assumes 1.5% sales charge 5.66% 5.35%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.43% 6.16%
Administration Shares 6.19% 5.93%
Service Shares 5.96% 5.71%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.34% 3.71%
Administration Shares 4.09% 3.42%
Service Shares 3.84% 3.22%
CORE FUND
Institutional Shares 6.60% 6.25%
Administration Shares 6.37% 6.03%
Service Shares 6.12% 5.78%
GLOBAL INCOME FUND
Institutional Shares 5.20% 4.76%
Service Shares/2/
Class A Shares
(Assumes 4.5% sales charge) 4.54% 4.08%
Class B Shares 4.23% 3.80%
MUNICIPAL INCOME FUND
Class A Shares 4.21% 3.56%
(assumes 4.5% sales charge)
Class B Shares 3.68% 3.25%
GOVERNMENT INCOME FUND
Class A Shares 6.04% 4.76%
(assumes 4.5% sales charge)
Class B Shares 5.57% 4.48%
</TABLE>
B-101
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION RATE
<S> <C> <C> <C>
30 Day Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate/1/
- -------------------------------- ------------------ ----------- ------------
30-Days
ended
10/31/96
ADJUSTABLE RATE FUND
Institutional Shares 5.87% 5.81%
Administration Shares 5.62% 5.56%
Service Shares/2/
Class A Shares
- Assumes no sales charge 5.62% 5.31%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.24% 5.97%
Administration Shares 6.00% 5.72%
Service Shares 5.78% 5.49%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.19% 3.56%
Administration Shares 3.94% 3.28%
Service Shares 3.69% 3.06%
MUNICIPAL INCOME FUND
Class A Shares 4.27% 3.59%
-assumes no sales charge
Class B Shares 3.53% 3.09%
GOVERNMENT INCOME FUND
Class A Shares 6.33% 5.00%
-assumes no sales charge
Class B Shares 5.58% 4.50%
CORE FUND
Institutional Shares 6.46% 6.12%
Administration Shares 6.23% 5.89%
Service Shares 5.98% 5.63%
GLOBAL INCOME FUND
Institutional Fund 5.95% 6.18%
Service Shares/2/
Class A Shares
- Assumes no sales charge 5.44% 4.96%
Class B Shares 5.02% 4.59%
</TABLE>
B-102
<PAGE>
TAX-EQUIVALENT YIELD/6/
<TABLE>
<CAPTION>
Pro-Forma
Investment Tax-Equivalent Tax-Equivalent
Fund Period Rate Yield/1/
- ---------------------------- --------------------- ------------- -----------------
<S> <C> <C> <C>
30-Days
ended
10/31/96
SHORT DURATION
TAX-FREE FUND/3/
Institutional Shares 6.94% 5.89%
Administration Shares 6.52% 5.43%
Service Shares 6.11% 5.07%
MUNICIPAL INCOME FUND/3/
Class A Shares 7.07% 5.94%
-assumes no sales charge
Class B Shares 5.84% 5.12%
_______________________________
</TABLE>
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 outstanding during the periods indicated.
3 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.
The above tables should not be considered a representation of future
performance.
B-103
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
-------------------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Expense Expense
Fund Date Investment Period Limitations Limitations
- -------------------------------- ---------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
ADJUSTABLE RATE FUND
Institutional Shares 7/17/91/1a/ ended 10/31/96 5.32% 5.19%
11/1/95 one year ended
10/31/96 6.86% 6.80%
11/1/91 five years ended
10/31/96 5.13% 5.05%
Administration Shares 4/15/93/1b/ ended 10/31/96 4.69% 4.64%
11/1/95 one year ended
10/31/96 6.60% 6.53%
Service Shares/1c/ N/A N/A
Class A Shares 5/12/95/1d/ ended 10/31/96
Assumes 1.5% Sales Charge 5.29% 4.96%
Assumes No Sales Charge 6.40% 6.07%
11/1/95 one year ended
Assumes 1.5% Sales Charge 10/31/96 4.99% 4.66%
Assumes No Sales Charge 6.60% 6.27%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 8/15/88/2a/ ended 10/31/96 7.24% 6.84%
11/1/95 one year ended
10/31/96 6.75% 6.47%
11/1/91 five years
ended 10/31/96 5.67% 5.44%
Administration Shares 2/28/96/2b/ ended 10/31/96 4.00% 3.82%
Service Shares 4/10/96/2b/ ended 10/31/96 4.35% 4.20%
</TABLE>
B-104
<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 10/31/96 4.21% 3.71%
11/1/95 one year ended
10/31/96 4.50% 3.92%
Administration Shares 5/20/93/3b/ ended 10/31/96 3.51% 3.15%
11/1/95 one year ended
10/31/96 4.24% 3.66%
Service Shares 9/20/94/3c/ ended 10/31/96 4.36% 3.92%
11/1/95 one year ended
10/31/96 3.98% 3.40%
CORE FUND
Institutional Shares 1/15/94/4a/ 10/31/96 6.34% 5.70%
11/1/95 one year ended
10/31/96 5.98% 5.58%
Administration Shares 2/28/96/4b/ ended
10/31/96 3.56% 3.29%
Service Shares 3/13/96/4b/ ended
10/31/96 4.90% 4.69%
</TABLE>
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>
GLOBAL INCOME FUND/5C/
Class A Shares 8/2/91/5a/ ended 10/31/96
Assumes 4.5% Sales Charge 7.08% 6.76%
Assumes No Sales Charge 8.02% 7.71%
Assumes 4.5% Sales Charge 11/1/95 one year 6.08% 5.57%
Assumes No Sales Charge ended 10/31/96 11.05% 10.53%
Assumes 4.5% Sales Charge 11/1/91 five years 7.02% 6.73%
Assumes No Sales Charge ended 10/31/96 8.01% 7.69%
Class B Shares/5b/ 5/1/96 ended 10/31/96/5d/ 6.24% 6.01%
Institutional Shares 8/1/95/5e/ ended 10/31/96 12.95% 12.45%
11/1/95 one year
ended 10/31/96 11.55% 11.05%
Service Shares/5f/
MUNICIPAL INCOME FUND
Class A Shares 7/20/93/6a/ ended 10/31/96
Assumes 4.5% Sales Charge 3.80% 2.78%
Assumes No Sales Charge 5.27% 4.23%
11/1/95 ended 10/31/96
Assumes 4.5% Sales Charge 1.35% 0.65%
Assumes No Sales Charge 6.13% 5.40%
Class B Shares/6b/ 5/1/96 ended 10/31/96 4.40% 4.07%
</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>
GOVERNMENT INCOME FUND
Class A Shares 2/10/93/7a/ ended 10/31/96
Assumes 4.5% Sales Charge 5.41% 2.92%
Assumes No Sales Charge 6.72% 4.21%
11/1/95 ended 10/31/96
Assumes 4.5% Sales Charge 1.06% -0.33%
Assumes No Sales Charge 5.80% 4.35%
Class B Shares/7b/ 5/1/96 ended 10/31/96 4.85% 4.17%
- ----------------
</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 of Adjustable Rate Fund commenced operations on May 12,
1995.
2a Institutional Shares of Short Duration Government Fund commenced
operations on August 15, 1988.
2b Administration Shares of Short Duration Government Fund commenced
operations on February 28, 1996. Service Shares of Short Duration
Government Fund commenced operations on April 10, 1996. An aggregate
total return (not annualized) is shown instead of an average annual
total return since Administration and Service Shares have not
completed a full 12 months of operation as of October 31, 1996.
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 Administration Shares of Core Fund commenced operations on February
28, 1996. Service Shares of Core Fund commenced operations on March
13, 1996. An aggregate total return (not annualized) is shown instead
of an average annual total return since Administration and Service
Shares have not completed a full 12 months of operation as of October
31, 1996.
5a Class A Shares of Global Income Fund commenced operations on August 2,
1991.
5b Class B Shares of Global Income Fund commenced operations on May 1,
1996.
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 Class B Shares have not completed a
full 12 months of operation as of October 31, 1996.
5e Institutional Shares of Global Income Fund commenced operations on
August 1, 1995.
5f No Service Shares of Global Income Fund were outstanding during the
periods indicated.
6a Class A shares of Municipal Income Fund commenced operations on July
20, 1993.
6b Class B Shares of Municipal Income Fund commenced operations on May 1,
1996. An aggregate total return (not annualized) is shown instead of
an average annual total return since Class B Shares have not completed
a full 12 months of operation as of October 31, 1996.
B-107
<PAGE>
7a Class A Shares of Government Income Fund commenced operations on
February 10, 1993.
7b Class B Shares of Government Income Fund commenced operations on May
1, 1996. An aggregate total return (not annualized) is shown instead
of an average annual total return since Class B Shares have not
completed a full 12 months of operation as of October 31, 1996.
The above table should not be considered a representation of future
performance.
B-108
<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, Government Income and Short Duration
Government Funds 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 and Municipal Income Funds may from time to
time advertise their 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, Global Income and High Yield Funds may each from time to time
advertise its performance relative to certain indices and benchmark investments,
including: (a) the Lipper Analytical Services, Inc. Mutual Fund Performance
Analysis, Fixed Income
B-109
<PAGE>
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 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.
The Trust 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;
B-110
<PAGE>
.. 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 Trust 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.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed by GSAM and/or its affiliates,
certain attributes or benefits to be derived from asset allocation strategies
and the Goldman Sachs mutual funds that may be offered as investment options for
the strategic asset allocations. Such advertisements and information may also
include GSAM's current economic outlook and domestic and international market
views to suggest periodic tactical modifications to current asset allocation
strategies. Such advertisements and information may include other material
which highlight or summarize the services provided in support of an asset
allocation program.
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
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
B-111
<PAGE>
asset value of each respective Fund at the time of redemption by a distribution
in kind of securities (instead of cash) from such Fund. The securities
distributed in kind would be readily marketable and would be valued for this
purpose using the same method employed in calculating each Fund's net asset
value per share. See "Net Asset Value." If a shareholder receives redemption
proceeds in kind, the shareholder should expect to incur transaction costs upon
the disposition of the securities received in the redemption.
The right of a shareholder to redeem shares and the date of payment by a
Fund may be suspended for more than seven days for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or when trading on such Exchange is restricted as determined by the
SEC; or during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for a Fund to dispose of securities owned by it or
fairly to determine the value of its net assets; or for such 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 1996 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 back cover of each Fund's Prospectus. Unaudited
financial statements for each Fund for the six months ended April 30, 1997 are
also attached hereto.
B-112
<PAGE>
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.
Authorized Dealers and other financial intermediaries provide varying
arrangements for their clients to purchase and redeem Fund shares. Some may
establish higher minimum investment requirements and others may limit the
availability of certain privileges with respect to the purchase and redemption
of shares or the reinvestment of dividends. Firms may arrange with their
clients for other investment or administrative services and may independently
establish and charge additional amounts to their clients for such services,
which charges would reduce a client's return. If shares of a Fund are held in a
"street name" account or were purchased through an Authorized Dealer,
shareholders should contact the Authorized Dealer to purchase, redeem or
exchange shares, to make changes in or give information about the account.
The Adviser, Distributor and/or their affiliates may pay, out of their own
assets, compensation to Authorized Dealers and other persons for the sale and
distribution of Class A, Class B and Class C Shares of the Funds and/or for the
servicing of those shares. These payments ("Additional Payments") would be in
addition to the payments by the Funds described in the Funds' Prospectus and
this Statement of Additional Information for distribution and shareholder
servicing and processing, and would also be in addition to the sales commissions
payable to dealers as set forth in the Prospectus. These Additional Payments
may take the form of "due diligence" payments for an Authorized Dealer's
examination of the Funds and payments for providing extra employee
B-119
<PAGE>
training and information relating to the Funds; "listing" fees for the placement
of the Funds on a dealer's list of mutual funds available for purchase by its
customers; "finders" or "referral" fees for directing investors to the Funds;
"marketing support" fees for providing assistance in promoting the sale of the
Funds' Class A, Class B and Class C Shares; and payments for the sale of Class
A, Class B and Class C Shares and/or the maintenance of Shares balances. In
addition, the Adviser, Distributor and/or their affiliates may make Additional
Payments for subaccounting, administrative and/or shareholder processing
services that are in addition to the shareholder servicing and processing fees
paid by the Funds. The Additional Payments made by the Adviser, Distributor and
their affiliates may be a fixed dollar amount, may be based on the number of
customer accounts maintained by an Authorized Dealer, or may be based on a
percentage of the value of Shares sold to, or held by, customers of the
Authorized Dealers involved, and may be different for different Authorized
Dealers. Furthermore, the Adviser, Distributor and/or their affiliates may
contribute to various non-cash and cash incentive arrangements to promote the
sale of shares, as well as sponsor various educational programs, sales contests
and/or promotions in which participants may receive prizes such as travel
awards, merchandise and cash and/or investment research pertaining to particular
securities and other financial instruments or to the securities and financial
markets generally, educational information and related support materials and
hardware and/or software. The Adviser, Distributor and their affiliates may also
pay for the travel expenses, meals, lodging and entertainment of Authorized
Dealers and their salespersons and guests in connection with educational, sales
and promotional programs, subject to applicable NASD regulations. The
Distributor currently expects that such additional bonuses or incentives will
not exceed 0.50% of the amount of any sales.
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 Fund (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 the Government Income 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 Fund
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,
B-120
<PAGE>
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 Fund 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 of the Funds
and Class A Shares of any other Goldman Sachs Fund 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, certain affinity groups 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, group'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 ($500,000 in the
case of Adjustable Rate Government Fund and $250,000 in the case of Short
Duration Government and Short Duration Tax-Free Funds) of Class A Shares of a
Fund alone or in combination with Class A Shares of any other Goldman Sachs Fund
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.
B-121
<PAGE>
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
=================================================
A Fund shareholder should obtain and read the prospectus relating to any
other Goldman Sachs Fund 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 Goldman Sachs Funds 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 Fund and its shares and consider its investment objective,
policies and applicable fees and expenses before electing an automatic exchange
into that Goldman Sachs Fund.
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, Class B or Class C Shares
B-122
<PAGE>
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, Class B
and Class C Shares. The CDSC applicable to Class B and Class C 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 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 Government Fund, Municipal Fund, Core Fund and Global
Income Fund are sold at a maximum sales charge of 4.5%, Adjustable Rate Fund at
1.5% and Short Duration Government Fund and Short Duration Tax-Free Fund at 3%.
Using the offering price as of October 31, 1996, the maximum offering price of
the class A shares of each Fund's shares then in existence would be as follows:
<TABLE>
<CAPTION>
Offering
Net Asset Maximum Price
Value Sales Charge to Public
--------- ------------ ---------
<S> <C> <C> <C>
Adjustable Rate Fund $ 9.82 $0.15 $ 9.97
Municipal Income Fund $14.37 $0.68 $15.05
Government Income Fund $14.36 $0.68 $15.04
Global Income Fund $14.53 $0.68 $15.21
Short Duration Government N/A N/A N/A
Short Duration Tax-Free N/A N/A N/A
Core Fixed Income N/A N/A N/A
</TABLE>
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.
B-123
<PAGE>
The Class A Plans were most recently approved on April 23, 1997 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.
Effective June 30, 1995, the Class A Plan for Adjustable Rate
Government, Government Income, Municipal and Global Income Funds 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, 1996, 1995 and 1994, each Fund
paid Goldman Sachs the following amounts under the Class A Plans:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ---------- ----------
<S> <C> <C> <C>
Adjustable Rate
Government Fund
with fee waivers $ 0 $ 0 $ N/A
without fee waivers 30,905 17,967 N/A
Municipal Income Fund
with fee waivers 0 70,023 85,242
without fee waivers 131,925 195,152 217,701
Government Income Fund
with fee waivers 0 25,630 14,350
without fee waivers 73,949 76,499 65,604
Global Income Fund
with fee waivers 493,170 645,259 1,518,814
without fee waivers 549,164 1,257,211 3,037,628
</TABLE>
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 fee is not paid to such dealers, Goldman
Sachs may retain such fee
B-124
<PAGE>
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, 1996, Goldman Sachs incurred the
following distribution expenses under the Class A Plan on behalf of Adjustable
Rate Government, Government Income, Municipal Income and Global Income Funds
(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
1996 Distributor and Travel to Other than and Advertising
and its Sales Expenses Current
Personnel Shareholders
<S> <C> <C> <C> <C> <C>
Adjustable
Rate Fund/1/ N/A N/A N/A N/A N/A
Municipal
Income Fund/2/ N/A N/A N/A N/A N/A
Government
Income Fund/2/ N/A N/A N/A N/A N/A
Global
Income Fund 0 $274,757 $116,417 $36,868 $102,215
</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/ Commencing June 1, 1995, Goldman Sachs is waiving the 0.25% Class A Plan
fee; as no distribution revenue has therefore been earned after June 1, 1995, no
expenses are reflected above.
B-125
<PAGE>
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 May 1, 1998 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.
CLASS B DISTRIBUTION PLAN. As described in the Prospectus, the Trust has
adopted on behalf of Short Duration Government Fund, Short Duration Tax Free
Fund, Municipal Income Fund, Government Income Fund, Core Fixed Income Fund,
Global Income Fund and High Yield 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 most recently approved on April 23, 1997 on behalf
of Municipal Income, Government Income, Global Income, High Yield, Short
Duration Government, Short Duration Tax-Free and Core Fixed Income Funds, in
each case 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
B-126
<PAGE>
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.
For the fiscal years ended October 31, 1996, each Fund paid Goldman Sachs
the following amounts under the Class B Plans:
<TABLE>
<CAPTION>
1996
----
<S> <C>
Municipal Income Fund
with fee waivers 378
without fee waivers 378
Government Income Fund
with fee waivers 332
without fee waivers 332
Global Income Fund
with fee waivers 374
without fee waivers 374
</TABLE>
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 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 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 distribu tion expenditures.
During the fiscal year ended October 31, 1996, Goldman Sachs incurred the
following expenses in connection with distribution under the Class B 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).
B-127
<PAGE>
<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
1996 Distributor and Travel to Other than and Advertising
and its Sales Expenses Current
Personnel Shareholders
<S> <C> <C> <C> <C> <C>
Municipal
Income Fund $241/(1)/ N/A N/A N/A N/A
Government
Income Fund $299/(1)/ N/A N/A N/A N/A
Global
Income Fund $247/(1)/ N/A N/A N/A N/A
</TABLE>
_______________________
(1) Advance commissions paid to dealers of 4% on Class B sales are
considered deferred assets which are amortized over a period of 6
years; amounts presented above reflect amortization expense recorded
during the period presented.
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.
CLASS C DISTRIBUTION PLANS. As described in the Prospectus, the Trust has
adopted, on behalf of the Funds, distribution plans (the "Class C Plans")
pursuant to Rule 12b-1 under the Act with
B-128
<PAGE>
respect to the Class C Shares. See "Distribution and Authorized Dealer Service
Plans" in the Prospectus.
The Class C Plans of each Fund were approved for the Funds on July 22,
1997, on behalf of the Trust 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 Class C Plans, cast in person at a meeting called for the
purpose of approving the Class C Plans. The Class C Plans for the Funds were
approved by the sole initial shareholders of the Class C Shares of the Funds on
___, 1997.
With respect to each Fund, the compensation payable under the Class C Plans
is equal to 0.75% per annum of the average daily net assets attributable to
Class C Shares of that Fund. 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 C Shares.
The Class C 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 C Plans were terminated by the 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.
Under the Class C 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 C Plans and the purposes for which
such services were performed and expenditures were made.
The Class C Plans will remain in effect until May 1, 1998 and from year to
year, provided such continuance is approved annually by a majority vote of the
Trustees, including a majority of the non-interested Trustees. A Class C 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 C Shares of that Fund. All material amendments of the Class C
Plans must also be approved by the Trustees in the manner described above. With
respect to any Fund, a Class C 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 C
Shares of that Fund. So long as Class C Plans are 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 C Plans will benefit
each Fund and their respective Class C shareholders.
B-129
<PAGE>
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, Class B and Class C 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 years ended October 31, 1996 and October 31, 1995 the
Adjustable Rate Government, Government Income, Municipal Income and Global
Income Funds paid Goldman Sachs the following amounts under their respective
Service Plans with respect to its Class A Shares and Class B shares:
<TABLE>
<CAPTION>
Class A Class B
1996 1995 1996
-------- ------- -------
<S> <C> <C> <C>
Adjustable Rate Fund $ 30,905 17,967 $ N/A
Municipal Income Fund 131,925 55,106 126
Government Income Fund 74,060 25,239 111
Global Income Fund 549,164 281,949 125
</TABLE>
The Service Plans applicable to Class A, Class B and Class C Shares were
most recently approved on April 23, 1997 by a majority of the Board of Trustees
of the Trust. The Service Plans will remain in effect until May 1, 1998 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.
B-130
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We welcome the opportunity to review the performance and the investment
activity of the Goldman Sachs Fixed Income Funds for the 12-month period ended
October 31, 1996. To help put the portfolios' performance in perspective, we
will also provide a brief overview of the U.S. economy and the bond market
during the period.
We are pleased to report that the Goldman Sachs Fixed Income Funds fared
well relative to their peers during the period.
The Bond Market Sold Off Amid Rising Rates, Then Stabilized
The U.S. fixed income market began the 12-month period under review with
a robust rally, fueled by weak economic data and low inflation. However, in
February 1996, the bond market began to come under pressure when stronger than
expected economic and job growth as well as surging commodity prices aroused
fears of higher inflation on the horizon. Bond market conditions significantly
worsened during March and April, when a sharp rise in interest rates triggered a
sell-off and increased volatility. By early May, long-term bond yields had
climbed above the psychologically important 7.0% level for the first time in
nearly a year. At the end of May, interest rates began to stabilize and
Treasury prices remained in a narrow trading range throughout the summer and
fall. During September and October, however, interest rates retreated and the
bond market strengthened. The rebound was primarily due to evidence of a
slowing U.S. economy and strong demand for Treasury bonds from the central banks
of China, Japan and Germany, which accelerated their purchases dramatically
toward the end of the period. By the end of October, prices of 30-year
Treasuries broke out of the trading range that had persisted for over six
months.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Table of Contents
Market Overview 1 GS Core Fixed Income Fund 22
GS Adjustable Rate Government Fund 3 Financial Statements 30
GS Short Duration Government Fund 9 Notes to Financial Statements 34
GS Short Duration Tax-Free Fund 15 Financial Highlights 42
- ---------------------------------------------------------------------------------------------------------
</TABLE>
After a Weak Start, Economic Growth Rebounded, Then Moderated
In late 1995, the economy was anemic, with weak consumer and capital
spending contributing to a fourth-quarter real Gross Domestic Product (GDP)
growth of only 0.3% (annualized). During the first quarter of 1996, harsh winter
weather and the General Motors strike continued to restrain economic growth.
Despite these adverse conditions, the economy advanced faster than expected,
with first-quarter real GDP growth reported at 2.0% (annualized). Momentum
accelerated more dramatically during the second quarter, as industrial activity,
automobile sales and home sales all showed significant improvement. As a result,
second-quarter GDP rose a robust 4.7% (annualized), its highest rate in two
years.
The economy's torrid growth cooled markedly during the third quarter,
with annualized real GDP at a revised 2.0%, largely due to lackluster consumer
spending and a widening U.S. trade deficit. In October some evidence of a
slowdown continued, with housing starts falling to their lowest level in a year
and U.S. capacity utilization also down. However, consumer confidence remained
high against a backdrop of low unemployment and higher household income. These
indicators led some economists to interpret October's retail sales numbers (up a
scant 0.2%) as a "breather" they expected to be followed by stronger holiday
shopping, while others were concerned about a more prolonged period of
restrained spending. Despite investors' earlier fears of increased inflationary
pressures and the fact that in October the producer and consumer price indexes
were up 0.4% and 0.3%, respectively, inflation remained subdued throughout the
period.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
The Fed Remained Neutral After Easing in December and January
In response to generally poor year-end 1995 economic conditions, the U.S.
Federal Reserve cut the Federal funds rate by 25 basis points in December 1995
and an additional 25 basis points in January 1996. The Fed then remained neutral
from February through the end of the period, leaving the Federal funds rate at
5.25% as of October 31, 1996.
During the period under review, the yield curve shifted upward everywhere
but at the shortest end, where it steepened. The yield on six-month Treasury
bills fell from 5.55% on October 31, 1995 to approximately 5.26% on October 31,
1996. For the same time period, the yield on the 30-year U.S. Treasury bond rose
from 6.33% a year ago to 6.64%. For the 12-month period ended October 31, 1996,
the total returns of one-year and 30-year Tresuries were 5.84% and 0.72%,
respectively.
Historical Treasury Yield Curve
[GRAPH APPEARS HERE]
The yield curve steepened on the short end and shifted upward on the longer end.
Outlook: Moderate Economic Growth for the Near Term
The recent economic weakness and the tame third-quarter labor cost report
increase the likelihood that the Fed will defer any changes in monetary policy
until 1997. Although a more extended slowdown is possible, as of this writing,
Goldman Sachs' economists believe a resumption of growth is likely if consumer
spending rebounds by year-end and the trade deficit does not significiantly
widen. On the fiscal front, the bond market environment should benefit from the
recent election results with President Clinton balanced by a
Republican-controlled Congress, which points toward continued budgetary
restraint.
We appreciate your confidence in the Goldman Sachs Fixed Income Funds and
we look forward to continuing to serve your investment needs in the future.
Sincerely,
/s/ David B. Ford
David B. Ford
Co-Head,
Goldman Sachs Asset Management
/s/ John P. McNulty
John P. McNulty
Co-Head,
Goldman Sachs Asset Management
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
November 29, 1996
- --------------------------------------------------------------------------------
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Adjustable Rate Government 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). Under normal interest rate
conditions, the fund's duration is expected to be in a range approximately equal
to that of a six-month to one-year U.S. Treasury security.
The ARM Market Began Weak but Improved as Prepayments Slowed and Demand
Increased
The key factors affecting ARM performance during the 12 months under review
were the changing direction of interest rates and, consequently, the pace of
mortgage prepayments. From November 1995 through early February 1996, declining
interest rates spurred homeowners to switch from ARMs to fixed rate mortgages to
lock in attractive rates. The high level of refinancing activity depressed the
ARM market and caused yield spreads between ARMs and Treasuries to widen until
the end of January 1996, when long-term interest rates began to rise. Throughout
the spring, the ARM market strengthened as interest rates climbed sharply.
Spreads between ARMs and Treasuries continued to tighten even after rates
stabilized from the end of May through August, partly due to strong demand from
"crossover" investors from other short-duration fixed income sectors. Although
interest rates declined in September and October, mortgage prepayment fears
remained subdued as rates were still relatively high compared with their levels
a year earlier. Investor demand for seasoned one-year Constant Maturity Treasury
(CMT) ARMs, which our fund stresses, remained especially strong due to their
relative prepayment stability in a falling rate environment.
Performance Review
During the period under review, the fund's Institutional, Administration
and Class A shares all significantly outperformed both the six-month U.S.
Treasury bill and the one-year U.S. Treasury bill. (As of October 31, the fund's
duration was 0.7 years, in between that of the six-month and the one-year U.S.
Treasury bill.) The fund's positive performance can be attributed to the
incremental yield its ARM holdings delivered over similar-duration Treasuries
and tightening spreads between ARMs and Treasuries.
- ------------------------------------------------------------------------
Performance Summary: October 31, 1995 - October 31, 1996
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six-
Month One-Year
Institu- Adminis- Class Treasury Treasury
tional tration A Bill Bill
------ ------- - ---- ----
<S> <C> <C> <C> <C> <C>
Total Return (based 6.86% 6.60% 6.60% 5.48% 5.82%
on net asset value)
- ------------------------------------------------------------------------
Return From 6.25% 5.99% 5.99% NA NA
Monthly
Distributions
- ------------------------------------------------------------------------
Return From Price 0.61% 0.61% 0.61% NA NA
Appreciation
- ------------------------------------------------------------------------
NAV (10/31/96) $9.83 $9.83 $9.83 NA NA
- ------------------------------------------------------------------------
NAV Change +$0.06 +$0.06 +$0.06 NA NA
- ------------------------------------------------------------------------
</TABLE>
We are also pleased to note that the fund outperformed most of its peers.
For the 12 months ended October 31, 1996, the fund's Institutional shares ranked
fourth out of 53 adjustable rate mortgage funds based on total return, as
tracked by Lipper Analytical Services, Inc. (Lipper does not rank the fund's
Administration and Class A shares. Please note that Lipper rankings do not take
sales charges into account and that past performance is not a guarantee of
future results.) As of October 31, 1996, the
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund (continued)
- --------------------------------------------------------------------------------
fund's Institutional shares were ranked "four stars" by Morningstar, Inc., an
independent rating agency.\1\
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Repos/Cash Equivalents 3.4%
CMOs 3.5%
SBA Floaters 7.8%
ARMs 85.3%
</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.
- ---------------------------------------------
/1/ Source (C) 1996 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 10/31/96.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five- and ten-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Institutional shares received five
and four stars for the three- and five-year periods, respectively. The
Institutional shares were rated among 1,054 and 572 fixed income funds for the
three- and five-year periods, respectively. For the one-year period, the
Institutional shares were rated among 1,654 fixed income funds. 22.5% of the
funds receive the four-star rating. The Morningstar rating applies only to the
fund's Institutional shares; the fund's Class A and Administration shares have
not been rated. Class A and Administration shares are subject to additional fees
that may have the effect of lowering performance and may affect and future
Morningstar rating. Morningstar rates funds against their peers in the same
category. In all, there are five Morningstar categories (domestic equity,
international equity, fixed income, municipal and hybrid). Morningstar ratings
range from five stars (highest) to one star (lowest). Funds with five-star
ratings are in the top 10% of their category, four-star ratings in the next
22.5%, three stars the next 35%, two stars the next 22.5% and one star the
lowest 10% of their categories.
Portfolio Composition and Investment Strategies
During the period under review, the portfolio's sector allocation shifted
slightly, with reductions in collateralized mortgage obligations (CMOs) and
Small Business Administration (SBA) loans in favor of ARMs.
.. ARMs. As of October 31, 1996, ARMs accounted for 85.3% of the portfolio, up
from 80.2% a year ago. We emphasized seasoned, one-year CMT issues that offered
relative prepayment and duration stability as well as incremental yield over
Treasuries. The position significantly contributed to the fund's performance
during the period.
.. SBA Floaters. The portfolio held a 7.8% allocation in securities backed by
Small Business Administration loans, which traded at attractive spreads relative
to Treasuries. We trimmed the portfolio's holdings in the sector slightly from
8.9% a year ago to take profits after the position performed well.
.. CMOs. CMOs accounted for 3.5% of the portfolio as of October 31,
approximately half their weighting a year ago (7.7%). This position provided
relatively stable cash flows and a greater number of opportunities to take
advantage of potential mispricing than comparable fixed income sectors. During
December 1995 and January 1996, the sector became expensive versus
similar-duration Treasuries, and we subsequently sold part of the fund's
holdings at a profit. The fund's CMO position included 1.4% in floaters, which
added incremental yield, and 0.4% in sequential-pay CMOs. In addition, the fund
held CMO super floaters, discussed below.
.. Prudent Use of Derivatives. We used higher risk derivatives very sparingly to
enhance the fund's performance without taking on additional undue risk. As of
October 31, 1996, the fund held a 1.5% position in super floaters, which
contributed to its performance during the year. (Super floaters are floating
rate securities whose coupons reset higher and more quickly than regular
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund (continued)
- --------------------------------------------------------------------------------
ARMs in a rising interest rate environment.) The portfolio also included minor
positions in interest-only (IO) and inverse IO securities.
.. Duration. As of October 31, the duration of the fund was 0.7 years, unchanged
from a year earlier. Rather than attempting to make interest rate predictions,
we seek to provide excess returns over a similar-duration U.S. Treasury security
through sector weightings and security selection. During the period, we used
financial futures as a tool to help manage the portfolio's duration.
.. Credit Quality. The fund invests exclusively in securities issued by the U.S.
government and its agencies or instrumentalities, which are considered to be of
the highest credit quality.
ARM Outlook: Seasoned ARMs Are Expected to Perform Well Relative to Other
Sectors
Our outlook for the ARM sector is moderately constructive. Although spreads
have tightened over the course of the year, we expect them to remain stable for
the near term due to strong investor demand and limited supply. In addition, we
believe that our core holding of seasoned ARMs should fare well relative to less
seasoned issues if rates continue to decline and prepayments increase.
Distribution Policy
During the 12-month period ended October 31, 1996, the fund's Institutional,
Administration and Class A shares distributed $0.59, $0.57 and $0.57 per
share, respectively.
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 nor significantly affected its net asset value (NAV) per share.
In conclusion, we appreciate your investment in the GS Adjustable Rate
Government Fund and will continue to seek attractive fixed income investments in
the months ahead.
Sincerely,
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Peter D. Dion
Peter D. Dion
/s/ James P. McCarthy
James P. McCarthy
Portfolio Managers
GS Adjustable Rate Government Fund
November 29, 1996
- --------------------------------------------------------------------------------
5
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Adjustable Rate Government Fund based on a normal minimum
initial investment, for each class, 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
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Institutional Lehman Short (1-2) One Year Six Month
Shares Gov't Index T-Bill T-Bill
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8/1/91 50,000 50,000 50,000 50,000
- --------------------------------------------------------------------------------
10/31/91 51,047 51,581 51,179 50,870
- --------------------------------------------------------------------------------
10/31/92 54,176 55,506 54,161 53,376
- --------------------------------------------------------------------------------
10/31/93 56,414 58,368 56,198 55,197
- --------------------------------------------------------------------------------
10/31/94 57,475 59,511 57,744 57,257
- --------------------------------------------------------------------------------
10/31/95 61,355 64,343 61,766 60,819
- --------------------------------------------------------------------------------
10/31/96 65,576 68,197 65,373 64,158
- --------------------------------------------------------------------------------
</TABLE>
Administration Shares
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Administration Lehman Short (1-2) One Year Six Month
Shares Gov't Index T-Bill T-Bill
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5/1/93 50,000 50,000 50,000 50,000
- --------------------------------------------------------------------------------
10/31/93 50,917 50,931 50,785 50,780
- --------------------------------------------------------------------------------
10/31/94 51,747 51,931 52,182 52,675
- --------------------------------------------------------------------------------
10/31/95 55,100 56,148 55,835 55,951
- --------------------------------------------------------------------------------
10/31/96 58,742 59,511 59,096 59,023
- --------------------------------------------------------------------------------
</TABLE>
Class A Shares
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman Short (1-2) One Year Six Month
(no sales charge) (w/ sales charge) Gov't Index T-Bill 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 10,069 10,277 10,260 10,246
- ---------------------------------------------------------------------------------------------------
10/31/96 10,898 10,735 10,893 10,859 10,809
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------
Average Annual Total Return
--------------------------------------------------
One Year Five Year Since Inception/(b)/
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Institutional Shares 6.86% 5.13% 5.32%
- --------------------------------------------------------------------------------
Administration Shares 6.60% N/A 4.69%
- --------------------------------------------------------------------------------
Class A Shares
excluding sales charge 6.60% N/A 6.40%
- --------------------------------------------------------------------------------
Class A Shares
including sales charge 4.99% N/A 5.29%
- --------------------------------------------------------------------------------
</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.
- --------------------------------------------------------------------------------
6
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations--96.3%
Adjustable Rate Federal Home Loan Mortgage Corp.
(FHLMC)(d)--25.6%
<S> <C> <C> <C>
$ 409,475 7.33% 11/01/17 $ 422,849
1,443,341 7.54 12/01/18 1,482,297
2,695,805 7.40 07/01/18 2,793,527
1,799,007 7.69 01/01/19 1,857,314
10,670,041 7.38 05/01/19 11,021,833
20,341,589 7.58 11/01/19 21,218,921
5,280,731 7.70 05/01/20 5,464,395
19,004,192 7.42 06/01/20 19,698,985
37,238,927 7.73 02/01/22/(a)/ 38,845,042
4,072,603 7.39 08/01/22 4,215,145
2,234,941 7.56 08/01/22 2,331,334
6,804,200 7.53 09/01/22 7,067,182
17,808,242 7.61 11/01/22 18,565,092
10,195,026 7.63 06/01/24 10,506,892
3,045,972 7.31 12/01/24 3,122,121
3,495,056 7.20 02/01/28 3,604,835
4,584,605 7.09 07/01/29 4,671,987
1,815,464 7.62 07/01/30 1,892,059
2,055,859 7.39 05/01/31 2,110,462
- --------------------------------------------------------------------------------
$160,892,272
- --------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association
(FNMA)(d)--55.4%
$ 1,138,394 7.80% 11/01/14 $ 1,187,493
6,190,161 6.54 03/01/17 6,277,194
3,662,002 7.56 03/01/17 3,799,511
4,221,326 6.21 03/01/18 4,247,709
6,778,125 7.66 04/01/18 7,046,064
874,932 7.63 05/01/18 901,180
7,405,181 7.34 07/01/18 7,724,566
5,249,737 7.41 07/01/18 5,456,472
6,398,858 7.08 08/01/18 6,609,828
3,972,504 7.64 08/01/18 4,143,838
3,746,795 7.42 10/01/18 3,896,068
6,780,326 7.41 11/01/18 7,009,162
2,068,449 7.29 12/01/18 2,138,591
13,495,001 7.67 12/01/18/(a)/ 14,077,040
3,484,080 7.27 06/01/19 3,597,870
4,440,531 7.31 07/01/19 4,579,297
1,698,502 7.34 07/01/19 1,755,826
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations(continued)
Adjustable Rate Federal National Mortgage Association
(FNMA)(d)(continued)
<S> <C> <C> <C>
$ 2,849,462 7.46% 01/01/20 $ 2,942,526
3,037,915 7.70 03/01/20 3,168,940
8,771,533 7.40 07/01/20 9,055,204
4,563,057 7.48 09/01/20 4,746,994
4,953,382 7.53 02/01/21 5,167,022
5,289,644 7.28 04/01/21 5,464,044
74,489,219 7.51 09/01/21/(a)/ 77,678,102
4,088,820 7.95 11/01/21 4,210,095
22,090,964 7.56 02/01/22 23,043,747
14,611,569 7.68 06/01/22 15,112,892
6,682,461 7.47 08/01/22 6,893,894
759,290 7.48 08/01/22 776,511
38,116,807 7.56 09/01/22/(a)/ 39,760,785
1,934,079 7.53 02/01/23 1,968,235
277,701 6.22 12/01/23 276,574
18,079,861 7.48 09/01/25 18,856,752
2,565,500 7.33 10/01/27 2,653,702
1,177,401 7.04 07/01/29 1,205,729
3,288,252 7.59 04/01/30 3,376,640
8,565,310 7.58 01/01/31 8,934,732
28,276,177 6.09 02/01/31 28,161,376
- --------------------------------------------------------------------------------
$ 347,902,205
- --------------------------------------------------------------------------------
Adjustable Rate Government National Mortgage Association
(GNMA)(d) -- 2.2%
$ 1,527,707 6.50% 03/20/16 $ 1,551,096
1,806,135 7.12 08/20/17 1,839,711
1,026,294 7.12 08/20/18 1,046,984
8,886,125 6.00 11/20/25 9,040,211
- --------------------------------------------------------------------------------
$ 13,478,002
- --------------------------------------------------------------------------------
Adjustable Rate Small Business Administration (SBA)(d)--7.8%
$ 1,416,469 6.75% 10/25/14 $ 1,449,883
2,562,866 6.75 02/25/15 2,624,144
3,684,715 6.75 03/25/15 3,773,370
2,839,268 6.75 04/25/15 2,907,581
2,057,142 6.75 05/25/15 2,106,637
1,036,764 6.75 08/25/15 1,062,040
1,684,161 6.75 09/25/15 1,725,220
2,069,161 6.75 10/25/15 2,119,917
1,110,382 6.37 09/25/16 1,125,305
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations (continued)
Adjustable Rate Small Business Administration
(SBA)(d)(continued)
$ 4,125,881 6.37% 07/25/17 $ 4,181,333
9,019,837 6.37 08/25/17 9,141,062
4,040,857 6.37 09/25/17 4,095,166
3,577,478 6.37 10/25/17 3,625,559
8,937,943 6.37 02/25/18 9,058,069
- --------------------------------------------------------------------------------
$ 48,995,286
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations-5.3%
Adjustable Rate CMOs(d)-1.8%
FNMA Remic Trust 1990-145, Class A
$ 11,024,778 6.51% 12/25/20 $ 11,025,439
- --------------------------------------------------------------------------------
Inverse Floater(d)-0.0%
FNMA Remic Trust 1991-91, Class S
$ 164,490 17.66% 07/25/98 $ 174,261
- --------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only(d)-0.0%
FNMA Remic Trust 1992-157, Class SA
$2,002,645/(b)/ 14.10% 03/25/04 $ 168,743
- --------------------------------------------------------------------------------
Inverse IOette-0.1%
FHLMC Series 1164, Class O
$ 36,128/(b)/ 29.44% 11/15/06 $ 489,372
- --------------------------------------------------------------------------------
IOette-0.1%
FNMA Remic Trust 1990-145, Class B
$ 27,091/(b)/ 10.00% 12/25/20 $ 657,906
- --------------------------------------------------------------------------------
Regular Floater CMOs(d)-1.4%
FHLMC Series 1011, Class F
$ 8,872,813 6.34% 11/15/20 $ 9,069,612
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs-0.4%
FNMA Remic Trust 1990-65, Class U
$ 616,589 9.50% 11/25/06 $ 619,475
FNMA Remic Trust 1991-37, Class E
1,664,339 8.50% 04/25/05 1,679,418
- --------------------------------------------------------------------------------
$ 2,298,893
- --------------------------------------------------------------------------------
Super Floater CMOs(d)-1.5%
FNMA Remic Trust 1992-157, Class FA
$ 9,859,177(b) 1.22% 03/25/04 $ 9,631,134
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 33,515,360
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $605,544,961) $604,783,125
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Repurchase Agreement-2.1%
Joint Repurchase Agreement Account
$ 13,000,000 5.58% 11/01/96/(a)/$ 13,000,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $13,000,000) $ 13,000,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $618,544,961/(c)/) $617,783,125
================================================================================
Futures contracts open at October 31, 1996:
</TABLE>
<TABLE>
<CAPTION>
Number of
Contracts
Long Settlement Unrealized
Type (Short)(e) Month Gain (Loss)
- --------------------------------- ------------- ------------------- ----------------
<S> <C> <C> <C>
1-Month Libor 45 November 1996 $4,500
Euro Dollars 365 December 1996 309,500
Euro Dollars 280 March 1997 95,000
Euro Dollars 55 June 1997 28,000
5-Year U.S. Treasury Notes 67 December 1996 9,766
10-Year U.S. Treasury Notes (270) December 1996 (302,812)
----------------
$143,954
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
Federal Income Tax Information:
<S> <C>
Gross unrealized gain for investments in which value
exceeds cost $ 2,404,589
Gross unrealized loss for investments in which cost
exceeds value (3,318,600)
- --------------------------------------------------------------------------------------
Net unrealized gain $ (914,011)
======================================================================================
</TABLE>
(a) Portions of these securities are being segregated for futures margin
requirements.
(b) Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
(c) The aggregate costs for federal income tax purposes is $618,697,136.
(d) Variable rate security. Coupon rate disclosed is that which is in effect
at October 31, 1996.
(e) Each Euro Dollar contract represents $1,000,000 in notional par value.
Each Libor contract represents $3,000,000 in notional par value. Each
5-Year and 10-Year U.S. Treasury Note and U.S. Treasury Bond contract
represents $100,000 in notional par value. The total notional amount and
market value are $879,000,000 and $200,909,125, respectively. The
determination of notional amounts and market value 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 Duration Government Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Short Duration Government 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. Under normal interest rate
conditions, the fund's duration is expected to be within one-half year of its
benchmark, the two-year U.S. Treasury security.
Performance Review
During the period under review, the fund's Institutional, Administration
and Service shares all outperformed the two-year U.S. Treasury security,
primarily due to our emphasis on and the favorable performance of
mortgage-backed security investments, as well as our ability to identify
relative value within the sector. In addition, the portfolio's term structure,
which overweighted one- and three-year maturity securities, also contributed to
performance when the yield curve steepened.
During the period, the net asset values (NAVs) of the fund's Institutional
and Administration shares (which opened February 28, 1996) were nearly unchanged
while the NAV of the fund's Service shares (which opened April 10, 1996) rose
$0.10 as interest rates stabilized and subsequently declined.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Institutional Administration* Service*
(10/31/95- (2/28/96- (4/10/96-
10/31/96) 10/31/96) 10/31/96)
-------- -------- --------
<S> <C> <C> <C>
Total Return (based on net 6.75% 4.00% 4.35%
asset value
- --------------------------------------------------------------------------------
Return From Monthly 6.65% 4.10% 3.32%
Distributions
- --------------------------------------------------------------------------------
Return From Price 0.10% -0.10% 1.03%
Depreciation/
Appreciation
- --------------------------------------------------------------------------------
Total Return of Two-Year 5.64% 3.61% 3.71%
U.S. Treasury
- --------------------------------------------------------------------------------
NAV (10/31/96) $9.83 $9.85 $9.82
- --------------------------------------------------------------------------------
NAV Change +$0.01 -$0.01 +$0.10
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
The fund performed well compared with its peers. The Institutional shares
ranked in the top 10% of short-intermediate U.S. government funds (fifth out of
88) based on total return for the 12-month period ended October 31, 1996,
according to Lipper Analytical Services, Inc. (The Administration and Service
shares were not ranked for this period because they were in existence less than
12 months. 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
The fund significantly reduced its allocation in U.S. Treasuries in favor
of collateralized mortgage obligations (CMOs), which offered more attractive
return potential according to our analysis. This strategy proved successful as
mortgage-backed securities outperformed comparable-duration Treasuries.
Portfolio Composition as of October 31, 1996*
<TABLE>
<CAPTION>
[PIE CHART APPEARS HERE]
<S> <C>
Repos/Cash Equivalents 1.1%
Fixed Rate Mortgage
Pass-Throughs 7.2%
U.S. Treasuries 15.8%
ARMs 19.0%
CMOs 56.9%
</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.
- --------------------------------------------------------------------------------
9
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
- --------------------------------------------------------------------------------
.. CMOs. During the period, we more than doubled the portfolio's allocation in
collateralized mortgage obligations, with most of the increase occurring from
February through April. As of October 31, 56.9% of the portfolio was invested in
CMOs, of which 24.7% were sequential-pay CMOs (up from 10.4% last year) and
17.0% were planned amortization class (PAC) CMOs (up from 1.9% last year).
These sectors were favored for their relatively stable cash flows and
incremental yields over Treasuries, and they performed well during the period.
Though the CMO sector was fairly valued relative to equal-duration Treasuries
from January through the end of the period, our extensive research enabled us to
identify specific securities that presented attractive investment opportunities.
.. ARMs. Adjustable rate mortgage securities (ARMs) accounted for 19.0% of the
portfolio as of October 31, down from 23.7% last year. We focused on seasoned
securities indexed to the one-year Constant Maturity Treasury (CMT), which
offered attractive income stability and low relative prepayment risk. A high
level of mortgage refinancing adversely impacted the sector in November and
December of 1995 when rates had eased, but ARMs strengthened when rates started
to rise during the first quarter of 1996 and prepayment fears faded.
.. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. The portfolio's
position in U.S. Treasuries was cut to 15.8%, down from 37.1% a year ago, as we
identified securities in other sectors that offered higher incremental yield. In
addition, repurchase agreements/cash equivalents were reduced to 1.1% from 4.7%
a year ago.
.. Fixed Rate Mortgage Pass-Throughs. Fixed rate pass-throughs, a 7.2%
allocation, offered more attractive yield spreads than most of the other
high-credit quality fixed income sectors. During the period under review, the
technical balance of the pass-through market strengthened, with investor demand
improving as prepayments and supply slowed from the high levels experienced last
November. We continued to emphasize seasoned premium mortgages because they
typically have lower prepayment risk than recently issued mortgages.
.. Issuer Composition. The breakdown of the portfolio's mortgage-backed security
holdings by issuer was 37.8% in Federal National Mortgage Association (FNMA)
issues, 36.0% in Federal Home Loan Mortgage Corporation (FHLMC) issues and 9.2%
in Government National Mortgage Association (GNMA) issues.
.. Credit Quality. The fund invests exclusively in issues of the U.S. government
and its agencies or instrumentalities.
.. Prudent Use of Derivatives. Sequential-pay CMOs and PAC CMOs, which are
typically considered to be lower risk derivatives, represented 24.7% and 17.0%
of the portfolio, respectively, as noted earlier. Other derivative investments
included CMO floaters (10.0%), which are securities whose coupons reset upward
as interest rates rise, and inverse floaters (3.2%), which have coupons that
reset in the opposite direction from interest rates. When floaters are held
along with inverse floaters, they can produce a position with a similar risk
profile as a fixed rate pass-through but provide a higher yield. The fund also
held a small position (1.3%) in PAC interest-only securities (IOs). We invest in
such higher risk derivatives very sparingly in an effort to enhance returns
without taking undue risk. In addition, we used futures as a tool to help manage
the portfolio's duration.
Market Outlook
In general, we have a cautiously optimistic view of the mortgage-backed
securities market in the near term. In the ARM sector, we expect spreads to
remain stable due to strong investor demand and limited supply. Given the
environment of declining rates for the past few months, we will continue to
emphasize seasoned one-year CMT
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
- -------------------------------------------------------------------------------
ARMs due to the relative prepayment stability that these securities offer.
Though we have a neutral outlook for the CMO market, we continue to find areas
that offer attractive investment opportunities. In the mortgage pass-through
market, we believe the recent widening of yield spreads during September and
October has been somewhat overdone, but we will remain vigilant to an increase
in prepayments that may result from a further decline in interest rates. We will
continue to actively allocate the portfolio's assets among the various fixed
income sectors as their relative value changes throughout the coming year.
Distribution Policy
During the period under review, the fund's Institutional shares paid out
distributions of $0.63 per share. From their inceptions through October 31,
1996, the fund's Administration and Service shares distributed $0.39 per share
and $0.32 per share, respectively. (The Administration shares opened on February
28, 1996 and the Service shares opened on April 10, 1996.) The fund distributes
substantially all of its investment company taxable income, as required by tax
law.
We thank you for your support and look forward to continuing to meet your
investment needs in the future.
Sincerely,
/s/Jonathan A. Beinner
Jonathan A. Beinner
/s/James B. Clark
James B. Clark
Portfolio Managers
GS Short Duration Government Fund
November 29, 1996
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Short Duration Government Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Short-Term Government 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
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Institutional Shares(a)
Institutional Shares 2-Year\r T-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
9/1/88 50,000 50,000 50,000
10/31/88 51,283 51,057 51,091
10/21/89 55,940 55,412 55,919
10/31/90 60,543 59,876 60,861
10/31/91 67,161 66,615 67,699
10/31/92 71,365 72,161 73,208
10/31/93 75,326 76,335 77,446
10/31/94 76,072 77,058 78,339
10/31/95 82,895 84,009 85,256
10/31/96 88,507 88,756 90,346
</TABLE>
Administration Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Administration Shares 2-Year\rT-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
2/28/96 50,000 50,000 50,000
10/31/96 52,000 51,805 51,760
</TABLE>
Service Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Service Shares 2-Year\rT-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
4/10/96 50,000 50,000 50,000
10/31/96 52,175 51,855 52,110
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------
Average Annual Total Return
-----------------------------------------------------------
One Year Five Year Since Inception(b)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Institutional shares 6.75% 5.6% 7.24%
- --------------------------------------------------------------------------------
Administrative shares N/A N/A 4.00(c)
- --------------------------------------------------------------------------------
Service shares N/A N/A 4.35(c)
- --------------------------------------------------------------------------------
</TABLE>
/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, Administration and Service shares commenced operations
August 15, 1988, February 28, 1996 and April 10, 1996, respectively.
/c/ An aggregate total return (not annualized) is shown instead of an average
annual total return since the Administration and Service shares have not
completed a full twelve months of operations.
- --------------------------------------------------------------------------------
12
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Government Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations--82.4%
Adjustable Rate Federal Home Loan Mortgage Corp.
(FHLMC)(a)--14.2%
$ 1,208,677 6.00% 11/15/16 $ 1,198,196
1,941,838 7.54 12/01/18/(b)/ 1,994,248
8,544,958 7.73 02/01/22/(b)/ 8,913,502
2,234,941 7.56 08/01/22 2,331,334
- --------------------------------------------------------------------------------
$ 14,437,280
- --------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association
(FNMA)(a)--6.2%
$ 389,769 9.00% 12/01/97 $ 402,558
2,732,146 7.80 11/01/14/(b)/ 2,849,984
3,025,230 7.48 08/01/22/(b)/ 3,093,842
- --------------------------------------------------------------------------------
$ 6,346,384
- --------------------------------------------------------------------------------
Fixed Rate Federal National Mortgage Association (GNMA)--3.5%
$ 1,093,610 6.00% 06/01/09/(b)/ $ 1,065,244
2,058,384 6.00 10/01/09/(b)/ 2,004,994
540,970 6.00 10/01/08/(b)/ 526,938
- --------------------------------------------------------------------------------
$ 3,597,176
- --------------------------------------------------------------------------------
Fixed Rate Government National Mortgage Association--3.3%
$ 3,040,068 10.00% 12/15/17/(b)/ $ 3,338,359
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations (CMOs)--55.3%
Inverse Floater(a)--5.7%
FHLMC Series 1296, Class J
$ 890,613 11.93% 07/15/99/(b)/ $ 948,502
FHLMC Series 1325, Class B
2,416,565 6.06 07/15/97/(b)/ 2,421,833
FHLMC Series 1325, Class C
1,028,325 7.56 07/15/97/(b)/ 1,034,598
FNMA Remic Trust 1991-127, Class S
144,496 12.98 09/25/98 153,084
FNMA Remic Trust, Series 1992-62, Class S
1,212,115 10.00 05/25/99 1,241,097
- --------------------------------------------------------------------------------
$ 5,799,114
- --------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only(a)--0.3%
FHLMC Series 1684, Class JD
$ 2,801,277(c) 3.66% 08/15/20/(b)/ $ 199,759
FNMA Remic Trust 1993-110, Class SC
2,597,458(c) 3.46 04/25/19/(b)/ 126,990
- --------------------------------------------------------------------------------
$ 326,749
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
Mortgage Backed Obligations (continued)
Collateralized Mortgage Obligations (continued)
Planned Amortization Class (PAC CMOs)--11.1%
FHLMC Series 1584, Class E
$ 3,000,000 5.75% 10/15/16/(b)/ $ 2,954,040
FNMA Remic Trust 1992-138, Class C
2,350,000 6.00 12/25/18/(b)/ 2,325,020
GNMA Remic Trust 1996-6, Class PB
6,000,000 6.50 06/16/09 6,038,400
- --------------------------------------------------------------------------------
$ 11,317,460
- --------------------------------------------------------------------------------
Planned Amortization Class Interest-Only (PAC IO) CMOs--0.6%
FHLMC Series 1552, Class JE
$ 10,552,245/(c)/ 7.00% 02/15/14/(b)/ $ 590,926
- --------------------------------------------------------------------------------
Planned Amortization Class Ioette CMOs--0.5%
FNMA Remic Trust 1992-198, Class K
$ 42,908/(c)/ 16.00% 12/25/15 $ 547,555
- --------------------------------------------------------------------------------
Regular Floater (a)--9.9%
FHLMC Series 1684, Class F
$ 5,000,000 5.75% 08/15/20/(b)/ $ 4,818,750
FHLMC Series 1684, Class JC
2,801,277 5.34 08/15/20/(b)/ 2,737,352
FNMA Remic Trust 1993-110, Class FC
2,597,459 5.54 04/25/19/(b)/ 2,565,796
- --------------------------------------------------------------------------------
$ 10,121,898
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--27.1%
FHLMC Series 1033, Class G
$ 2,000,000 8.00% 01/15/06/(b)/ $ 2,095,620
FHLMC Series 1296, Class I
2,493,715 5.24 07/15/99/(b)/ 2,481,546
FHLMC Series 174, Class Z
3,757,885 10.00 08/15/21 4,189,703
FNMA Remic Trust 1988-12, Class A
4,076,171 10.00 02/25/18/(b)/ 4,350,090
FNMA Remic Trust 1988-12, Class B
3,218,030 4.47 02/25/18/(b)/ 3,081,585
FNMA Remic Trust 1989-12, Class X
1,955,861 10.00 12/25/14/(b)/ 2,021,246
FNMA Remic Trust 1989-18, Class B
1,312,493 9.50 01/25/04 1,359,730
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations(continued)
Collateralized Mortgage Obligations(continued)
Sequential Fixed Rate CMOs (continued)
$ 4,628,657 7.75% 10/25/18 (b) $ 4,699,707
FNMA Remic Trust 1992-44, Class CA
3,000,000 12.00 08/25/20/(b)/ 3,394,800
- --------------------------------------------------------------------------------
$ 27,674,027
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 56,377,729
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $83,545,715) $ 84,096,928
- --------------------------------------------------------------------------------
U.S. Treasury Obligations--15.7%
United States Treasury Notes
$ 5,150,000 5.88% 04/30/98 $ 5,166,068
10,900,000 5.13 06/30/98/(b)/ 10,804,620
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $15,894,705) $ 15,970,688
- --------------------------------------------------------------------------------
Repurchase Agreement--1.0%
Joint Repurchase Agreement Account
$ 1,000,000 5.58% 11/01/96/(b)/ $ 1,000,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $1,000,000) $ 1,000,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $100,440,420(d)) $ 101,067,616
================================================================================
Futures contracts open at October 31, 1996 are as follows:
Number of
Contracts
Long Settlement Unrealized
Type (Short)(e) Month Gain (Loss)
- ------------------------- -------------- ------------------ ----------------
Euro Dollars 40 December 1996 $28,000
Euro Dollars 29 March 1997 34,650
Euro Dollars 37 June 1997 38,950
Euro Dollars 47 September 1997 68,625
Euro Dollars 45 December 1997 80,375
Euro Dollars 35 March 1998 25,250
Euro Dollars 20 June 1998 9,000
2 Year U.S. Treasury Notes 71 December 1996 87,859
5 Year U.S. Treasury Notes (89) December 1996 (173,203)
10 Year U.S. Treasury Notes (44) December 1996 (131,781)
20 Year U.S. Treasury Notes (7) December 1996 (34,844)
--------------
$32,881
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 826,961
Gross unrealized loss for investments in which
cost exceeds value (213,881)
- --------------------------------------------------------------------------------
Net unrealized gain $ 613,080
================================================================================
/(a)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(b)/Portions of these securities are being segregated for futures margin
requirements.
/(c)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(d)/The aggregate cost for federal income tax purposes is $100,454,536.
/(e)/Each Euro Dollar contract represents $1,000,000 in notional par value. 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 20-
Year U.S. Treasury Note contract represents $100,000 in notional par value.
The total notional amount and market value are $253,200,000 and
$89,469,788, respectively. The determination of notional amounts and market
value 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.
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. Under normal
interest rate conditions, the fund's duration will be within one-half year of
its benchmark, the Lehman Brothers Three-Year Municipal Bond Index. The fund's
approximate interest rate sensitivity is comparable to that of a three-year
bond.
After a Weak Start, the Municipal Bond Market Strengthened
The municipal bond market outperformed Treasuries during the 12-month
period under review, though both markets came under pressure when rates rose
during the first half of 1996. The average price of a three-year municipal bond
(as calculated from data provided by Municipal Market Data, an independent
municipal market information provider) fell slightly (0.14%), while yields rose
from 4.10% on October 31, 1995 to 4.15% on October 31, 1996.
The municipal bond market began the period under review on a weak note.
Tax reform uncertainty impacted investor demand during November and December
1995, while municipal bond supply was high due to seasonably heavy year-end
issuance. The market environment improved during January and February 1996, when
fading tax reform concerns helped to revive investor interest in the sector and
issuance declined. From March through the end of the period, the market's
technical balance was generally healthy, though occasional spikes in supply
periodically overwhelmed demand and briefly impacted performance. The largest of
these surges occurred in June when supply rose to its highest level since late
1995, but subsequently both new issuance and secondary supply fell dramatically
from July through September.
On the demand side, interest in municipal bonds was generally stable until
late summer and early fall. Demand from individual investors (who control
approximately 65% of municipal bond ownership either through mutual funds or
direct investment) began to decline when interest rates declined and municipal
yields fell below the psychologically significant 6% level. In addition,
property/casualty companies (which control approximately 10% of municipal bond
ownership) also dropped out of the market because the sector had become somewhat
unattractive relative to Treasuries. The supply drought finally abated in
October when many issuers sought to take advantage of lower interest rates, and
a continued weakness in demand caused municipals to underperform taxable bonds
for the month.
Municipal Bond Yield Curve
[LINE GRAPH APPEARS HERE]
The yield curve steepened at the short end and shifted downward at the longer
end.
Performance Review
The performance of the fund's Institutional shares was in line with the
benchmark, the Lehman Brothers Three-Year Municipal Bond Index (the "Index"),
for the 12-month period ended October 31, 1996. The Administration and Service
shares also performed well, but slightly lagged the benchmark.
- --------------------------------------------------------------------------------
15
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1995 - October 31, 1996
- --------------------------------------------------------------------------------
Lehman Brothers
Institu- Adminis- 3-Year
tional tration Service Municipal Bond Index
-------- -------- ------- ---------------------
<S> <C> <C> <C> <C>
Total Return (based on net 4.50% 4.24% 3.98% 4.51%
asset value)
- --------------------------------------------------------------------------------
Return From 4.30% 4.04% 3.78% NA
Monthly
Distributions
- --------------------------------------------------------------------------------
Return From Price 0.20% 0.20% 0.20% NA
Appreciation
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $9.96 $9.96 $9.97 NA
- --------------------------------------------------------------------------------
NAV Change +$0.02 +$0.02 +$0.02 NA
- --------------------------------------------------------------------------------
</TABLE>
The fund's positive performance during the period was primarily due to our
emphasis on higher yielding revenue bonds, as well as successful selection of
specific securities and relative value trades. As always, we did not make any
bets on the direction of interest rates, but rather kept the fund's duration in
line with the Index, occasionally using Treasury futures to actively manage
sector allocation.
In our search for incremental yield, we focused on three types of bonds.
The first category was relatively generic, highly liquid securities; the second
included slightly less liquid issues such as insured hospital bonds and
letter-of-credit-backed debt; and the last area was "story" bonds, such as
uninsured hospital and electric utility issues and multifamily housing revenue
bonds, whose value is often unrecognized by the market because they are unique
or generally not well understood. We identified attractive investment
opportunities for the third category through our extensive credit analysis.
We are pleased to report that the fund's Institutional shares ranked first
out of 26 funds in Lipper Analytical Services, Inc.'s short-intermediate
municipal debt category for the 12-month period ended October 31, 1996 based on
total return. (Lipper did not rank the fund's Administration and Service shares.
Please note that Lipper rankings do not take sales charges into account and that
past performance is not a guarantee of future results.) In addition, as of
October 31, 1996, the fund's Institutional shares were rated "five stars" by
Morningstar, Inc., its highest rating./1/
Portfolio Composition and Investment Strategies:
Revenue Bonds Dramatically Increased
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
General Obligations 3.0%
Variable Rate Demand Notes 4.7%
Insured General Obligations 12.6%
Insured Revenue Bonds 24.2%
Revenue Bonds 55.5%
* 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.
- ----------------------------
1 Source: (C) 1996 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 10/31/96.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and ten-year average annual returns (where applicable) in excess of
90-day Treasury bill returns with appropriate fee and sales charge adjustments
and a risk factor that reflects fund performance below 90-day Treasury bill
returns. The one-year rating is calculated using the same methodology, but is
not a component of the overall rating. The fund's Institutional shares received
five stars and were rated among 1,038 municipal bond funds for the three-year
period. For the one-year period, the Institutional shares received five stars
and were rated among 1,728 municipal bond funds. 10% of the funds receive the
five-star rating. The Morningstar rating applies only to the fund's
Institutional shares; the fund's Administration and Service shares have not been
rated. Administration and Service shares are subject to additional fees that may
have the effect of lowering performance and may affect any future Morningstar
rating. Morningstar rates funds against their peers in the same category. In
all, there are five Morningstar categories (domestic equity, international
equity, fixed income, municipal and hybrid). Morningstar ratings range from five
stars (highest) to one star (lowest). Funds with five-star ratings are in the
top 10% of their category, four-star ratings in the next 22.5%, three stars the
next 35%, two stars the next 22.5% and one star the lowest 10% of their
categories.
- --------------------------------------------------------------------------------
16
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------
.. Revenue Bonds. As of October 31, the portfolio's combined position in
insured and uninsured revenue bonds was significantly overweighted compared with
the Index, 79.7% versus 35.8%. We substantially increased the portfolio's total
revenue bond allocation (from 29.2% a year ago) because our emphasis on credit
analysis enabled us to identify attractive revenue bonds that offered higher
incremental yield than was available from general obligation bonds. (Revenue
bonds pay interest and principal out of a specific revenue stream, such as sales
taxes, hospital charges, tolls, electric rates and airport fees.)
.. General Obligation (GO) Bonds. The fund's allocation in insured and
uninsured GO bonds was dramatically cut during the period to 15.6% of the
portfolio, down from 51.0% a year ago and significantly underweighted versus the
Index's 55.5%. GOs are backed by the general taxing power of a municipality and
are typically higher credit quality but lower yielding than revenue bonds.
.. Variable Rate Demand Notes (VRDNs). VRDNs are high-quality cash
equivalents that we used to manage the portfolio's excess liquidity. VRDNs
were a 4.7% position, down from 10.0% a year ago.
.. Pre-refunded Bonds. Over the course of the year, we trimmed the fund's
holdings in pre-refunded bonds (9.8% as of October 31, 1995). In October, we
sold the fund's remaining position in the sector in favor of revenue bonds that
offered more attractive yields.
.. Duration. As of October 31, the fund's duration was in line with that of
the Index at 2.7 years.
.. Credit Quality. During the year, the fund's credit quality allocations
shifted. We reduced the portfolio's allocation in triple-A-rated GOs in favor of
single-A-rated revenue bonds, which allowed us to maintain the fund's targeted
double-A-rated average credit quality and liquidity while achieving higher
overall yields. We structured the portfolio's credit-quality allocation like a
"barbell," emphasizing higher credit quality securities in the four- to five-
year maturity range and lower relative credit quality securities in the one- to
three-year maturity range. As of October 31, more than half of the portfolio was
invested in triple-A-rated bonds (52.7%), while double-A- and single-A-rated
securities accounted for 20.1% and 27.2%, respectively.
Market Outlook
We have a bullish long-term outlook for municipal bond supply, since new
money issuance (bonds issued for purposes other than refunding older debt) tends
to be stable and grows at the same rate as GDP. In addition, we do not
anticipate a significant increase in refunding unless interest rates drop
substantially. On the demand side, investor interest is likely to remain
healthy, as we believe that two to four more years of divided government (a
Democratic president and a Republican-controlled Congress) should avert any
significant tax reform that would threaten municipal bonds' tax-exempt status.
Distribution Policy
Dividends are declared daily and paid on a monthly basis. During the
12-month period ended October 31, 1996, the fund's Institutional, Administration
and Service shares paid out monthly distributions totaling approximately $0.42,
$0.39 and $0.37 per share, respectively. The fund intends to distribute
substantially all of its investment company tax-exempt income, as required by
tax law.
- --------------------------------------------------------------------------------
17
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
We value your continued confidence in the GS Short Duration Tax-Free Fund
and look forward to reporting on the fund's progress in the coming year.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Elisabeth Schupf Lonsdale
Elisabeth Schupf Lonsdale
Portfolio Managers
GS Short Duration Tax-Free Fund
November 29, 1996
- --------------------------------------------------------------------------------
18
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. 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.
HYPOTHETICAL $50,000 INVESTMENT/(a)/
[GRAPH APPEARS HERE]
Institutional Shares
<TABLE>
<CAPTION>
Institutional Shares 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
10/1/92 50000 50000
- --------------------------------------------------------------------------------
10/31/92 49830 49805
- --------------------------------------------------------------------------------
10/31/93 53333 53102
- --------------------------------------------------------------------------------
10/31/94 53424 53825
- --------------------------------------------------------------------------------
10/31/95 56618 58023
- --------------------------------------------------------------------------------
10/31/96 59172 60646
- --------------------------------------------------------------------------------
</TABLE>
[GRAPH APPEARS HERE]
Administration Shares
<TABLE>
<CAPTION>
Admin 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
6/1/93 50000 50000
- --------------------------------------------------------------------------------
10/31/93 51088 51144
- --------------------------------------------------------------------------------
10/31/94 51031 51840
- --------------------------------------------------------------------------------
10/31/95 53971 55884
- --------------------------------------------------------------------------------
10/31/96 56265 58410
- --------------------------------------------------------------------------------
</TABLE>
[GRAPH APPEARS HERE]
Service Shares
<TABLE>
<CAPTION>
Service 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
10/1/94 50000 50000
- --------------------------------------------------------------------------------
10/31/94 49810 49880
- --------------------------------------------------------------------------------
10/31/95 52594 53771
- --------------------------------------------------------------------------------
10/31/96 54693 56201
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------
Average Annual Total Return
------------------------------------
One Year Since Inception/(b)/
-----------------------------------------------------------
<S> <C> <C>
Institutional Shares 4.50% 4.21%
-----------------------------------------------------------
Administration Shares 4.24% 3.51%
-----------------------------------------------------------
Service Shares 3.98% 4.36%
-----------------------------------------------------------
</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.
- --------------------------------------------------------------------------------
19
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligation--98.2%
Alabama--2.8%
Selma, AL IDA for International Paper Co. PCRB (A-/A3)
$1,000,000 4.15% 07/15/08 $1,000,000
- --------------------------------------------------------------------------------
Arkansas--3.8%
West Memphis, AR Public Utility System RB (MBIA) (NR/Aaa)
$1,310,000 5.25%(e) 12/01/00 $1,344,388
- --------------------------------------------------------------------------------
Colorado--4.2%
Municipal Sub District of Northern Colorado Water Conservation Co.
RB(AMBAC)(AAA/Aaa)
$1,435,000 5.75% 12/01/01 $1,508,845
- --------------------------------------------------------------------------------
Connecticut--4.3%
Connecticut State Resource Recovery Authority Series A RB (AA-/NR)
$1,500,000 5.60% 11/15/99 $1,546,185
- --------------------------------------------------------------------------------
Illinois--4.4%
Chicago, IL GO (MBIA) (AA/Aaa)
$1,500,000 5.40% 10/31/00 $1,547,670
- --------------------------------------------------------------------------------
Kentucky--7.5%
Jefferson County, KY Trust Certificates (A+/NR)RB
$1,145,000 5.25% 03/01/99 $1,163,904
Pendleton County, KY LOC (Self Insurance)(NR/VMIG1)
1,500,000 4.25 07/01/01 1,503,045
- --------------------------------------------------------------------------------
$2,666,949
- --------------------------------------------------------------------------------
Louisiana--7.4%
Louisiana Offshore Deepwater Part Authority Term B RB (A/Baa1)
$1,000,000 5.85% 09/01/00 $1,040,080
Louisiana State Refunding RB, Series A GO (FGIC) (AAA/Aaa)
1,500,000 6.00 08/01/01 1,583,970
- --------------------------------------------------------------------------------
$2,624,050
- --------------------------------------------------------------------------------
New Jersey--4.0%
West Windsor/Plainsboro, NJ Regional School District (FGIC)
(AAA/Aaa)
$1,400,000 5.25% 12/01/99 $1,436,750
- --------------------------------------------------------------------------------
New York--6.8%
Municipal Assistance Corp. Refunding RB (AMBAC) (AAA/Aaa)
$1,000,000 6.00% 07/01/00 $1,051,690
Syracuse, NY IDA RB (AA/NR)
$1,365,000 4.60% 10/15/98 $1,369,491
- --------------------------------------------------------------------------------
$2,421,181
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Oklahoma--13.5%
Enid, OK Hospital Authority RB (Societe Generale LOC) (NR/Aa2)
$2,700,000 6.63%(a) 10/01/15 $2,747,115
Southern Oklahoma Memorial Hospital RB(b) (A/A)
2,000,000 5.60 02/01/00 2,043,680
- -------------------------------------------------------------------------------
$4,790,795
- -------------------------------------------------------------------------------
Oregon--4.2%
Klamath Falls, OR Salt Caves Hydroelectic RB (SP1+/NR)
$1,500,000 4.50% 05/01/23 $1,507,980
- -------------------------------------------------------------------------------
Pennsylvania--9.7%
Pennsylvania Intergovernmental Cooperative Authority Special Tax RB
(FGIC) (AAA/Aaa)
$1,500,000 5.75% 06/15/00 $1,559,730
Philadelphia, PA Gas Works COPS (FSA) (AAA/Aaa)
1,800,000 5.95 04/01/00 1,879,146
- --------------------------------------------------------------------------------
$3,438,876
- --------------------------------------------------------------------------------
Texas--11.4%
Bexar County, TX MFH Finance Corp. RB (CFMG) (NR/A3)
$1,500,000 4.88% 11/01/04 $1,502,220
Houston, TX Water & Sewer RB Series B (A/A)
1,430,000 5.25 12/01/99 1,460,802
Port Neches, TX Independent School District GO (AAA/Aaa)
1,000,000 7.00 02/15/01 1,092,480
- -------------------------------------------------------------------------------
$4,055,502
- -------------------------------------------------------------------------------
Virginia--5.0%
Petersburg, VA Hospital Authority RB (NR/A)
$1,760,000 5.50% 07/01/99 $1,798,157
- -------------------------------------------------------------------------------
Washington--4.6%
Washington State Public Power Supply System RB, Series B (AA-/Aa1)
$1,500,000 7.20% 07/01/02 $1,623,044
- -------------------------------------------------------------------------------
Wyoming--4.6%
Uinta County, WY School District GO, Series A (FSA) (AAA/Aaa)
$1,500,000 6.88% 06/01/00 $1,620,390
- -------------------------------------------------------------------------------
Total Debt Obligations
(Cost $34,727,338) $34,930,762
===============================================================================
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Short-Term Obligations--4.5%
Illinois--0.6%
Illinois Development Finance Authority RB (AA+/A-1)/(c)/
$200,000 3.55% 01/1/96 $200,000
Louisiana--3.9%
East Baton Rouge Parish PCRB (AAA/Aaa)/(c)/
$1,400,000 3.60% 11/1/96 $1,400,000
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $1,600,000) $ 1,600,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $36,328,338)/(d)/ $36,530,762
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 204,715
Gross unrealized loss for investments in which
cost exceeds value (2,291)
- --------------------------------------------------------------------------------
Net unrealized gain $ 202,424
================================================================================
</TABLE>
/(a)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(b)/Portions of these securities are being segregated for when-issued
securities.
/(c)/Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next reset interest dates.
/(d)/The amount stated also represents aggregate cost for federal income tax
purposes.
/(e)/When-issued securities.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
================================================================================
Investment Abbreviations:
AMBAC --Insured by American Municipal Bond Assurance Corp.
CFMG --Credit Lyonnais Line of Credit
COPS --Certificates of Participation
FGIC --Insured by Financial Guaranty Insurance Co.
FSA --Financial Security Assurance Co.
GO --General Obligation
IDA --Industrial Development Authority
LOC --Letter of Credit
MBIA --Insured by Municipal Bond Investors Assurance
NR --Not Rated
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Core Fixed Income Fund seeks to achieve a total return consisting of
capital appreciation and income that exceeds the total return of its benchmark,
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 non-dollar-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. The fund's
approximate interest rate sensitivity is expected to be comparable to that of a
five-year bond.
Performance Review
During the period under review, the fund's Institutional shares outperformed
the Index. The strong performance was primarily due to its investments in
corporate bonds and emerging market debt. In addition, the fund also benefited
from its mortgage-backed and asset-backed holdings when both sectors
strengthened during the period.
The fund fared well relative to its peers. For the 12-month period ended
October 31, 1996, the fund's Institutional shares ranked in the top quartile
(24th out of 96 funds) in Lipper Analytical Services, Inc.'s "corporate debt -
BBB-rated" category based on total return. (Lipper did not rank the fund's
Administration and Service shares for the period because they were in existence
less than 12 months. Please note that Lipper rankings do not take sales charges
into account and that past performance is not a guarantee of future results.)
The fund's Administration and Service shares, which began operations on
February 28, 1996 and March 13, 1996, respectively, achieved positive returns
since their inceptions.
During the period, the net asset value (NAV) of the fund's Institutional
shares fell $0.15 due to the sharp rise in interest rates during the first half
of 1996. Reflecting the fact that rates had already risen significantly, the NAV
of the fund's Administration shares (which opened in February) also declined but
not as significantly, while the NAV of the fund's Service shares (which opened
in March) rose $0.09.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Performance Summary
- -------------------------------------------------------------------------------
Institutional Administration* Service*
(10/31/95- (2/28/96- (3/13/96-
10/31/96) 10/31/96) 10/31/96)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Return (based on 5.98% 3.56% 4.90%
net asset value)
- -------------------------------------------------------------------------------
Return From Monthly 7.48% 4.27% 3.98%
Distributions
- -------------------------------------------------------------------------------
Return From Price -1.50% -0.71% 0.92%
Depreciation/
Appreciation
- -------------------------------------------------------------------------------
Total Return of Lehman 5.83% 3.74% 4.94%
Brothers Aggregate
Bond Index
- -------------------------------------------------------------------------------
NAV (as of 10/31/96) $9.85 $9.84 $9.86
- -------------------------------------------------------------------------------
NAV Change -$0.15 -$0.07 +$0.09
- -------------------------------------------------------------------------------
</TABLE>
*New share class opened during the period.
Portfolio Composition and Investment Strategies
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
Corporate Bonds 26.6%
Fixed Rate Mortgage Pass-Throughs 23.9%
U.S. Treasuries 19.5%
ABSs 12.5%
CMOs 9.8%
Emerging Market Debt 4.5%
Repos/Cash Equivalents 1.7%
Agency Debentures 1.5%
* 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.
- --------------------------------------------------------------------------------
22
<PAGE>
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
.. Corporate Bonds. As of October 31, the fund's largest allocation was in
corporate bonds, overweighted relative to the Index (26.6% versus 17.6%),
which significantly benefited performance. Though corporate bonds began the
period on a weak note due to the economic slowdown during November and December,
the sector improved dramatically when companies reported positive earnings
growth from January 1996 through the end of the period. Within the sector, we
stressed industrial and financial issues. Industrials performed well due to the
strengthening economy, while financials benefited from the relatively steep
yield curve, which enabled issuers to borrow at lower, short-term rates and lend
at higher, long-term rates.
.. Fixed Rate Mortgage Pass-Throughs. Fixed rate mortgage pass-throughs, a
23.9% position as of October 31, were underweighted compared with the Index
(29.7%), with the remainder of the fund's mortgage-backed security allocation
invested in collateralized mortgage obligations (CMOs). We emphasized seasoned
premium mortgages, which have lower prepayment risk than recently issued
mortgages. The sector suffered from high prepayments during November and
December 1995, but conditions improved when interest rates rose sharply during
the first half of 1996 and prepayments declined. Over the course of the year,
these securities positively contributed to the fund's performance.
During the period, we occasionally used mortgage dollar rolls to benefit from
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 -- 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.
.. CMOs. During the period, we increased the portfolio's CMO allocation to
9.8%, up from 2.0% a year earlier. Within the sector, we initiated a
position in sequential-pay/support CMOs (5.1% as of October 31) and increased
the portfolio's position in planned amortization class (PAC) CMOs to 3.5% from
0.9%. These securities were favored for their relative stability and attractive
spreads compared with Treasuries, and they benefited performance during the
period. The remaining CMO positions were inverse floaters, discussed below.
.. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. The fund's
allocation in U.S. Treasuries was reduced to 19.5% from 24.7% a year ago. We
significantly underweighted Treasuries relative to the benchmark (45.2%) to
focus on other sectors that offered more attractive relative value. In addition,
repurchase agreements/cash equivalents accounted for 1.7% of the portfolio, up
from 0.4% a year ago.
.. Asset-Backed Securities (ABSs). We increased the fund's allocation in ABSs to
12.5%, up from 9.9% a year ago. The ABS position consisted of short-term,
high-credit-quality issues primarily backed by credit card loans, as well as
smaller positions in automobile loan debt and other receivables, that offered
incremental yield over similar-duration Treasuries. When the period under review
began, the ABS market was weak due to uncertainty regarding credit card
delinquencies, but those concerns waned and the sector strengthened from January
through October. The supply of ABSs was robust during the period, with a wide
variety of innovative new issues across a range of maturities, collateral types
and structures. Despite the increased issuance, the technical balance of the ABS
market remained favorable due to heavy investor demand from foreign banks,
insurance companies and an increasing number of corporate "crossover" accounts.
- --------------------------------------------------------------------------------
23
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
.. Emerging Market Debt. The portfolio's investments in emerging market debt
(4.5%) performed extremely well during the period. We carefully managed the
fund's exposure in the sector by stressing higher credit-quality, short-duration
bonds. Geographically, we emphasized Latin American countries because we believe
this region has the best risk/reward characteristics. During the period, we
focused on bonds from Chile, Colombia and the Andean region development bank. We
also initiated a new position in investment-grade Mexican bonds.
.. Agency Debentures. Agency debentures, a small position (1.5%), added to the
portfolio's diversification and contributed incremental yield. However, we
underweighted the sector relative to the Index (6.5%) because our analysis
indicated that it did not adequately compensate us given its level of risk.
.. Duration. As of October 31, the fund's duration matched that of the Index at
4.7 years. Rather than attempting to predict the direction of interest rates, we
manage the fund's duration to approximate that of the Index, partly through the
use of financial futures. We seek to add incremental return over the Index
through sector weighting and individual security selection.
.. Credit Quality. More than half of the portfolio was invested in government
and agency securities (51 .1%), with another 12.6% invested in triple-A-rated
securities. The remainder of the portfolio was made up of double-A-rated
securities (2.7%), single-A-rated securities (12.5%), triple-B-rated
securities (19.4%) and cash equivalents
(1.7%).
.. Prudent Use of Derivatives. As noted, the portfolio held positions in asset-
backed securities (12.5%), sequential-pay/support CMOs (5.1%) and PAC CMOs
(3.5%), which are all typically considered to be lower risk derivatives. In
addition, we held a 1.2% position in inverse floaters, which are securities
whose coupons reset in the opposite direction from interest rate movements.
These securities performed well during the period, offering incremental yield
over Treasuries.
Market Outlook
We are somewhat cautious on the corporate bond sector as it has become
expensive relative to Treasuries, but expect the sector to continue to benefit
from strong technical and fundamental factors. We intend to continue to
overweight industrial and financial issues and underweight utilities due to
their regulatory and competitive pressures. In the mortgage pass-through market,
certain segments are attractively valued, and we believe that our current
seasoned holdings should fare well relative to other sectors if interest rates
were to continue to fall and increase the level of prepayments. We are
cautiously optimistic on the ABS market, where we expect the sector's
significant spread premiums relative to comparably rated corporate securities to
continue to buoy investor demand. In addition, Fed surveys indicate that banks
have been tightening their underwriting standards over the last three quarters,
which should help to allay lingering investor concerns surrounding consumer
credit card delinquencies. Finally, we remain optimistic on the prospects for
the relative performance of emerging market debt, which continues to offer good
value compared with other asset classes. Overall, the economic trends in
emerging markets appear to be headed in the right direction and the
globalization of financial markets is likely to increase investor interest in
the sector. During the coming year, we will continue to actively allocate the
portfolio's assets among the various fixed income sectors as their relative
value changes.
Distribution Policy
During the 12-month period under review, the fund's Institutional shares
distributed $0.72 per share. From their inceptions through October 31, the
fund's Administration and Service shares paid out $0.41 and $0.38 per share,
respectively. (The Administration shares' inception date was on February 28,
1996, and the Service shares' inception date was on March 13, 1996.) Dividends
are
- --------------------------------------------------------------------------------
24
<PAGE>
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
declared daily and paid on a monthly basis. As required by tax law, the fund
distributes substantially all of its investment company taxable income.
In closing, we appreciate your investment and look forward to serving you in
the future.
Sincerely,
/s/ Jonathan A Beinner
Jonathan A Beinner
/s/ Richard H. Buckholz
Richard H. Buckholz
/s/ C. Richard Lucy
C. Richard Lucy
/s/ Stephen R. Warren
Stephen R. Warren
Portfolio Managers
GS Core Fixed Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
25
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund
- --------------------------------------------------------------------------------
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. 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
[GRAPH APPEARS HERE] [GRAPH APPEARS HERE] [GRAPH APPEARS HERE]
Institutional Shares/(a)/ Administration Shares Service Shares
1/5/94 50000 2/28/96 50000 3/13/96 50000
10/31/94 48500 10/31/96 51780 10/31/96 52450
10/31/95 56124
10/31/96 59492
Lehman Aggregate Index Lehman Aggregate Index Lehman Aggregate Index
1/5/94 50000 2/28/96 50000 3/13/96 50000
10/31/94 46980 10/31/96 51870 10/31/96 52470
10/31/95 54332
10/31/96 57505
<TABLE>
<CAPTION>
------------------------ -----------------------------------------------------
Average Annual Total Return
------------------------ -----------------------------------------------------
One Year Since Inception/(a)/
<S> <C> <C>
------------------------ ---------------------------- ------------------------
Institutional Shares 5.98% 6.34%
------------------------ ---------------------------- ------------------------
Administration Shares N/A 3.56/(b)/
------------------------ ---------------------------- ------------------------
Service Shares N/A 4.90/(b)/
------------------------ ---------------------------- ------------------------
</TABLE>
(a) The Institutional, Administration and Service shares commenced operations
January 5, 1994, February 28, 1996 and March 13, 1996, respectively
(b) An aggregate total return (not annualized) is shown instead of an average
annual total return since the Administration and Service shares have not
completed a full twelve months of operations.
- --------------------------------------------------------------------------------
26
<PAGE>
Statement of Investments
- ---------------------------------------------------------------------
GS Core Fixed Income Fund
October 31, 1996
- ---------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
=====================================================================
Corporate Bonds--26.8%
Finance Bonds--12.6%
BankAmerica Corp.
$ 20,000 6.03% 05/17/99 $ 201,724
Bear Stearns Mortgage Securities, Inc.
2,045,784 6.50 03/28/09 1,903,048
Capital One Bank
600,000 8.63 01/15/97 603,000
500,000 8.13 02/27/98 511,610
Comdisco Inc.
950,000 9.75 01/15/97 956,717
200,000 7.33 03/06/97 201,112
Conseco Inc.
340,000 10.50 12/15/04 402,688
Continental Bank N.A.
525,000 11.25 07/01/01 565,971
Countrywide Funding Corp.
125,000 6.08 07/14/99 124,166
250,000 8.43 11/16/99 263,653
250,000 7.75 08/10/01 259,800
Ford Capital Corp.
200,000 9.38 01/01/98 207,584
300,000 9.50 07/01/01 333,960
General Motors Acceptance Corp.
275,000 7.63 03/09/98 281,064
200,000 7.13 05/10/00 204,238
375,000 9.63 12/15/01 422,483
Meditrust, Inc.
240,000 7.82 09/10/26 258,144
Security Pacific Corp.
995,000 11.50 11/15/00 1,268,429
Signet Banking Corp.
240,000 9.63 06/01/99 257,527
Washington Real Estate Corp.
120,000 7.13 08/13/03 120,307
- ---------------------------------------------------------------------
$ 9,247,225
- ---------------------------------------------------------------------
Industrial Bonds--13.7%
360 Communications Co.
$ 525,000 7.13% 03/01/03 $ 520,312
Auburn Hills Trust
210,000 12.00 05/01/20 316,730
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
=====================================================================
Corporate Bonds (continued)
Industrial Bonds (continued)
Cablevision Industries Corp.
$ 150,000 10.75% 01/30/02 $ 162,534
Continental Airlines, Inc.
349,679 7.75 07/02/14 364,513
569,776 8.56 07/02/14 620,880
Ford Holdings, Inc.
300,000 9.25 03/01/00 325,581
Mitchell Energy & Development Corp.
400,000 8.00 07/15/99 410,020
News America Holdings, Inc.
350,000 9.13 10/15/99 375,340
150,000 7.50 03/01/00 154,083
Northwest Airlines Corp.
167,795 8.26 03/10/06 179,500
575,000 8.97 01/02/15 605,573
RJR Nabisco Inc.
175,000 8.00 07/15/01 175,334
450,000 8.63 12/01/02 456,467
Tele-Communications, Inc.
50,000 6.46 03/06/00 49,465
300,000 8.25 01/15/03 296,652
1,135,000 6.27 09/15/03 1,132,764
Tenneco Inc.
1,175,000 10.00 08/01/98 1,249,178
Time Warner, Inc.
1,650,000 7.95 02/01/00 1,708,410
400,000 7.98 08/15/04 409,452
U.S. Air Inc.
560,072 6.76 04/15/08 547,711
- ---------------------------------------------------------------------
$10,060,499
- ---------------------------------------------------------------------
Utility Bonds--0.5%
Central Maine Power Co.
$ 330,000 7.45% 08/30/99 $ 329,248
- ---------------------------------------------------------------------
$ 329,248
- ---------------------------------------------------------------------
Total Corporate Bonds
(Cost $19,435,482) $19,636,972
- ---------------------------------------------------------------------
Asset-Backed Securities--12.2%
Airplanes Pass Through Trust Series 1, Class C
$ 155,000 8.15% 03/15/19 $ 159,816
- ---------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
27
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C> <C>
Asset-Backed Securities (continued)
Chevy Chase Auto Receivables Trust Series 1995-2, Class A
$ 232,121 5.80% 06/15/02 $ 231,466
Discover Card Master Trust, Series 1996-4, Class A
1,910,000 5.76 10/16/13 1,926,101
Discover Card Master Trust, Series 1996-4, Class B
1,100,000 5.93 10/16/13 1,100,000
General Motors Acceptance Corp. Series 1995, Class A
99,367 7.15 03/15/00 100,546
Navistar Financial Corp. Owner Trust, Series 1995-A, Class A2
291,994 6.55 11/20/01 293,725
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
314,669 6.85 06/15/01 318,757
Premier Auto Trust Series 1995-1, Class A4
360,000 7.85 09/04/98 362,023
Premier Auto Trust Series 1995-1, Class A5
80,000 7.90 05/04/99 81,150
Sears Credit Account Master Trust, Series 1996-1, Class A
680,000 6.20 02/16/06 675,750
Sears Credit Account Master Trust, Series 1995-2, Class A
550,000 8.10 06/15/04 577,500
Sears Credit Card Master Trust, Series 1995-3, Class A
300,000 7.00 10/15/04 306,561
Standard Credit Card Trust, Series 1990-3, Class A
1,120,000 9.50 07/10/98 1,140,294
Standard Credit Card Trust, Series 1990-6, Class B
900,000 9.63 09/10/98 924,183
Standard Credit Card Trust, Series 1994-4, Class A
680,000 8.25 11/07/03 726,111
- --------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $8,987,847) $8,923,983
- --------------------------------------------------------------------------------
Emerging Market Debt--3.9%
Bancoldex
$ 160,000 8.63% 06/02/00 $ 164,731
Corp. Andina de Fomento
200,000 7.25 04/30/98 202,294
40,000 8.38 07/29/01 40,698
Empresa Col Petroleos
900,000 7.25 07/08/98 904,563
Financiera Energy Nacional
530,000 6.63 12/13/96 534,400
160,000 9.38 06/15/06 165,234
- --------------------------------------------------------------------------------
Emerging Market Debt (continued)
Instituto de Fomento Industrial
$ 80,000 8.38% 07/29/01 $ 81,397
Korea Electric Power
266,952 7.40 04/01/16 269,197
YPF Sociedad Anonima
456,886 7.50 10/26/02 463,036
- --------------------------------------------------------------------------------
Total Emerging Market Debt
(Cost $2,799,425) $2,825,550
- --------------------------------------------------------------------------------
Government Bonds--0.9%
Province of Quebec
$ 520,000 13.25% 09/15/14 $ 630,058
- --------------------------------------------------------------------------------
Total Government Bonds
(Cost $653,628) $ 630,058
- --------------------------------------------------------------------------------
Mortgage Backed Obligations--31.1%
Federal Home Loan Mortgage Corp. (FHLMC((b)
$4,500,000 7.50% TBA-30 Yr(b) $4,515,435
1,208,677 6.00 TBA-30 Yr(b) 1,198,196
Federal National Mortgage Association (FNMA)
1,000,000 7.00 TBA-30 Yr(b) 980,930
1,000,000 8.00 11/15/16 1,020,000
126,229 8.50 06/01/06 131,790
125,861 8.50 09/01/06 131,406
720,814 8.50 03/01/10 752,213
500,000 6.25 07/25/18 492,810
989,360 7.00 02/01/26 970,493
1,000,001 8.50 07/01/26 1,034,681
FNMA Remic Trust, Series 1993-201G
1,000,000 3.50 05/25/19 871,560
GE Capital Mortgage Services, Inc. Series 1994-17, Class A10
2,000,000 7.00 05/25/24 1,842,500
Government National Mortgage Association (GNMA)
1,000,000 7.00 TBA-30 Yr(b) 980,620
1,000,000 7.50 TBA-30 Yr(b) 1,003,120
3,000,000 8.00 TBA-30 Yr(b) 3,067,500
1,000,000 8.50 TBA-30 Yr(b) 1,038,120
342,966 8.00 02/15/17 356,042
850,876 7.50 03/15/23 857,785
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
- ----------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
======================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations(continued)
Government National Mortgage Association (GNMA)--(continued)
$ 512,583 7.00% 08/15/23 $ 505,699
124,369 7.50 08/15/23 125,379
Prudential Home Mortgage Securities Corp., Series 1992-39 A8
1,000,000 7.74 12/25/07 892,270
- ----------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $22,482,170) $22,768,549
- ----------------------------------------------------------------------
Sovereign Credit--1.3%
United Mexican States
$ 650,000 7.69% 08/06/01 $ 658,769
State of Israel
300,000 6.38 12/15/05 286,611
- ----------------------------------------------------------------------
Total Sovereign Credit
(Cost $926,260) $ 945,380
- ----------------------------------------------------------------------
U.S. Government Agency Obligations--1.5%
Federal Home Loan Mortgage Corp. (FHLMC)
$ 300,000 8.20% 01/16/98 $ 301,734
250,000 6.83 09/18/02 249,023
Resolution Funding Corp. Principal-Only Stripped Securities/(c)/
1,790,000 7.08 10/15/20 335,392
1,140,000 7.08 01/15/21 210,136
- ----------------------------------------------------------------------
Total U.S. Government Agency Obligations
(Cost $1,058,170) $ 1,096,285
- ----------------------------------------------------------------------
U.S. Treasury Obligations--19.3%
United States Treasury Bonds
$ 3,900,000 8.75% 05/15/17 $ 4,772,625
30,000 8.88 08/15/17 37,153
150,000 8.75 08/15/20 185,180
120,000 7.88 02/15/21 135,900
United States Treasury Interest-Only Stripped Securities/(d)/
2,250,000 6.69 08/15/09 968,063
350,000 6.75 11/15/10 137,736
United States Treasury Notes
1,200,000 5.88 04/30/98 1,203,744
3,250,000 6.88 08/31/99 3,331,250
100,000 6.13 07/31/00 100,375
2,090,000 7.88 11/15/04 2,293,775
United States Treasury Principal-Only Stripped Securities/(c)/
40,000 5.54 11/15/97 37,792
590,000 6.41 11/15/04 354,885
2,920,000 6.95 05/15/20 581,460
- ----------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $13,792,338) $14,139,938
- ----------------------------------------------------------------------
Repurchase Agreements--19.0%
Joint Repurchase Agreement Account/(a)/
$ 13,900,000 5.58% 11/01/96 $13,900,000
- ----------------------------------------------------------------------
Total Repurchase Agreements
(Cost $13,900,000) $13,900,000
- ----------------------------------------------------------------------
Total Investments
(Cost $84,035,320/(e)/) $84,866,715
======================================================================
</TABLE>
Futures contracts open at October 31, 1996 are as follows:
<TABLE>
<CAPTION>
Number of
Contracts Settlement Unrealized
Type Long (f) Month Gain
- ------------------------- ------------ --------------- ------------
<S> <C> <C> <C>
Euro Dollars 5 December 1996 $5,125
Euro Dollars 5 March 1997 6,875
Euro Dollars 3 September 1997 825
Euro Dollars 5 June 1997 7,500
Euro Dollars 5 June 1998 3,625
5-Year U.S. Treasury
Notes 7 December 1996 8,641
10-Year U.S. Treasury
Notes 18 December 1996 65,625
=====================================================================
$98,216
-----------
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 993,383
Gross unrealized loss for investments in
which cost exceeds value (243,229)
=====================================================================
Net unrealized gain $ 750,154
- ---------------------------------------------------------------------
</TABLE>
/(a)/Portions of these securities are being segregated for open TBA purchases,
mortgage dollar rolls and futures.
/(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 securities represents effective
yields to maturity.
/(d)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(e)/The aggregate cost for federal income tax purposes is $84,116,561.
/(f)/Each Euro Dollar contract represents $1,000,000 in notional par value. Each
5-Year U.S. Treasury Note and, 10-Year U.S. Treasury Note contract
represents $100,000 in notional par value. The total notional amount and
market value are $25,500,000 and $8,144,325, respectively. The
determination of notional amounts and market value 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.
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
==============================================================
<S> <C> <C> <C> <C>
Assets:
Investments in securities, at value (cost $618,544,961, $100,440,420,
$36,328,338 and $84,035,320, respectively) $617,783,125 $1O1,067,616 $36,530,762 $84,866,715
Receivables:
Investment securities sold 9,023,710 -- 2,639,947 4,512,122
Interest 6,238,391 962,570 560,207 981,011
Fund shares sold 93,534 9,761 48,407
Variation margin -- -- -- 5,475
Cash 23,482 85,863 133,870 70,206
Deferred organization expenses, net -- -- 20,748 53,352
Other assets 186,057 127,499 66,001 66,089
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 633,348,299 102,253,309 39,999,942 90,554,970
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Dividends 1,479,757 109,402 20,960 23,483
Investment securities purchased 3,134,490 -- 4,336,434 17,313,687
Fund shares repurchased 732,405 55,958 20,916 6,846
Variation margin 20,125 256 -- --
Investment adviser fees 210,539 34,534 11,033 22,677
Transfer agent fees 46,181 -- 5,254 3,058
Authorized dealer service fees 1,675 -- -- --
Accrued expenses and other liabilities 54,249 35,598 48,693 40,800
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 5,679,421 235,748 4,443,290 17,410,551
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 680,810,713 115,128,671 39,403,964 72,421,889
Accumulated undistributed (distributions in excess of) net
investment income (3,441,783) 770,624 90,133 33,551
Accumulated net realized loss on investment and futures
transactions (49,082,170) (14,541,811) (4,139,869) (240,632)
Net unrealized gain (loss) on investments and futures (617,882) 660,077 202,424 929,611
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets $627,668,878 $102,017,561 $35,556,652 $73,144,419
===================================================================================================================================
Net asset value, offering and redemption price per share
Institutional shares $9.83 $9.83 $9.96 $9.85
Administration shares $9.83 $9.85 $9.96 $9.84
Service shares -- $9.82 $9.97 $9.86
Class A shares(a) $9.83 -- -- --
===================================================================================================================================
Shares Outstanding:
Institutional shares 62,407,407 10,168,881 3,494,408 7,312,322
Administration shares 385,738 25,537 4,845 71,240
Service shares -- 185,492 69,696 38,782
Class A shares 1,091,335 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest outstanding, $.001 par value
(unlimited number of shares authorized) 63,884,480 10,379,910 3,568,949 7,422,344
===================================================================================================================================
</TABLE>
(a) Maximum public offering price per share (NAV per share x 1.0152) for Class A
shares of GS Adjustable Rate Government Fund is $9.97
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Operations
October 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
==========================================================
<S> <C> <C> <C> <C>
Investment income:
Interest, net (a) $39,925,070 $7,068,555 $1,979,825 $4,292,039
- ------------------------------------------------------------------------------------------------------------------------------------
Total income 39,925,070 7,068,555 1,979,825 4,292,039
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 2,535,709 514,200 169,796 246,568
Distribution fees 30,905 -- -- --
Authorized dealer service fees 30,905 -- -- --
Administration share fees 9,833 107 129 751
Service share fees -- 1,222 2,322 422
Transfer agent fees 278,337 -- 16,980 24,657
Custodian fees 136,975 66,180 53,929 81,841
Professional fees 86,751 56,020 54,712 53,340
Registration fees 72,001 37,210 44,701 48,435
Amortization of deferred organization expenses 20,848 -- 22,735 24,562
Trustees' fees 1,899 1,287 760 915
Other 106,857 59,952 65,554 30,136
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 3,311,020 736,178 431,618 511,627
Less--Expenses reimbursable and fees waived by Goldman Sachs (417,768) (272,069) (238,097) (233,065)
- ------------------------------------------------------------------------------------------------------------------------------------
Net expenses 2,893,252 464,109 193,521 278,562
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 37,031,818 6,604,446 1,786,304 4,013,477
- ------------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment and
futures transactions:
Net realized gain (loss) from:
Investment transactions (310,326) (222,458) 367,144 (108,070)
Futures transactions (2,192,298) (345,361) (35,506) (145,350)
Net change in unrealized gain (loss) on:
Investments 6,892,986 661,003 (396,071) (192,910)
Futures 818,120 (41,385) -- 117,560
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment and futures
transactions 5,208,482 51,799 (64,433) (328,770)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $42,240,300 $ 6,656,245 $ 1,721,871 $3,684,707
====================================================================================================================================
(a) Net of $1,314 in foreign withholding tax for the Core Fixed Income Fund.
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
October 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
----------------------------------------------------------
<S> <C> <C> <C> <C>
From Operations:
Net investment income $ 37,031,818 $6,604,446 $1,786,304 $4,013,477
Net realized gain (loss) from investment and futures transactions (2,502,624) (567,819) 331,638 (253,420)
Net change in unrealized gain (loss) on investments and futures 7,711,106 619,618 (396,071) (75,350)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 42,240,300 6,656,245 1,721,871 3,684,707
- ------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (36,233,589) (6,561,519) (1,766,892) (4,019,797)
Administration shares (220,450) (2,548) (2,032) (19,144)
Service shares -- (14,792) (17,380) (5,349)
Class A shares (577,779) -- -- --
In excess of net investment income
Institutional shares (1,304,006) -- -- --
Administration shares (7,930) -- -- --
Class A shares (20,794) -- -- --
Net realized gain (loss) on investment, and future transactions
Institutional shares -- -- -- (450,016)
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (38,364,548) (6,578,859) (1,786,304) (4,494,306)
- ------------------------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 406,586,374 42,019,441 22,248,684 21,976,567
Reinvestment of dividends and distributions 18,181,648 4,153,816 1,401,492 4,315,748
Cost of shares repurchased (477,107,914) (47,993,112) (46,918,400) (7,840,575)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from shares transactions (52,339,892) (1,819,855) (23,268,224) 18,451,740
- ------------------------------------------------------------------------------------------------------------------------------
Total (decrease) increase (48,464,140) (1,742,469) (23,332,657) 17,642,141
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------
Beginning of year $676,133,018 $103,760,030 $58,889,309 $55,502,278
- ------------------------------------------------------------------------------------------------------------------------------
End of year $627,668,878 $102,017,561 $35,556,652 $73,144,419
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated (distributions in excess of) undistributed
net investment income $ (3,441,783) $ 770,624 $ 90,133 $ 33,551
- ------------------------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 41,534,978 4,293,467 2,233,482 2,244,430
Reinvestment of dividends and distributions 1,856,783 424,274 140,950 439,299
Shares repurchased (48,741,470) (4,905,357) (4,727,959) (811,075)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding (5,349,709) (187,616) (2,353,527) 1,872,654
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
32
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GS Adjustable GS Short-Term
Rate Government
Government Agency
Agency Fund Fund
==================================
<S> <C> <C>
From Operations:
Net investment income $ 42,586,453 $ 8,885,667
Net realized gain (loss) from investment and futures transactions (12,000,479) (4,030,174)
Net change in unrealized gain on investments and futures 16,138,367 5,735,691
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 46,724,341 10,591,184
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (42,629,917) (8,684,213)
Administration shares (278,448) (11,164)
Service shares -- --
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)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 456,762,969 49,034,023
Proceeds from reorganizations 37,593,780 --
Reinvestment of dividends and distributions 21,273,685 4,993,443
Cost of shares repurchased (790,211,526) (145,988,674)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from share
transactions (274,581,092) (91,961,208)
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (273,350,262) (90,065,401)
Net Assets:
Beginning of year 949,483,280 193,825,431
- ----------------------------------------------------------------------------------------------------------------
End of year $676,133,018 $103,760,030
================================================================================================================
Accumulated (distributions in excess of) undistributed net investment
income $ (2,129,902) $ 708,450
================================================================================================================
Summary of Share Transactions:
Shares sold 46,809,171 5,072,030
Shares exchanged in reorganizations 3,843,169 --
Reinvestment of dividends and distributions 2,181,117 516,178
Shares repurchased (81,125,615) (15,135,663)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding (28,292,158) (9,547,455)
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
GS Short GS Core
Duration Fixed
Tax-Free Income
Fund Fund
============================
<S> <C> <C>
From Operations:
Net investment income $ 2,814,454 $2,248,195
Net realized gain (loss) from investment and futures transactions (472,312) 921,130
Net change in unrealized gain on investments and futures 1,270,197 1,663,176
- ---------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 3,612,339 4,832,501
- ---------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (2,771,793) (2,253,625)
Administration shares (20,584) --
Service shares (22,077) --
Class A shares -- --
In excess of net investment income
Institutional shares -- --
Administration shares -- --
Class A shares -- --
- ---------------------------------------------------------------------------------------------------------
Total distributions to shareholders (2,814,454) (2,253,625)
- ---------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 36,468,900 30,256,879
Proceeds from reorganizations -- --
Reinvestment of dividends and distributions 1,873,154 2,232,160
Cost of shares repurchased (67,865,169) (4,073,379)
- ---------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from share
transactions (29,523,115) 28,415,660
- ---------------------------------------------------------------------------------------------------------
Total (decrease) increase (28,725,230) 30,994,536
Net Assets:
Beginning of year 87,614,539 24,507,742
- ---------------------------------------------------------------------------------------------------------
End of year $58,889,309 $55,502,278
=========================================================================================================
Accumulated (distributions in excess of) undistributed net investment
income $ 67,398 $ 40,202
=========================================================================================================
Summary of Share Transactions:
Shares sold 3,733,382 3,077,397
Shares exchanged in reorganizations -- --
Reinvestment of dividends and distributions 190,942 230,595
Shares repurchased (6,950,294) (411,156)
- ---------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding (3,025,970) 2,896,836
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial
statements.
33
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
October 31, 1996
- --------------------------------------------------------------------------------
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 Fund, GS Short Duration
Government 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 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. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts.
A. Investment Valuation
-------------------------
Investments in mortgage backed, asset backed and U.S. Treasury obligations
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. Other securities are valued based on yield equivalents, a
pricing matrix or other sources, under valuation procedures established by the
Trust's Board of Trustees. Portfolio securities for which accurate market
quotations are not readily available are valued based on yield equivalents,
pricing matrix or other sources, under valuation procedures established by the
Trust's Board of Trustees. 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 ("OID") 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. OID amortization on
mortgage backed REMIC securities is initially recorded based on estimates of
principal paydowns using the most recent OID factors available from the issuer.
Recorded amortization amounts are adjusted when actual OID factors are received.
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,
34
<PAGE>
coupon and maturity) but not identical securities on a specified future date.
The Fund loses the right to receive principal and interest paid on the
securities sold. However, the Fund benefits to the extent of any price received
for the securities sold and the lower forward price for the future purchase
(often referred to as the "drop") or fee income plus the interest earned on the
cash proceeds of the securities sold until the settlement date of the forward
purchase. The Fund will hold and maintain in a segregated account, until the
settlement date, cash or liquid, high-grade debt securities in an amount equal
to the forward purchase price. For financial reporting and tax 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 in order to hedge against
changes in interest rates, securities prices, currency exchange rates in the
case of GS Core Fixed Income Fund or to seek to increase total return. A Fund
will engage in futures transactions only for bona fide hedging purposes as
defined in regulations of the CFTC or to seek to increase total return to the
extent permitted by such regulations. 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.
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
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.
35
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
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.
At October 31, 1996, 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 Fund $47,923,000 2000-2003
GS Short Duration Government
Fund $13,272,000 2002-2003
GS Short Duration Tax-Free
Fund $4,271,000 2002-2003
GS Core Fixed Income
Fund $77,000 2004
</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 and GS Short Duration Government 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,
GS Short Duration Tax-Free and GS Core Fixed Income Funds and .50% of average
daily net assets of GS Short Duration Government Fund. Until further notice,
GSFM has voluntarily agreed not to impose .10% of its investment advisory fee
for the GS Short Duration Government Fund. For the year ended October 31, 1996,
investment advisory fees of approximately $103,000 were waived for the GS Short
Duration Government Fund.
The adviser has voluntarily agreed to limit certain of the Funds' expenses
(excluding investment advisory fees, taxes, interest, brokerage, litigation,
administrative and service share fees, indemnification and other extraordinary
expenses and with respect to GS Adjustable Rate Government 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, 1996, the amount of reimbursed expenses for the GS
Adjustable Rate Government, GS Short Duration Government, GS Short Duration
Tax-Free and GS Core Fixed Income Funds were approximately $387,000, $169,000,
$238,000 and $233,000, respectively. The amounts reimbursable to the GS
Adjustable Rate Government, GS Short Duration Government, GS Short Duration
Tax-Free and the GS Core Fixed Income Funds at October 31, 1996 were
approximately $29,000, $12,000, $31,000 and $19,000, 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 Fund Class A shares. At October 31,
1996, Goldman Sachs retained approximately $79,000 of sales load related to
Class A shares. Goldman Sachs also serves as Transfer Agent of the Funds for a
fee.
- --------------------------------------------------------------------------------
36
<PAGE>
- --------------------------------------------------------------------------------
The Trust, on behalf of the GS Adjustable Rate Government 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
approximately $31,000.
The Trust, on behalf of the GS Adjustable Rate Government 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 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 year ended October 31, 1996, GS Adjustable Rate Government Fund,
GS Short Duration Government Fund, GS Short Duration Tax-Free Fund and GS Core
Fixed Income Fund incurred commission expenses of approximately $108,000,
$24,000, $1,000 and $4,000, respectively, in connection with futures contracts
entered into with Goldman Sachs. At October 31, 1996, GS Adjustable Rate
Government Fund had approximately $20,000, payable to Goldman Sachs related to
variation margin on futures contracts. Approximately $5,000 relating to
variation margin was due to the GS Core Fixed Income Fund from 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 the year ended
October 31, 1996, 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, 1996, were as follows:
================================================================================
GS GS GS
Adjustable Short Short GS
Rate Duration Duration Core Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
- --------------------------------------------------------------------------------
Purchases of U.S.
Government and
agency obligations $319,204,368 $117,205,724 -- $227,149,602
- --------------------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) -- -- $101,504,852 41,015,852
- --------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 370,448,093 113,784,637 -- 251,512,185
- --------------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and
agency obligations) -- -- 128,041,004 19,684,141
- --------------------------------------------------------------------------------
6. Summary of Share Transactions
Share activity for the year ended October 31, 1996 is as follows:
Fund Dollars Shares
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
Institutional Shares:
Shares sold $391,363,204 39,981,299
Reinvestment of dividends and
distributions 17,432,484 1,780,288
Shares repurchased (456,776,795) (46,666,343)
----------------------------------------
(47,981,107) (4,904,756)
----------------------------------------
Administration Shares:
Shares sold 1,457,872 148,981
Reinvestment of dividends and
distributions 94,420 9,641
Shares repurchased (1,356,764) (138,609)
----------------------------------------
195,528 20,013
----------------------------------------
37
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund: Dollars Shares
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares:
Shares sold $ 13,765,298 1,404,698
Reinvestment of dividends and distributions 654,744 66,854
Shares repurchased (18,974,355) (1,936,518)
-------------------------------------
(4,554,313) (464,966)
-------------------------------------
Total $ (52,339,892) (5,349,709)
=====================================
GS Short Duration Government Fund
Institutional Shares:
Shares sold $ 39,855,638 4,072,082
Reinvestment of dividends and distributions 4,137,041 422,559
Shares repurchased (47,875,174) (4,893,286)
-------------------------------------
(3,882,495) (398,645)
-------------------------------------
Administration Shares:
Shares sold 326,101 33,251
Reinvestment of dividends and distributions 2,032 207
Shares repurchased (77,312) (7,921)
-------------------------------------
250,821 25,537
-------------------------------------
Service Shares:
Shares sold 1,837,702 188,134
Reinvestment of dividends and distributions 14,743 1,508
Shares repurchased (40,626) (4,150)
-------------------------------------
1,811,819 185,492
-------------------------------------
Total $ (1,819,855) (187,616)
=====================================
GS Short Duration Tax-Free Fund
Institutional Shares:
Shares sold $ 20,777,050 2,085,253
Reinvestment of dividends and distributions 1,383,351 139,126
Shares repurchased (45,664,878) (4,601,865)
-------------------------------------
(23,504,477) (2,377,486)
-------------------------------------
Administration Shares:
Shares sold 105,302 10,672
Reinvestment of dividends and distributions 2,017 203
Shares repurchased (105,478) (10,644)
-------------------------------------
1,841 231
-------------------------------------
Service Shares:
Shares sold $ 1,366,332 137,557
Reinvestment of dividends and distributions 16,124 1,621
Shares repurchased (1,148,044) (115,450)
-------------------------------------
234,412 23,728
-------------------------------------
Total $ (23,268,224) (2,353,527)
=====================================
GS Core Fixed Income Fund
Institutional Shares:
Shares sold $ 20,524,422 2,094,833
Reinvestment of dividends and distributions 4,292,533 436,903
Shares repurchased (7,431,360) (769,104)
-------------------------------------
17,385,595 1,762,632
-------------------------------------
Administration Shares:
Shares sold 1,029,912 106,074
Reinvestment of dividends and distributions 17,883 1,847
Shares repurchased (358,284) (36,681)
-------------------------------------
689,511 71,240
-------------------------------------
Service Shares:
Shares sold 422,233 43,525
Reinvestment of dividends and distributions 5,332 549
Shares repurchased (50,931) (5,292)
-------------------------------------
376,634 38,782
-------------------------------------
Total $ 18,451,740 1,872,654
=====================================
</TABLE>
- --------------------------------------------------------------------------------
Share activity for the year ended October 31, 1995 is as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund Dollars Shares
- --------------------------------------------------------------------------------------------
<S> <C> <C>
GS Adjustable Rate Government 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)
-------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund Dollars Shares
============================================================================================
<S> <C> <C>
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
-------------------------------------
Total $(274,581,092) (28,292,158)
=====================================
GS Short Duration Government 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)
-------------------------------------
Total $ (91,961,208) (9,547,455)
=====================================
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
-------------------------------------
Total $(29,523,115) (3,025,970)
=====================================
</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 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, 1996, the GS Adjustable Rate Government, GS Short Duration
Government and GS Core Fixed Income Funds had an .49%, .04% and .52%,
respectively, undivided interest in the repurchase agreements in the following
joint account which equaled $13,000,000, $1,000,000 and $13,900,000,
respectively, in principal amount.
- --------------------------------------------------------------------------------
39
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
As of October 31, 1996, 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:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
Bear Stearns & Co., dated 10/31/96, repurchase price $700,108,500 (FNMA:
$555,290,445, 5.5%--8.50%, 2.1.09-6/1/26; FHLMC: $165,859,789, 5.50%--8.50%,
9/1/98--8/1/26)
$700,000,000 5.58% 11/01/96 $700,000,000
Lehman Brothers, Inc. dated 10/31/96, repurchase price $924,843,329 (U.S. Treasury
Notes: $942,903,967, 4.38%--8.50%, 11/15/96--8/15/03)
924,700,000 5.58 11/01/96 924,700,000
Nomura Securities International, Inc. dated 10/31/96, repurchase price
$700,108,500 (FNMA: $256,600,142, 5.50%--8.00%, 2/1/02-10/1/26; FHLMC:
$464,523,981, 6.00%--9.00%, 9/1/1-10/1/26)
700,000,000 5.58 11/01/96 700,000,000
Smith Barney, Inc. dated 10/31/96, repurchase price $170,026,161 (U.S. Treasury
Interest Only Stripped Securities: $11,653,277, 2/15/98--5/15/02; U.S. Treasury
Notes: $85,997,728, 5.25%--7.75%, 5/15/97-10/15/06; U.S. Treasury Principal
Only Stripped Securities: $33,993,571, 5/15/97--5/15/05; U.S. Treasury Bills:
$41,756,285, 12/12/96--3/20/97)
170,000,000 5.54 11/01/96 170,000,000
Union Bank of Switzerland, Inc. dated 10/31/96, repurchase price
$175,026,979
(Treasury Notes: $178,528,739, 6.88%--7.75%, 8/31/99-1/31/00)
175,000,000 5.55 11/01/96 175,000,000
- --------------------------------------------------------------------------------
Total Joint Repurchase Agreement $2,669,700,000
================================================================================
</TABLE>
9. Administration and Service Plans
The Funds have adopted Administration and Service Plans. These plans allow
for Administration shares and Service shares, respectively, to compensate
service organizations for providing varying levels of account administration and
shareholder liaison services to their customers who are beneficial owners of
such shares. The Administration and Service Plans provide for compensation to
the service organizations in an amount up to .25% and .50% (on an annualized
basis), respectively, of the average daily net asset value of the respective
shares.
10. Other Matters
On April 28, 1995, the GS Adjustable Rate Government 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 Fund and
(ii) the assumption by GS Adjustable Rate Government 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 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
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:
================================================================================
GS Government
Agency
Portfolio
(For Financial GS Adjustable GS Adjustable
Institutions Rate Government Rate Government
(Pre- Fund (Pre- Fund (Post-
Reorganization) Reorganization) Reorganization)
--------------- --------------- ---------------
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
================================================================================
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
- --------------------------------------------------------------------------------
40
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Adjustable Rate Government Fund. GS Adjustable Rate Mortgage Fund's assets were
acquired by GS Adjustable Rate Government Fund in exchange solely for (i) the
issuance of Class A shares of beneficial interest of GS Adjustable Rate
Government Fund and (ii) the assumption by GS Adjustable Rate Government Fund of
the liabilities of GS Adjustable Rate Mortgage Fund. Following this transfer, GS
Adjustable Rate Mortgage Fund was liquidated and GS Adjustable Rate Government
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 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
Rate Mortgage GS Adjustable GS Adjustable
Fund Rate Government Rate Government
(Pre- Fund (Pre- Fund (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
Institutions 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 Fund due to these reorganization was
approximately $3,154,000.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
As of October 31, 1996, the Goldman, Sachs & Co. Employees Profit Sharing
and Retirement Income Plan was beneficial owner of approximately 29% of the
outstanding shares of the GS Short Duration Government Fund.
11. Certain Reclassifications
In accordance with Statement of Position 93-2, the GS Adjustable Rate
Government Fund, GS Short Duration Tax-Free Fund, and GS Core Fixed Income Fund
have reclassified $20,849, $36,587, $22,735, and $24,162, 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 Fund's capital accounts on a tax basis.
- --------------------------------------------------------------------------------
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 ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ $9.77 $0.5759(a) $0.0772(a) -- $0.6531 $ (0.5725) -- $ (0.0206)
1996-Administration
Shares............ 9.77 0.5489(a) 0.0797(a) -- 0.6286 (0.5489) -- (0.0198)
1996-Class A
Shares............ 9.77 0.5481(a) 0.0806(a) -- 0.6287 (0.5489) -- (0.0198)
1995-Institutional
Shares............ 9.74 0.5630(a) 0.0717(a) -- 0.6347 (0.5759) -- (0.0287)
1995-Administration
Shares............ 9.74 0.5366(a) 0.0737(a) -- 0.6103 (0.5528) -- (0.0275)
1995-Class A
Shares(c)......... 9.79 0.2721(a) (0.0090)(a) -- 0.2631 (0.2697) -- (0.0134)
1994-Institutional
Shares............ 10.00 0.4341(a) (0.2455)(a) -- 0.1886 (0.4486) -- --
1994-Administration
Shares............ 10.00 0.4211(a) (0.2572)(a) -- 0.1639 (0.4239) -- --
1993-Institutional
Shares............ 10.04 0.4397 (0.0376)(d) -- 0.4021 (0.4397) -- (0.0024)
1993-Administration
Shares(e)......... 10.02 0.2146 (0.0173)(d) -- 0.1973 (0.2146) -- (0.0027)
1992-Institutional
Shares............ 10.03 0.5599 (0.0029)(d) -- 0.5570 (0.5470) -- --
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ 10.00 0.1531 0.0322(d) -- 0.1853 (0.1553) -- --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
=========================================
In excess of
net realized Net
gain on increase Ratio of
investment, From Total (decrease) Net asset net
option and paid distributions in net value at expenses
futures in to asset end of Total to average
transactions capital shareholders value period return(k) net assets
==============================================================================================================
GS ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ -- -- $(0.5931) $0.0600 $9.83 6.86% 0.45%
1996-Administration
Shares............ -- -- (0.5687) 0.0600 9.83 6.60 0.70
1996-Class A
Shares............ -- -- (0.5687) 0.0600 9.83 6.60 0.70
1995-Institutional
Shares............ -- -- (0.6046) 0.0301 9.77 6.75 0.46
1995-Administration
Shares............ -- -- (0.5803) 0.0300 9.77 6.48 0.71
1995-Class A
Shares(c)......... -- -- (0.2831) (0.0200) 9.77 2.74(f) 0.69(b)
1994-Institutional
Shares............ -- -- (0.4486) (0.2600) 9.74 1.88 0.46
1994-Administration
Shares............ -- -- (0.4239) (0.2600) 9.74 1.63 0.71
1993-Institutional
Shares............ -- -- (0.4421) (0.0400) 10.00 4.13 0.45
1993-Administration
Shares(e)......... -- -- (0.2173) (0.0200) 10.00 2.01(f) 0.70(b)
1992-Institutional
Shares............ -- -- (0.5470) 0.0100 10.04 6.12 0.42
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ -- -- (0.1553) 0.0300 10.03 2.14(f) 0.20(b)
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
=============================
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate(d) (in 000s) net assets net assets
========================================================================
GS ADJUSTABLE RATE GOVERNMENT FUND
------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ 5.85% 52.36% $613,149 0.51% 5.79%
1996-Administration
Shares............ 5.59 52.36 3,792 0.76 5.53
1996-Class A
Shares............ 5.59 52.36 10,728 1.01 5.28
1995-Institutional
Shares............ 5.77 24.12 657,358 0.53 5.70
1995-Administration
Shares............ 5.50 24.12 3,572 0.78 5.43
1995-Class A
Shares(c)......... 5.87(b) 24.12 15,203 1.01(b) 5.55(b)
1994-Institutional
Shares............ 4.38 37.81 942,523 0.49 4.35
1994-Administration
Shares............ 4.27 37.81 6,960 0.74 4.24
1993-Institutional
Shares............ 4.36 103.74 2,760,871 0.48 4.33
1993-Administration
Shares(e)......... 3.81(b) 103.74 5,326 0.73(b) 3.78(b)
1992-Institutional
Shares............ 5.61 286.40 2,145,064 0.55 5.48
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ 7.31(b) 145.67(b) 239,642 1.02(b) 6.49(b)
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
42
<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,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-------------------------------------------------------------------------------------------------------------------
GS SHORT DURATION GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31,
- -------------------------------------------------------
1996-Institutional
Shares ........... $9.82 $0.6290/(a)/ $0.0136/(a)/ -- $0.6426 $(0.6326) --
1996-Administration
Shares/(h)/ ...... 9.86 0.3837/(a)/ 0.0003/(a)/ -- 0.3840 (0.3940) --
1996-Service
Shares/(i)/ ...... 9.72 0.3134/(a)/ 0.1018/(a)/ -- 0.4152 (0.3152) --
1995-Institutional
Shares ........... 9.64 0.6652/(a)/ 0.1666/(a)/ -- 0.8318 (0.6518) --
1995-Administration
Shares ........... 9.64 0.2384/(a)/ (0.0433)/(a)/ -- 0.1951 (0.2051) --
1994-Institutional
Shares ........... 10.14 0.5628/(a)/ (0.4592)/(a)/ -- 0.1036 (0.5598) (0.0438)
1994-Administration
Shares ........... 10.14 0.5329/(a)/ (0.4539)/(a)/ -- 0.0790 (0.5352) (0.0438)
1993-Institutional
Shares ........... 10.16 0.5627 (0.0135)/(d)/ -- 0.5492 (0.5627) --
1993-Administration
Shares/(e)/ ...... 10.23 0.2725 (0.0900)/(d)/ -- 0.1825 (0.2725) --
1992-Institutional
Shares ........... 10.22 0.6703 (0.0600)/(d) -- 0.6103 (0.6703) --
1991-Institutional
Shares ........... 10.00 0.8020 0.2200/(d)/ -- 1.0220 (0.8020) --
1990-Institutional
Shares ........... 10.07 0.8300 (0.0700)/(d) -- 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/(d)/ -- 0.2800 (0.1800) --
<CAPTION>
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of
income transactions capital shareholders value period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31,
1996-Institutional
Shares ............ -- -- -- $(0.6326) $0.0100 $9.83
1996-Administration
Shares/(h)/ ....... -- -- -- (0.3940) (0.0100) 9.85
1996-Service
Shares/(i)/ ....... -- -- -- (0.3152) 0.1000 9.82
1995-Institutional
Shares ............ -- -- -- (0.6518) 0.1800 9.82
1995-Administration
Shares ............ -- -- -- (0.2051) (0.0100) 9.63/(h)/
1994-Institutional
Shares ............ -- -- -- (0.6036) (0.5000) 9.64
1994-Administration
Shares ............ -- -- -- (0.5790) (0.5000) 9.64
1993-Institutional
Shares ............ (0.0065) -- -- (0.5692) (0.0200) 10.14
1993-Administration
Shares/(e)/ ....... -- -- -- (0.2725) (0.9000) 10.14
1992-Institutional
Shares ............ -- -- -- (0.6703) (0.0600) 10.16
1991-Institutional
Shares ............ -- -- -- (0.8020) 0.2200 10.22
1990-Institutional
Shares ............ -- -- -- (0.8300) (0.0700) 10.00
1989-Institutional
Shares ............ -- -- (0.0300) (0.9100) (0.0300) 10.07
For the Period August 15, 1988/(g)/ through October 31,
- -------------------------------------------------------
1988-Institutional
Shares ............ -- -- -- (0.1800) 0.1000 10.10
<CAPTION>
Ratios assuming
not voluntary waiver
of fees or
expense limitations
--------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
Total to average to average turnover period to average to average
return/(k)/ net assets net assets rate/(d)/ (in 000s) net assets net assets
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
1996-Institutional
Shares ............ 6.75% 0.45% 6.44% 115.45% $99,944 0.71% 6.18%
1996-Administration
Shares/(h)/ ....... 4.00/(f)/ 0.70%/(b)/ 5.97/(b)/ 115.45 252 0.96/(b)/ 5.71/(b)/
1996-Service
Shares/(i)/ ....... 4.35/(f)/ 0.95/(b)/ 6.05/(b) 115.45 1,822 1.21/(b)/ 5.79/(b)/
1995-Institutional
Shares ............ 8.97 0.45 6.87 292.56 103,760 0.72 6.60
1995-Administration
Shares ............ 2.10 0.70/(b)/ 7.91/(b)/ 292.56 -- 0.90/(b)/ 7.71/(b)/
1994-Institutional
Shares ............ 0.99 0.45 5.69 289.79 193,095 0.59 5.55
1994-Administration
Shares ............ 0.73 0.70 5.38 289.79 730 0.84 5.24
1993-Institutional
Shares ............ 5.55 0.45 5.46 411.66 359,708 0.64 5.31
1993-Administration
Shares/(e)/ ....... 1.74 0.70/(b)/ 4.84/(b)/ 411.66 16,490 0.80/(b)/ 4.74/(b)/
1992-Institutional
Shares ............ 6.24 0.45 6.60 216.07 277,927 0.69 6.36
1991-Institutional
Shares ............ 10.93 0.45 8.25 155.44 158,948 0.79 7.91
1990-Institutional
Shares ............ 8.23 0.45 8.62 173.21 68,995 0.95 8.12
1989-Institutional
Shares ............ 9.03 0.46 8.71 137.37 31,015 1.39 7.78
For the Period August 15, 1988/(g)/ through October 31,
- -------------------------------------------------------
1988-Institutional
Shares ............ 3.30/(f)/ 0.55/(b)/ 8.55/(b)/ 167.00/(b)/ 39,052 1.42/(b)/ 7.68/(b)/
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<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,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
===============================================================================================
GS SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... $9.94 $0.4192/(a)/ $0.0200/(a)/ -- $0.4392 $(0.4192) --
1996-Administration Shares.......... 9.94 0.3944/(a)/ 0.0200/(a)/ -- 0.4144 (0.3944) --
1996-Service Shares................. 9.95 0.3697/(a)/ 0.0200/(a)/ -- 0.3897 (0.3697) --
1995-Institutional Shares........... 9.79 0.4235/(a)/ 0.1500/(a)/ -- 0.5735 (0.4235) --
1995-Administration Shares.......... 9.79 0.3989/(a)/ 0.1500/(a)/ -- 0.5489 (0.3989) --
1995-Service Shares................. 9.79 0.3744/(a)/ 0.1600/(a)/ -- 0.5344 (0.3744) --
1994-Institutional Shares........... 10.23 0.3787/(a)/ (0.3575)/(a)/ -- 0.0212 (0.3787) (0.0825)
1994-Administration Shares.......... 10.23 0.3537/(a)/ (0.3575)/(a)/ -- (0.0038) (0.3537) (0.0825)
1994-Service Shares/(j)/............ 9.86 0.0475/(a)/ (0.0700)/(a)/ -- (0.0225) (0.0475) --
1993-Institutional Shares........... 9.93 0.3834 0.3000/(d)/ -- 0.6834 (0.3834) --
1993-Administration Shares/(j)/..... 10.16 0.1555 0.0720/(d)/ -- 0.2275 (0.1555) --
For the Period October 1, 1992/(g)/ through October 31,
- ----------------------------------------------------
1992-Institutional Shares........... 10.00 0.0341 (0.0700)/(d)/ -- (0.0359) (0.0341) --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
==================================
In excess of
net realized Net
gain on increase Ratio of
In excess investment, From Total (decrease) Net asset net
of net option and paid distributions in net value at expenses
investment futures in to asset end of Total to average
income transactions capital shareholders value period return/(k)/ net assets
==================================================================================================
GS SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
====================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... -- -- -- $(0.4192) $0.0300 $9.96 4.50% 0.45%
1996-Administration Shares.......... -- -- -- (0.3944) 0.0300 9.96 4.24 0.70
1996-Service Shares................. -- -- -- (0.3697) 0.0200 9.97 3.98 0.95
1995-Institutional Shares........... -- -- -- (0.4235) 0.1500 9.94 5.98 0.45
1995-Administration Shares.......... -- -- -- (0.3989) 0.1500 9.94 5.76 0.70
1995-Service Shares................. -- -- -- (0.3744) 0.1600 9.95 5.59 0.95
1994-Institutional Shares........... -- -- -- (0.4612) (0.4400) 9.79 0.17 0.45
1994-Administration Shares.......... -- -- -- (0.4362) (0.4400) 9.79 (0.11) 0.70
1994-Service Shares/(j)/............ -- -- -- (0.0475) (0.0700) 9.79 (0.32)/(f)/ 0.95/(b)/
1993-Institutional Shares........... -- -- -- (0.3834) 0.3000 10.23 7.03 0.41
1993-Administration Shares/(j)/..... -- -- -- (0.1555) 0.0720 10.23 2.28/(f)/ 0.70/(b)/
For the Period October 1, 1992/(g)/ through October 31,
- -----------------------------------------------------
1992-Institutional Shares........... -- -- -- (0.0341) (0.0700) 9.93 (0.34)/(f)/ 0.05/(b)/
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
==================================
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate/(d)/ (in 000s) net assets net assets
==========================================================
GS SHORT DURATION TAX-FREE FUND
- --------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ---------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996-Institutional Shares........... 4.21% 231.65% $34,814 1.01% 3.65%
1996-Administration Shares.......... 3.96 231.65 48 1.26 3.40
1996-Service Shares................. 3.74 231.65 695 1.51 3.18
1995-Institutional Shares........... 4.31 259.52 58,389 0.77 3.99
1995-Administration Shares.......... 4.14 259.52 46 1.02 3.82
1995-Service Shares................. 3.87 259.52 454 1.27 3.55
1994-Institutional Shares........... 3.74 354.00 83,704 0.61 3.58
1994-Administration Shares.......... 3.51 354.00 3,866 0.86 3.35
1994-Service Shares/(j)/............ 4.30/(b)/ 354.00 440 1.11/(b)/ 4.14/(b)/
1993-Institutional Shares........... 3.70 404.60 115,803 1.06 3.05
1993-Administration Shares/(j)/..... 3.32/(b)/ 404.60 911 1.07/(b)/ 2.95/(b)/
For the Period October 1, 1992/(g)/ through October 31,
- -----------------------------------------------------
1992-Institutional Shares........... 4.58/(b)/ 31.19/(f)/ 14,601 2.68/(b)/ 1.95/(b)/
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
44
<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 From net
and unrealized unrealized Total realized gain
gain (loss) gain (loss) income on
Net asset on investment, on foreign (loss) investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-----------------------------------------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... $10.00 $0.6448 $(0.0704) -- $0.5744 $(0.6438) $(0.0806)
1996-Administrative Shares(l)....... 9.91 0.4083 (0.0703) -- 0.3380 (0.4080) --
1996-Service Shares(l).............. 9.77 0.3756 0.0898 -- 0.4654 (0.3754) --
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) --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
---------------------------------------------------
In excess of
net realized Net
gain on increase Ratio of
In excess investment, From Total (decrease) Net asset net
of net option and paid distributions in net value at expenses
investment futures in to asset end of Total to average
income transactions capital shareholders value period return(k) net assets
--------------------------------------------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... -- -- -- $(0.7244) $(0.1500) $9.85 5.98% 0.45%
1996-Administrative Shares(l)....... -- -- -- (0.4080) (0.0700) 9.84 3.56(f) 0.70(b)
1996-Service Shares(l).............. -- -- -- (0.3754) 0.0900 9.86 4.90(f) 0.95(b)
1995-Institutional Shares........... -- -- -- (0.6433) 0.7600 10.00 15.72 0.45
For the Period January 5, 1994(g)through October 31,
- ----------------------------------------------------
1994-Institutional Shares........... -- -- -- (0.4648) (0.7617) 9.24 (3.00) 0.45(b)
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
-------------------------
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate(d) (in 000s) net assets net assets
------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ---------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996-Institutional Shares........... 6.51% 414.20% $72,061 0.83% 6.13%
1996-Administrative Shares(l)....... 6.41(b) 414.20 702 1.08(b) 6.03(b)
1996-Service Shares(l).............. 6.37(b) 414.20 381 1.33(b) 5.99(b)
1995-Institutional Shares........... 6.56 383.26 55,502 0.96 6.05
For the Period January 5, 1994(g)through October 31,
- ----------------------------------------------------
1994-Institutional Shares........... 6.48(b) 288.25 24,508 1.46(b) 5.47(b)
</TABLE>
- ------------------
(a)Calculated based on the average shares outstanding methodology.
(b)Annualized.
(c)Class A share activity commenced on May 15, 1995.
(d)Includes the effect of mortgage dollar roll transactions.
(e)Administration share activity commenced on April 15, 1993.
(f)Not annualized.
(g)Commencement of operations.
(h)GS Short Duration Government Fund Administration shares were redeemed in
full on February 23, 1995 and re-commenced on February 28, 1996 at $9.86.
(i)Service share activity commenced on April 10, 1996.
(j)Administration and service share activity commenced on May 20, 1993 and
September 20, 1994 respectively.
(k)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 not sales
charges. For Class A shares only, total return would be reduced if a sales
charge were taken into account.
(l)Administration and Service share activity commenced on February 28, 1996 and
March 13, 1996 respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
45
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the GS Adjustable Rate Government
Fund, GS Short Duration Government 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 Fund, GS Short Duration Government 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, 1996, 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, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of the GS Adjustable Rate Government Fund, GS Short Duration Government
Fund, GS Short Duration Tax-Free Fund and GS Core Fixed Income Fund as of
October 31, 1996, 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 12, 1996
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
-------------------------------------------------------------------
Annual Report
October 31, 1996
GS Adjustable Rate Government Fund
GS Short Duration Government Fund
GS Short Duration Tax-Free Fund
GS Core Fixed Income Fund
Goldman
Sachs
GST/AR/1096(INST)
- --------------------------------------------------------------------------------
================================================================================
<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 each Fund's objectives and policies, management, expenses and
other information.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We welcome the opportunity to review the performance and the investment
activity of the Goldman Sachs Fixed Income Funds for the 12-month period ended
October 31, 1996. To help put the portfolios' performance in perspective, we
will also provide a brief overview of the U.S. economy and the bond market
during the period.
We are pleased to report that the Goldman Sachs Fixed Income Funds fared
well relative to their peers during the period.
The Bond Market Sold Off Amid Rising Rates, Then Stabilized
The U.S. fixed income market began the 12-month period under review with a
robust rally, fueled by weak economic data and low inflation. However, in
February 1996, the bond market began to come under pressure when stronger than
expected economic and job growth as well as surging commodity prices aroused
fears of higher inflation on the horizon. Bond market conditions significantly
worsened during March and April, when a sharp rise in interest rates triggered a
sell-off and increased volatility. By early May, long-term bond yields had
climbed above the psychologically important 7.0% level for the first time in
nearly a year. At the end of May, interest rates began to stabilize and Treasury
prices remained in a narrow trading range throughout the summer and fall. During
September and October, however, interest rates retreated and the bond market
strengthened. The rebound was primarily due to evidence of a slowing U.S.
economy and strong demand for Treasury bonds from the central banks of China,
Japan and Germany, which accelerated their purchases dramatically toward the end
of the period. By the end of October, prices of 30-year Treasuries broke out of
the trading range that had persisted for over six months.
After a Weak Start, Economic Growth Rebounded, Then Moderated
In late 1995, the economy was anemic, with weak consumer and capital
spending contributing to a fourth-quarter real Gross Domestic Product (GDP)
growth of only 0.3% (annualized). During the first quarter of 1996, harsh winter
weather and the General Motors strike continued to restrain economic growth.
Despite these adverse conditions, the economy advanced faster than expected,
with first-quarter real GDP growth reported at 2.0% (annualized). Momentum
accelerated more dramatically during the second quarter, as industrial activity,
automobile sales and home sales all showed significant improvement. As a result,
second-quarter GDP rose a robust 4.7% (annualized), its highest rate in two
years.
The economy's torrid growth cooled markedly during the third quarter, with
annualized real GDP at a revised 2.0%, largely due to lackluster consumer
spending and a widening U.S. trade deficit. In October some evidence of a
slowdown continued, with housing starts falling to their lowest level in a year
and U.S. capacity utilization also down. However, consumer confidence remained
high against a backdrop of low unemployment and higher household income. These
indicators led some economists to interpret October's retail sales numbers (up a
scant 0.2%) as a "breather" they expected to be followed by stronger holiday
shopping, while others were concerned about a more prolonged period of
restrained spending. Despite investors' earlier fears of increased inflationary
<TABLE>
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Table of Contents
Market Overview 1 Financial Statements 24
Goldman Sachs Government Income Fund 4 Notes to Financial Statements 28
Goldman Sachs Global Income Fund 11 Financial Highlights 36
Goldman Sachs Municipal Income Fund 17
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
pressures and the fact that in October the producer and consumer price indexes
were up 0.4% and 0.3%, respectively, inflation remained subdued throughout the
period.
The Fed Remained Neutral After Easing in December and January
In response to generally poor year-end 1995 economic conditions, the U.S.
Federal Reserve cut the Federal funds rate by 25 basis points in December 1995
and an additional 25 basis points in January 1996. The Fed then remained neutral
from February through the end of the period, leaving the Federal funds rate at
5.25% as of October 31, 1996.
During the period under review, the yield curve shifted upward everywhere
but at the shortest end, where it steepened. The yield on six-month Treasury
bills fell from 5.55% on October 31, 1995 to approximately 5.26% on October 31,
1996. For the same time period, the yield on the 30-year U.S. Treasury bond rose
from 6.33% a year ago to 6.64%. For the 12-month period ended October 31, 1996,
the total returns of one-year and 30-year Treasuries were 5.84% and 0.72%,
respectively.
Historical Treasury Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Retail Treasury Bar Chart
<S> <C> <C>
10/31/95 10/31/96
3-Month 5.49% 5.13
6-Month 5.55 5.26
1 5.54 5.4
2 5.61 5.73
3 5.68 5.86
5 5.81 6.07
10 6.02 6.34
30 6.33 6.64
</TABLE>
Source: Bloomberg, L.P.
The yield curve steepened on the short end and shifted upward on the longer
end.
The Dollar's Climb Versus the Mark and the Yen
Continued
During the period under review, the U.S. dollar appreciated against both the
Deutsche mark and Japanese yen, rising more against the yen. The dollar
strengthened relative to the mark as the Bundesbank progressively edged rates
lower during the period to stimulate the sluggish German economy, reaching a 15-
month high against the mark in May. By October, the dollar had retreated
slightly as further Bundesbank cuts became less likely. In contrast, the
dollar's climb against the yen continued through the end of October, when it
reached a three-and-a-half-year high. The yen's weakness was primarily due to
the softness in Japan's economic recovery. However, in November the yen rose
against the dollar as Japanese officials made it clear that they believed the
yen had weakened enough.
Outlook: Moderate Economic Growth for the Near Term
The recent economic weakness and the tame third-quarter labor cost report
increase the likelihood that the Fed will defer any changes in monetary policy
until 1997. Although a more extended slowdown is possible, as of this writing,
Goldman Sachs' economists believe a resumption of growth is likely if consumer
spending rebounds by year-end and the trade deficit does not significantly
widen. On the fiscal front, the bond market environment should benefit from the
recent election results with President Clinton balanced by a Republican-
controlled Congress, which points toward continued budgetary restraint.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
We appreciate your confidence in the Goldman Sachs Fixed Income Funds and we
look forward to continuing to serve your investment needs in the future.
Sincerely,
/s/ David B. Ford
David B. Ford
Co-Head, Goldman Sach Asset Management
/s/ John P. McNulty
John P. McNulty
Co-Head, Goldman Sachs Asset Management
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
November 29, 1996
- --------------------------------------------------------------------------------
3
<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 such
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. The fund's interest rate
sensitivity is expected to be comparable to that of a five-year bond.
Mortgage-Backed Securities Strengthened Amid Slowing Prepayments
During the 12-month period under review, the performance of mortgage-backed
securities (MBSs) was closely linked to the changing direction of interest
rates. From November 1995 through February 1996, declining interest rates
spurred homeowners to switch to long-term, fixed rate mortgages, resulting in a
high level of refinancing activity and widening spreads between MBSs and
Treasuries. Long-term interest rates began to rise at the end of January and
prepayments peaked in February. Throughout the spring, the mortgage-backed
securities market strengthened due to declining prepayment fears, and adjustable
rate mortgages (ARMs) and fixed rate mortgage pass-throughs continued to do well
when rates stabilized during the summer. However, the direction of interest
rates reversed course beginning in September, and by the end of October, rates
on 30-year mortgages had slipped below 8%. The decline increased some
homeowners' incentive to refinance, but rates continued to be significantly
above their levels of a year earlier and "seasoned" mortgage-backed securities
(securities backed by older mortgages that typically have lower prepayment risk)
continued to do well. In addition, the market's technical balance remained
strong, with prices supported by healthy investor demand coupled with no
significant new issuance.
Performance Review: Fund Performed Well Due to Mortgage-and Asset-Backed
Securities
During the 12-month period ended October 31, the fund's Class A shares
outperformed the benchmark, the Lehman Brothers Government/Mortgage Index (the
"Index") due to favorable results from the fund's positions in collateralized
mortgage obligations (CMOs) and asset-backed securities (ABSs). The fund's Class
B shares, which opened on May 1, 1996 when interest rates were still rising,
also achieved positive returns.
The fund performed well compared with its peers. The fund's Class A shares
ranked eighth out of 124 intermediate U.S. government income funds based on
total return for the 12 months ended October 31, 1996, according to Lipper
Analytical Services, Inc. (Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results. Class B shares were not ranked for this period because they were in
existence less than 12 months.)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Class A Class B*
(10/31/95- (5/1/96-
10/31/96) 10/31/96)
--------- ---------
<S> <C> <C>
Total Return (based on net asset value) 5.80% 4.85%
- --------------------------------------------------------------------------------
Return From Monthly Distributions 6.56% 3.01%
- --------------------------------------------------------------------------------
Return From Price Depreciation/ -0.76% 1.84%
Appreciation
- --------------------------------------------------------------------------------
Total Return of Lehman Brothers
Government/Mortgage Index 5.74% 5.12%
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.36 $14.37
- --------------------------------------------------------------------------------
NAV Change -$0.11 +$0.26
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
Portfolio Composition and Investment Strategies
During the period under review, we significantly reduced the portfolio's
holdings of U.S. Treasuries in favor of mortgage-backed and asset-backed
securities.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
Agency Debentures 0.4%
Repos/Cash Equivalents 1.1%
U.S. Treasuries 16.2%
Asset-Backed Securities 19.9%
CMOs 22.0%
Fixed Rate Mortgage Pass-Throughs 40.4%
* 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's single largest position as of
October 31, 1996 was in fixed rate mortgage pass-throughs at 40.4% (nearly
unchanged from a year ago), which was overweighted relative to the Index
allocation of 36.4%. Overall, the fund benefited from the sector's incremental
yield compared with similar-duration Treasury securities. Although pass-throughs
suffered from a high rate of mortgage prepayments when the period began, the
sector improved when interest rates began to rise at the end of January.
During the period, we occasionally used mortgage dollar rolls, which helped
the portfolio to benefit from 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 -- 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.
.. CMOs. As of October 31, the fund's allocation in CMOs was 22.0%, up from
7.7% a year ago. These securities included sequential-pay/support CMOs (13.0%),
a position we initiated in February, which offered relative stability and
attractive spreads compared with Treasuries. We cut the portfolio's allocation
in planned amortization class (PAC) CMOs to 5.5% from 6.3% a year ago in favor
of other sectors that offered greater relative value. We also held very small
positions in inverse floaters, interest-only (IO) and principal-only (PO)
securities, discussed below.
.. Asset-Backed Securities. The portfolio's ABS holdings, which were primarily
issues backed by credit card and automobile debt, represented 19.9% of the
portfolio, up from 14.3% a year ago. This position consisted of short-term,
triple-A-rated issues that offered attractive incremental yield over similar-
duration Treasuries. The ABS market began the period on a weak note, as concerns
surrounding credit card delinquencies impacted the sector during November and
December 1995. From January through the end of the period, these uncertainties
faded and the sector strengthened. Spreads between ABSs and Treasuries
tightened, as the ABS market benefited from strong investor demand from a
variety of sources: foreign banks, insurance companies and an increasing number
of corporate and CMO "crossover" accounts. ABS supply was robust as well, with a
wide variety of innovative new issues across a range of maturities, collateral
types and structures, but demand kept pace.
.. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. We reduced the
fund's allocation in U.S. Treasuries and repurchase agreements/cash equivalents
to take advantage of securities in other sectors that offered better relative
value. As of October 31, Treasuries accounted for 16.2% of the portfolio,
significantly
- --------------------------------------------------------------------------------
5
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
underweighted relative to the Index (55.4%), while cash equivalents were a 1.1%
position.
.. Agency Debentures. During the period, we reduced the fund's holdings in
agency debentures (bonds issued by agencies of the U.S. government) to a scant
0.4% because we determined that the sector's tight spreads compared with
Treasuries did not offer attractive return potential.
.. Issuer Composition. The breakdown of the portfolio's mortgage-backed
security holdings by issuer was 23.3% in Federal National Mortgage Association
(FNMA) issues, 14.0% in Government National Mortgage Association (GNMA) issues,
9.8% in Federal Home Loan Mortgage Corporation (FHLMC) issues and 15.3% in
private issues.
.. Credit Quality. As of October 31, U.S. government and agency securities
accounted for 66.6% of the portfolio, triple-A-rated securities were 32.3% of
the portfolio and cash equivalents were 1.1% of the portfolio.
.. Prudent Use of Derivatives. As noted, sequential-pay/ support and PAC CMOs,
which are generally considered to be lower risk derivative instruments,
accounted for 13.0% and 5.5% of the portfolio, respectively. The portfolio also
held inverse floaters (1.3%) for their potential to add incremental yield, as
well as a "combo" consisting of minor positions in interest-only and principal-
only CMOs. When IOs are held along with POs, they can produce a position with a
similar risk profile as a fixed rate mortgage pass-through but with a higher
yield. In addition, we used futures as a tool to help manage the portfolio's
duration.
.. Duration. The fund's duration as of October 31 was 4.5 years, in line with
the Index. We carefully manage the fund's duration to approximate that of the
Index rather than attempting to make interest rate predictions. Instead, we seek
excess return over the Index through our sector weightings and specific security
selection.
Fund Outlook
We have a cautiously optimistic view of the mortgage pass-through market in
general. Certain segments continue to be attractively valued, and we believe
that our current seasoned holdings should fare well relative to other sectors if
interest rates continue to fall and prepayments increase. We have a neutral
outlook for the CMO sector in general, which we believe does not offer
significant value over mortgage pass-throughs. However, we continue to identify
specific CMO securities that present attractive investment opportunities. In the
ABS market, significant spread premiums relative to comparably rated corporate
securities are expected to continue to buoy investor demand. In addition, Fed
surveys indicate that banks have been tightening their underwriting standards
over the last three quarters, which should help to allay lingering investor
concerns surrounding consumer credit card delinquencies. During the coming year,
we will continue to actively allocate the portfolio's assets among the various
fixed income sectors as their relative value changes.
Distribution Policy
The fund's Class A shares paid out monthly distributions of approximately
$0.92 per share during the 12-month period ended October 31, 1996. From their
inception on May 1, 1996 through October 31, 1996, the fund's Class B shares
paid out approximately $0.41 per share. Dividends are declared daily and paid on
a monthly basis. The fund distributes substantially all of its taxable income,
as is required for all investment companies.
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
We thank you for your support and look forward to continuing to serve your
investment needs in the future.
Sincerely,
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Erica Adelberg
Erica Adelberg
/s/ James B. Clark
James B. Clark
Portfolio Managers
Goldman Sachs Government Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
7
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Government Income Fund (assuming both the
maximum sales charge of 4.5% and no sales charge for Class A shares and the
maximum redemption fee of 5% and no redemption fee for the Class B shares), 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
Class A/(a)/
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman Lehman
(no sales (w/sales Gov't/MBS U.S. Gov't
Date charge) charge) Index Index
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
10/31/96 12,392 11,834 12,500 12,395
</TABLE>
Class B
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class B Shares Class B Shares Lehman Lehman
(no redemption (w/redemption Gov't/MBS U.S. Gov't
Date charge) charge) Index Index
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000 $10,000
10/31/96 10,485 9,985 10,512 10,508
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------
Average Annual Total Return
----------------------------------------
One Year Since Inception/(b)/
- -----------------------------------------------------------------------------
<S> <C> <C>
Class A, excluding sales 5.80% 6.72%
charge
- -----------------------------------------------------------------------------
Class A, including sales 1.06% 5.41%
charge
- -----------------------------------------------------------------------------
Class B, excluding
redemption charge N/A 4.85%/(c)/
- -----------------------------------------------------------------------------
Class B, including
redemption charge N/A (0.15%)/(c)/
- -----------------------------------------------------------------------------
</TABLE>
/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/ Class A and Class B shares commenced operations February 10, 1993 and May 1,
1996, respectively.
/c/ An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve months
of operations.
- --------------------------------------------------------------------------------
8
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations--55.5%
Federal Home Loan Mortgage Corp.(FHLMC)--10.3%
$ 3,000,000 7.50% TBA 30-Yr/(a)/ $ 3,010,290
- --------------------------------------------------------------------------------
Federal National Mortgage Association (FNMA)--16.5%
$ 989,360 7.00 02/01/26 $ 970,493
831,317 8.50 07/01/26 860,147
168,683 8.50 09/01/26 174,533
1,000,000 7.00 TBA 30-Yr/(a)/ 1,034,680
2,000,000 8.00 TBA 30-Yr/(a)/ 2,040,000
- --------------------------------------------------------------------------------
$ 5,079,853
- --------------------------------------------------------------------------------
Government National Mortgage Association
(GNMA)--14.1%
$ 939,735 7.00% 08/15/23 $ 927,115
353,966 9.00 TBA 30-Yr/(a)/ 377,748
1,363,733 7.50 TBA 30-Yr/(a)/ 995,228
2,000,000 8.00 TBA 30-Yr/(a)/ 2,045,000
- --------------------------------------------------------------------------------
$ 4,345,091
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations--26.4%
Interest Only--0.7%
FNMA Interest-Only Stripped Security, Series 151, Class 2
$ 712,363/(b)/ 9.50% 07/25/22 $ 225,926
- --------------------------------------------------------------------------------
Inverse Floater--1.3%
FNMA Remic Trust, Series 1992-62, Class S
404,038 10.00%/(c)/ 05/25/99 413,699
- --------------------------------------------------------------------------------
Planned Amortization Class (PAC)--5.4%
FNMA Remic Trust, Series 1993-160, Class PG
1,000,000 6.30% 09/25/18 987,500
GE Capital Mortgage Services, Inc. Series 1994-11, Class A1
693,546 6.50 03/25/24 694,191
- --------------------------------------------------------------------------------
$ 1,681,691
- --------------------------------------------------------------------------------
Principal Only--1.4%
FNMA Remic Trust, Series G-35, Class N
575,000/(e)/ 5.28% 10/25/21 415,369
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--2.9%
Citicorp Mortgage Securities Series 1993-11, Class A6
907,177 6.25% 09/25/08 880,207
- --------------------------------------------------------------------------------
Support--13.2%
Bear Stearns Mortgage Securities, Inc., Series 1996-7, Class AD
$ 988,793 6.50% 11/27/23 900,395
GE Capital Mortgage Services, Inc. Series 1994-10, Class A22
996,703 6.50 03/25/24 874,966
Housing Securities, Inc. Series 1994-1, Class A13
1,455,585 6.50 03/25/09 1,370,928
Prudential Securities Series 1995-2, Class A
916,596 5.76 11/15/15 918,243
- --------------------------------------------------------------------------------
$ 4,064,532
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 7,681,424
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $16,959,996) $17,106,368
- --------------------------------------------------------------------------------
Asset-Backed Securities--16.6%
Chemical Bank Master Credit Card Trust, Series 1995-2, Class A
$ 720,000 6.23% 06/15/03 $ 717,746
Fingerhut Master Trust, Series 1996-1, Class A
590,000 6.45 02/20/02 593,870
Ford Credit Auto Loan Master Trust, Series 1996-1, Class A
650,000 5.50 02/15/03 629,077
MBNA Master Credit Card Trust, Series 1991-1, Class A
245,000 7.75 10/15/98 245,688
Navistar Financial Corp. Owner Trust, Series 1995-A, Class A2
304,971 6.55 11/20/01 306,780
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
540,182 6.85 06/15/01 544,666
Premier Auto Trust, Series 1993-6, Class A2
403,341 4.65 11/02/99 398,675
Premier Auto Trust, Series 1994-1, Class A3
310,533 4.75 02/02/00 308,592
Sears Credit Account Master Trust, Series 1995-2, Class A
460,000 8.10 06/15/04 483,000
Standard Credit Card Trust, Series 1990-3, Class A
860,000 9.50 07/10/98 875,583
- --------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $5,174,476) $ 5,103,677
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
===============================================================================
<S> <C> <C> <C>
U.S. Government Agency Obligations--0.4%
Federal Home Loan Mortgage Corp. (FHLMC)
$ 110,000 8.20% 01/16/98 $ 110,636
- -------------------------------------------------------------------------------
Total Government Agency Obligations
(Cost $113,163) $ 110,636
- -------------------------------------------------------------------------------
U.S. Treasury Obligations--15.9%
United States Treasury Bonds/(d)/
$ 360,000 8.75% 05/15/17 $ 440,550
280,000 8.75 08/15/20 345,668
United States Treasury Notes/(d)/
2,210,000 7.38 11/15/97 2,249,360
700,000 5.88 04/30/98 702,184
700,000 6.88 08/31/99 717,500
United States Treasury Principal-Only Stripped Securities/(e)/
230,000 6.41 11/15/04 138,344
1,550,000 6.95 05/15/20 307,570
- -------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $4,910,644) $ 4,901,176
- -------------------------------------------------------------------------------
Repurchase Agreement--27.0%
Joint Repurchase Agreement Account/(d)/
$8,400,000 5.58% 11/01/96 $ 8,400,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $8,400,000) $ 8,400,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $38,555,545/(f)/) $38,632,147
===============================================================================
Futures contracts open at October 31, 1996 are as follows:
Number of
Contracts Settlement Unrealized
Type Long(/g/) Month Gain
- -------------------------- ------------- ----------------- -----------
Euro Dollars 3 September 1997 $2,850
5 Year U.S. Treasury Notes 4 December 1996 3,000
10 Year U.S. Treasury Notes 2 December 1996 8,313
U.S. Long Term Bond 14 December 1996 60,437
------------
$74,600
===============================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 260,565
Gross unrealized loss for investments in which cost exceeds
value (195,408)
- -------------------------------------------------------------------------------
Net unrealized gain $ 65,157
===============================================================================
</TABLE>
/(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)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(c)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(d)/Portions of these securities are being segregated for open TBA purchases,
open futures contracts and futures margin requirements.
/(e)/The interest rate disclosed for these securities represents effective
yields to maturity.
/(f)/The aggregate cost for federal income tax purposes is $38,566,990.
/(g)/Each 10-Year U.S. Treasury Note, 5-Year 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 notional
amount and market value are $5,000,000 and $2,936,825, respectively. The
determination of notional amounts and market value as presented here are
indicative only of volume of activity and not a measure of market risk.
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.
10
<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
government and other high-quality (double-A or better) fixed income securities
issued in the United States and in foreign markets. The fund has the additional
flexibility to invest in sovereign (government) debt rated single-A (or better)
or deemed to be of comparable quality. The maximum duration of the fund is 7.5
years and its approximate interest rate sensitivity is comparable to that of a
six-year bond. 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 to seek to enhance returns.
European Bond Markets Achieved the Strongest Performance While Treasuries Lagged
During the 12 months ended October 31, 1996, global bonds generally
performed well, particularly during the second half of the period, with a number
of markets achieving extremely strong returns. Most international bond markets
have outperformed the United States, thus illustrating the benefits of
diversification.
The European higher yielding bonds (Italy, Spain and Sweden) were the best
performers of all the major bond markets during the period, while most of the
other European bond markets achieved good, albeit more modest, returns (hedged
into U.S. dollars). In general, European bond markets benefited from an
accommodative environment of sluggish economic growth and low inflation.
European bonds were also buoyed by tighter fiscal policies, as several European
countries attempted to reduce their deficits enough to qualify for European
monetary union. To counter less government spending, several countries (notably
Germany) attempted to stimulate economic growth by lowering their interest
rates.
The total return of Japanese Government Bonds (JGBs) during the period
under review was lower than those of most European bond markets but still
favorable (hedged into U.S. dollars). After lackluster performance during the
first half of the period amid fears of accelerating growth, JGBs experienced a
volatile, halting recovery when Japan's economy showed signs of weakening during
the summer and fall of 1996.
U.S. Treasuries underperformed all of the major bond markets. Though
Treasuries performed well in November and December 1995, accelerating economic
growth triggered a sharp correction from January through May 1996. The U.S. bond
market partially recovered when it rallied during September and October, but it
continued to lag. Within the dollar bloc, Canadian bonds did particularly well
during the period, reflecting a continuing easing of monetary policy by the Bank
of Canada, a strong currency and a relatively weak economy.
Performance Review: Favorable Country Allocations Benefited Fund Performance
During the period under review, the Goldman Sachs Global Income Fund's
Class A and Institutional shares outperformed the fund's benchmark, the J.P.
Morgan Global Government Bond Index (hedged into U.S. dollars) (the "Index").
The Index covers 14 major bond markets and reflects their currency exposures.
That favorable performance relative to the benchmark was primarily due to the
fact that during most of the period the fund was overweighted in European bonds
and moderately underweighted in U.S. Treasuries.
The fund's Class B shares, which began operations on May 1, 1996 while U.S.
interest rates were still rising, underperformed the benchmark.
- --------------------------------------------------------------------------------
11
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Class A Class B* Institutional
(10/31/95- (5/1/96- (10/31/95-
10/31/96) 10/31/96) 10/31/96)
-------- -------- --------
<S> <C> <C> <C>
Total Return (based on net asset 11.05% 6.24% 11.55%
value)
- --------------------------------------------------------------------------------
Return From Monthly 10.50% 2.68% 11.07%
Distributions
- --------------------------------------------------------------------------------
Return From Price Appreciation 0.55% 3.56% 0.48%
- --------------------------------------------------------------------------------
Total Return of J.P. Morgan 10.06% 6.53% 10.06%
Global Government Bond Index
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.53 $14.53 $14.52
- --------------------------------------------------------------------------------
NAV Change +$0.08 +$0.50 +$0.07
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
Though the portfolio is typically fully hedged into U.S. dollars, we
occasionally employed currency strategies during the period. These included the
initiation of a long position in the U.S. dollar against the yen and European
currencies, which helped the fund's performance when the dollar strengthened
during the period.
Portfolio Composition and Investment Strategies
Portfolio Composition as of October 31, 1996*
<TABLE>
<CAPTION>
[PIE CHART APPEARS HERE]
<S> <C>
Sweden 1.9%
Denmark 2.5%
Spain 2.6%
Netherlands 2.6%
Ireland 2.7%
Italy 5.7%
U.K. 6.3%
Japan 9.0%
Germany 15.0%
Cash 15.4%
U.S. 36.3%
</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.
.. Dollar Bloc. As of October 31, 1996, U.S. Treasuries were the fund's sole
allocation in the dollar bloc countries. However, during the period, we
intermittently held positions in Canadian and Australian bonds.
U.S. During most of the period, the portfolio was underweighted in U.S.
Treasuries relative to the benchmark, which worked to its advantage when the
U.S. market was impacted by rising interest rates. In September and October, we
raised the fund's Treasury allocation, and the shift helped performance when the
Treasury market rallied during those months. As of October 31, the portfolio
held a 36.3% Treasury allocation, in line with the benchmark.
Other Dollar Bloc. The fund began the period overweighted in Canada (7.7%
as of October 31, 1995). However, we reduced the position in January and
liquidated the remainder in May on the expectation that Canada's current round
of interest rate easing had run its course, which proved not to be the case. In
July, we reestablished an overweighting in Canada, then sold the position the
following month after the market rallied. During September and October, the
Canadian bond market rose again on weaker economic news, but the fund did not
participate. Though the fund was not invested in Australia as of October 31, it
held an overweighted position at times during the period, which contributed to
performance when the market strengthened in anticipation of easing monetary
policy.
.. Europe. The fund benefited from being overweighted in Europe during much of
the period. After we sold part of the allocation in the region at a profit, the
fund was slightly underweighted in European bonds relative to the Index, 39.3%
versus 43.9%, as of October 31.
Germany. Germany's economic growth was anemic during the first half of the
period, with real GDP declining during the fourth quarter of 1995 and the first
quarter of 1996. To help stimulate growth amid a tight fiscal policy, the
Bundesbank aggressively cut interest rates, which proved only modestly
successful as high unemployment and weak manufacturing activity continued to
persist. To
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
participate in Germany's favorable bond market environment, we significantly
overweighted our holdings at 15.0% (versus 9.6% for the Index), preferring
Germany over France in the core European markets.
Italy, Spain and Sweden. During the period, we increased the fund's
allocation in the higher yielding European markets, then trimmed its exposure
after these markets became less favorably valued. In January, we initiated a
position in Italy, which was attractive due to its tight fiscal policy, expected
interest rate cuts and better than anticipated inflation data. As of October 31,
Italy was overweighted relative to the benchmark, 5.7% versus 5.2%, and it
significantly benefited the fund as it proved to be the best performing bond
market during the period. Spain, another top-performing bond market, was cut to
a 2.6% position as of October 31 after we determined the market fully reflected
expectations that Spain would meet the criteria for European monetary union. We
also benefited by establishing and maintaining an overweighted position in
Sweden during most of the period, then subsequently reduced the position to
1.9%, nearly in line with the benchmark.
U.K. The U.K.'s economy was sluggish during much of the period, but by
September economic activity began to rebound, particularly in the consumer
sector. In anticipation of renewed inflationary pressures, as well as political
uncertainty related to the forthcoming general election, we sold approximately
half of the portfolio's U.K. position during the period. As of October 31, the
portfolio's 6.3% U.K. weighting was in line with the benchmark.
Ireland, the Netherlands and Denmark. Small, new positions added during the
period included Ireland (2.7%), the Netherlands (2.6%) and Denmark (2.5%). Like
the rest of Europe, these countries had attractive bond market environments, and
they contributed to the fund's performance. We believe Ireland is particularly
attractive as it has an exemption on its debt level, enabling it to join
European monetary union (EMU) on the first round.
France. Over the course of the year we reduced the fund's position in
France, finally liquidating our remaining holdings in July, in favor of German
bonds that we believed were more attractively valued. Unfortunately, this
strategy was not successful when France subsequently outperformed Germany.
Belgium. Belgium, a 3.5% allocation last year, performed well and we
trimmed the position over the course of the year. In October, we sold the fund's
remaining holdings in Belgium in favor of the Netherlands, which our analysis
determined offered greater total return potential.
.. Japan. JGBs accounted for 9.0% of the portfolio, significantly
underweighted compared with the benchmark (15.1%), which benefited the fund when
JGBs were weak during the first half of the period, but did not work in its
favor when JGBs rebounded in the second half of the year. However, the fund
partially participated in the Japanese bond rally through a call option on JGBs,
as well as its direct investments.
.. Cash Equivalents. The fund's allocation in cash equivalents was 15.4%,
approximately the same as a year ago (16.4%). We anticipate reducing the
position as we identify attractive investment opportunities.
.. Credit Quality. The portfolio was 100% invested in triple-A-rated
securities as of the end of the period.
.. Duration. As of October 31, the fund's duration of 4.4 years was
approximately a half year lower than that of the benchmark. (Duration is a
measurement of the fund's sensitivity to interest rate movements; the shorter
the duration, the less the fund's net asset value [NAV] should move in relation
to interest rate fluctuations.) The duration difference was primarily due to the
portfolio's cash equivalent position and its underweighting in Japan.
- --------------------------------------------------------------------------------
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
Fund Outlook
Going forward, we expect European bonds to continue to outperform U.S.
Treasuries, in terms of both capital gains and yields. In general, European
economies are weaker than that of the United States, with slow growth, high
unemployment and tight fiscal policies. Germany's economic recovery appears
intact, which makes us somewhat more cautious on German bonds at current low
yield levels. Nevertheless, German bonds still offer excess returns over cash,
provided German monetary policy remains on hold. Longer term, we favor the U.K.
gilt, as we believe the market has overreacted to the U.K.'s lack of
participation in European monetary union and its recent political uncertainty.
We also have a positive longer term view of the higher yielding markets of Italy
and Spain, though they have not offered investors a sufficient risk premium in
recent months. As of this writing, we are neutral on U.S. Treasuries, but we
will be watching for signs that the U.S. Federal Reserve expects to preempt any
potential inflationary pressure with tighter monetary policy in the near future.
Our analysis indicates that after their spectacular run, Canadian bonds do not
offer attractive relative value, but we are considering reestablishing a
position in Australia, which is experiencing slowing growth and waning
inflationary pressures. We expect to remain underweighted in Japan because we
anticipate that its economic recovery will resume despite recent weakness,
opening the possibility for monetary tightening. With JGBs currently yielding
just under 3%, our analysis indicates that we would not be adequately
compensated for their level of risk.
Distribution Policy
During the 12-month period under review, the fund's Class A and
Institutional shares paid out distributions of $1.43 and $1.50 per share,
respectively. From their inception on May 1, 1996 through October 31, 1996, the
fund's Class B shares paid out $0.36 per share. The fund declares and pays
dividends on a monthly basis. The fund distributes substantially all of its
taxable income, as is required for all investment companies.
As always, we will utilize the resources of Goldman, Sachs & Co.'s London-
based Economics Research Group for economic and market trend analysis as we
continue to seek out attractive global bond investment opportunities. We
appreciate your investment in the Goldman Sachs Global Income Fund and look
forward to continuing to help you achieve your investment goals.
Sincerely,
/s/ Stephen C. Fitzgerald
Stephen C. Fitzgerald
Portfolio Manager, Fixed Income Investments
/s/ Andrew F. Wilson
Andrew F. Wilson
Portfolio Manager, Fixed Income Investments
/s/ Gareth I. Evans
Gareth I. Evans
Portfolio Manager, Currency
Goldman Sachs Global Income Fund
London, November 29, 1996
- --------------------------------------------------------------------------------
14
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Global Income Fund (assuming both the maximum
sales charge of 4.5% and no sales charge for the Class A shares, the first year
maximum redemption fee of 5% and no redemption fee for the Class B shares and
net asset value for the Institutional shares) is compared with its benchmark--
the J.P. Morgan Global Government Bond Index hedged to U.S. Dollars ("J.P.
Morgan GGB Index-$ 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.
HYPOTHETICAL $10,000 INVESTMENT
[CHART APPEARS HERE]
Class A Shares (a)
<TABLE>
<CAPTION>
Class A Shares Class A Shares J.P. Morgan GGB Index-
(no sales charge) (w/sales charge) $ Hedged
<S> <C> <C> <C>
09/01/91 $10,000 $9,500 $10,000
10/31/91 $10,145 $9,688 $10,263
10/31/92 $11,034 $10,538 $11,156
10/31/93 $12,220 $11,670 $12,509
10/31/94 $11,672 $11,146 $12,051
10/31/95 $13,432 $12,827 $13,903
10/31/96 $14,921 $14,250 $15,306
</TABLE>
Class B Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class B Shares Class B Shares J.P. Morgan GGB
(no redemption charge) (w/redemption charge) Index-$ Hedged
<S> <C> <C> <C>
05/01/96 $10,000 $10,000 $10,000
10/31/96 $10,624 $10,124 $10,653
</TABLE>
Institutional shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Institutional J.P. Morgan GGB
Shares Index-$ Hedged
<S> <C> <C>
08/01/95 $10,000 $10,000
10/31/95 $10,442 $10,351
10/31/96 $11,651 $11,395
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------
Average Annual Total Return
----------------------------------------------------
One Year Five Year Since Inception(b)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Class A, excluding
sales charge 11.05% 8.01% 8.02%
- ---------------------------------------------------------------------------
Class A, including
sales charge 6.08% 7.02% 7.08%
- ---------------------------------------------------------------------------
Class B, excluding
redemption charge N/A N/A 6.24%(c)
- ---------------------------------------------------------------------------
Class B, including
redemption charge N/A N/A 1.24%(c)
- ---------------------------------------------------------------------------
Institutional Class 11.55% N/A 12.95%
- ---------------------------------------------------------------------------
</TABLE>
(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, Class B and Institutional shares commenced operations August 2,
1991, May 1, 1996 and August 1, 1995, respectively.
(c) An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve months
of operations.
- --------------------------------------------------------------------------------
15
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount (a) Rate Date Value
================================================================================
<S> <C> <C> <C>
Debt Obligations--83.2%
British Pound Sterling--6.2%
United Kingdom Treasury
BPS 9,000,000 8.50% 12/07/05 $ 15,573,120
- --------------------------------------------------------------------------------
Danish Krone--2.5%
Kingdom of Denmark
DKK 33,000,000 9.00% 11/15/00 $ 6,415,484
- --------------------------------------------------------------------------------
Deutschemark--14.8%
Federal Republic of Germany
DEM 8,000,000 7.12% 12/20/02 $ 5,742,980
7,500,000 6.75 07/15/04 5,245,292
33,000,000 6.50 10/14/05 22,549,455
3,500,000 7.38 01/03/05 2,528,510
Treuhandanstalt
2,000,000 6.50 04/23/03 1,388,437
- --------------------------------------------------------------------------------
$ 37,454,674
- --------------------------------------------------------------------------------
Irish Pound--2.7%
Republic of Ireland
IEP 4,000,000 8.00% 10/18/00 $ 6,905,421
- --------------------------------------------------------------------------------
Italian Lira--5.4%
Republic of Italy
ITL 19,000,000,000 10.50% 11/01/00 $ 13,851,419
- --------------------------------------------------------------------------------
Japanese Yen--8.9%
International Bank for Reconstruction &
Development
JPY 700,000,000 6.75% 06/18/01 $ 7,536,474
Japanese Developmental Bank
1,400,000,000 6.50 09/20/01 15,019,116
- --------------------------------------------------------------------------------
$ 22,555,590
- --------------------------------------------------------------------------------
Netherlands Guilder--2.5%
Dutch Government Bond
NLG 10,000,000 7.00% 06/15/05 $ 6,350,937
- --------------------------------------------------------------------------------
Spanish Peseta--2.5%
Government of Spain
ESP 500,000,000 10.30% 06/15/02 $ 4,448,842
Kingdom of Spain
200,000,000 10.15 01/31/06 1,804,930
- --------------------------------------------------------------------------------
$ 6,253,772
- --------------------------------------------------------------------------------
Swedish Krona--1.8%
Kingdom of Sweden
SEK 32,000,000 6.00% 02/09/05 $ 4,489,558
- --------------------------------------------------------------------------------
United States Dollar--35.9%
United States Treasury Notes
USD 10,000,000 6.88% 07/31/99 $ 10,243,700
18,000,000 5.25 01/31/01 17,507,880
17,000,000 6.38 03/31/01 17,196,520
8,200,000 6.25 02/15/03 8,229,438
10,000,000 7.88 11/15/04 10,975,000
12,000,000 6.50 08/15/05 12,125,640
14,000,000 7.00 07/15/06 14,616,840
- --------------------------------------------------------------------------------
$ 90,895,018
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $206,293,080) $210,744,993
- --------------------------------------------------------------------------------
Short-Term Obligations--15.4%
Euro-Time Deposit
USD 38,987,507 5.50% 11/01/96 38,987,507
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $38,987,507) $ 38,987,507
- --------------------------------------------------------------------------------
Total Investments
(Cost $245,280,587/(b)/ ) $249,732,500
================================================================================
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $6,414,087
Gross unrealized loss for investments in which cost
exceeds value (2,188,683)
- --------------------------------------------------------------------------------
Net unrealized gain $4,225,404
================================================================================
</TABLE>
/(a)/ The principal amount of each security is stated in the currency in which
the bond is denominated. See below.
BPS = British Pound Sterling ITL = Italian Lira
NLG = Netherlands Guilder JPY = Japanese Yen
DKK = Danish Krone ESP = Spanish Peseta
DEM = Deutschemark SEK = Swedish Krona
IEP = Irish Pound USD = United States Dollar
/(b)/ The aggregate cost for federal income tax purposes is $245,507,096. 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.
16
<PAGE>
Letter 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 preservation of capital. In pursuit of its objective, the fund invests in a
diversified portfolio of municipal securities with a weighted average credit
quality of double-A or better. The fund buys only investment-grade securities
or, if unrated, deemed to be of comparable quality. Under normal interest rate
conditions, the fund's duration is expected to be within one year of its
benchmark, the Lehman Brothers 15-Year Municipal Bond Index. The fund's
approximate interest rate sensitivity is comparable to that of a 15-year bond.
After a Weak Start, the Municipal Bond Market Strengthened
The municipal bond market outperformed Treasuries during the 12-month
period under review, though both markets came under pressure when rates rose
during the first half of 1996. The average price of a 15-year municipal bond (as
calculated from data provided by Municipal Market Data, an independent municipal
market information provider) rose approximately 0.50%, while yields declined
from 5.35% on October 31, 1995 to 5.30% on October 31, 1996.
The municipal bond market began the period under review on a weak note. Tax
reform uncertainty impacted investor demand during November and December 1995,
while municipal bond supply was high due to seasonably heavy year-end issuance
and relatively low interest rates. The market environment improved during
January and February 1996, when fading tax reform concerns helped to revive
investor interest in the sector and issuance declined. From March through the
end of the period, the market's technical balance was generally healthy, though
occasional spikes in supply periodically overwhelmed demand and briefly impacted
performance. The largest of these surges occurred in June when supply rose to
its highest level since late 1995, but subsequently both new issuance and
secondary supply fell dramatically from July through September.
On the demand side, interest in municipal bonds was generally stable until
late summer and early fall. Demand from individual investors (who control
approximately 65% of municipal bond ownership either through mutual funds or
direct investment) began to decline when interest rates declined and municipal
yields fell below the psychologically significant 6% level. In addition,
property/casualty companies (who control approximately 10% of municipal bond
ownership) also dropped out of the market because the sector had become somewhat
unattractive relative to Treasuries. The supply drought finally abated in
October when many issuers sought to take advantage of lower interest rates, and
a continued weakness in demand caused municipals to underperform taxable bonds
for the month.
Municipal Bond Yield Curve
[YIELD CURVE LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Year of Maturity 10/31/96 10/31/95
---------------- -------- --------
<S> <C> <C>
1997 3.6 3.9
1998 3.9 4.1
1999 4.15 4.2
2000 4.3 4.3
2001 4.4 4.4
2002 4.5 4.5
2003 4.6 4.6
2004 4.7 4.7
2005 4.8 4.8
2006 4.9 4.95
2007 5 5.05
2008 5.1 5.15
2009 5.2 5.25
2010 5.25 5.35
2011 5.3 5.4
2012 5.35 5.45
2013 5.4 5.5
2014 5.4 5.55
2015 5.45 5.55
2016 5.45 5.55
2017 5.45 5.55
2018 5.5 5.55
2019 5.5 5.6
2020 5.5 5.6
2021 5.5 5.6
2022 5.5 5.6
2023 5.5 5.6
2024 5.5 5.6
2025 5.5 5.6
</TABLE>
The yield curve steepened at the short end and shifted downward at the longer
end.
Performance Review: Term Structure, Sector Weightings and Security Selection
Contributed to the Fund's Favorable Performance
During the period under review, the fund's Class A shares outperformed
their benchmark, the Lehman Brothers 15-Year Municipal Bond Index (the "Index").
The fund's Class B shares, which opened on May 1, 1996 while interest rates were
still rising, also performed well but slightly lagged the benchmark.
- --------------------------------------------------------------------------------
17
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
We are pleased to report that the fund's Class A shares outperformed most of
their peers. For the 12 months ended October 31, 1996, Class A shares ranked in
the top 20% of general municipal debt funds (36 out of 228) based on total
return, according to Lipper Analytical Services, Inc. (Please note that Lipper
rankings do not take sales charges into account and that past performance is not
a guarantee of future results. Class B shares were not included because they
were not in existence during the entire 12-month period.)
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B*
(10/31/95- (5/1/96-
10/31/96) 10/31/96)
-------- --------
<S> <C> <C>
Total Return (based on net asset value) 6.13% 4.40%
- --------------------------------------------------------------------------------
Return From Monthly Distributions 4.72% 1.98%
- --------------------------------------------------------------------------------
Return From Price Appreciation 1.41% 2.42%
- --------------------------------------------------------------------------------
Lehman Brothers 15-Year Municipal
Bond Index 5.99% 4.80%
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.37 $14.37
- --------------------------------------------------------------------------------
NAV Change +$0.20 +$0.34
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
The fund's positive performance during the period can be attributed to our
term structure management, sector weightings and specific security selections.
.. The portfolio's neutral term structure is "credit-barbelled," emphasizing
high-quality bonds with maturities of 20 to 30 years on the long end of the
yield curve and lower quality bonds with four to ten year maturities on the
short end of the curve. However, during the period, we regularly adjusted the
term structure to take advantage of changing market conditions. For example,
when the municipal bond yield curve flattened during September and the beginning
of October, we sold securities in the 20- to 30-year range in favor of 15- to
20-year bonds. In mid-October, the yield curve steepened as we anticipated, and
the fund's 15- to 20-year bonds outperformed 20- to 30-year bonds. By the end of
the month, when longer maturity bonds had become more attractively valued, we
reestablished a more evenly distributed maturity structure.
.. In September, we underweighted the fund's municipal bond position relative
to the Index when our analysis indicated that municipal bonds had become
expensive compared with Treasuries. We replaced a small percentage of the fund's
duration with U.S. Treasury bond futures contracts, which we preferred over
buying Treasuries directly because they allowed us to participate in a Treasury
rally without incurring taxable net investment income. This strategy proved
successful when municipal bonds underperformed Treasuries in October, and we
returned the fund to its 100% municipal bond weighting after municipals had
cheapened to an attractive level at the end of the month.
.. The fund's performance also benefited from our extensive credit analysis.
Our research helped us identify specific investment opportunities, such as
"story" bonds. These securities are often misunderstood or incorrectly valued,
but can have unique security structures and attractive yield potential.
Portfolio Composition and Investment Strategies:
Revenue Bonds Were Stressed Over GOs
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Variable Rate Demand Notes 7.6%
General Obligations 5.5%
Insured Revenue Bonds 34.7%
Revenue Bonds 27.9%
Insured General Obligations 24.3%
</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.
- --------------------------------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
.. Revenue Bonds. We emphasized revenue bonds over general obligation bonds
because the sector offers higher yields and better price appreciation potential.
As of October 31, the fund held a 62.6% position in a combination of insured and
uninsured revenue bonds, overweighted compared with the Index (53.9%). (Revenue
bonds pay interest and principal out of a specific revenue stream, such as sales
taxes, hospital charges, tolls, electric rates and airport fees.)
.. General Obligation (GO) Bonds. As of October 31, the fund's GO holdings,
which are backed by the general taxing power of a municipality, were
underweighted relative to the Index, 29.8% versus 45.6%. Though the fund's total
GO allocation was little changed from a year ago, we did increase its weighting
in insured GOs (to 24.3% versus 12.6% last year) and reduced uninsured GOs (to
5.5% versus 16.6% last year) due to security-specific investment opportunities.
.. Variable Rate Demand Notes (VRDNs). VRDNs, which are high-quality cash
equivalents, were used to manage the portfolio's excess liquidity. The position
accounted for 7.6% of the portfolio, nearly unchanged from last year.
.. Credit Quality. During the period, the fund's average credit quality has
remained double-A. However, in contrast to last year's emphasis on triple-A-
rated bonds, this year the fund's credit quality was structured like a
"barbell," with higher quality securities at the long end of the yield curve and
lower quality securities (but still investment grade) at the short end. As of
October 31, 70.5% of the fund was invested in triple-A-rated securities, nearly
the same as a year ago, while double-A- and single-A-rated securities were
reduced to 9.3% and 1.8%, respectively. In the late spring of 1996, we initiated
a new position in triple-B-rated securities (the lowest credit category for
investment-grade securities), which accounted for 18.4% of the portfolio by the
end of the period. We used extensive credit research to identify specific
securities that offered higher yields than average triple-B-rated securities,
but still were of sound credit quality. The triple-B-rated position benefited
the fund's performance during the period by enabling us to lock in above-market
yields and providing greater price appreciation potential relative to the
market. Each of these positions is monitored carefully, and we will remain
vigilant for any changes in their credit quality.
Market Outlook
We have a bullish long-term outlook for municipal bond supply, since new
money issuance (bonds issued for purposes other than refunding older debt) tends
to be stable and grows at the same rate as GDP. In addition, we do not
anticipate a significant increase in refunding unless interest rates drop
substantially. On the demand side, investor interest is likely to remain
healthy, as we believe that two to four more years of divided government (a
Democratic president and a Republican-controlled Congress) should avert any
significant tax reform that would threaten municipal bonds' tax-exempt status.
Distribution Policy
During the period under review, the fund's Class A shares paid out
distributions of $0.65 per share. The fund's Class B shares, which opened on May
1, 1996, paid out $0.27 per share from their inception through October 31, 1996.
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.
- --------------------------------------------------------------------------------
19
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
We value your investment in the Goldman Sachs Municipal Income Fund and we
look forward to reporting on the fund's progress in the coming year.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Elisabeth Schupf Lonsdale
Elisabeth Schupf Lonsdale
Portfolio Managers
Goldman Sachs Municipal Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
20
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Municipal Income Fund (assuming both the
maximum sales charge of 4.5% and no sales charge for Class A shares and the
maximum redemption fee of 5% and no redemption fee for the Class B shares) 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
Class A /(a)/
[LINE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman 15-year
Date (no sales charge) (w/sales charge) Muni Index
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
8/1/93 $10,000 $9,550 $10,000
- --------------------------------------------------------------------------------
10/31/93 $10,455 $9,984 $10,385
- --------------------------------------------------------------------------------
10/31/94 $9,878 $9,434 $9,860
- --------------------------------------------------------------------------------
10/31/95 $11,241 $10,735 $11,414
- --------------------------------------------------------------------------------
10/31/96 $11,933 $11,395 $12,100
- --------------------------------------------------------------------------------
</TABLE>
Class B
[LINE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman
(no redemption (w/redemption 15-year
Date charge) charge) Muni Index
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/96 10,000 10,000 10,000
- --------------------------------------------------------------------------------
Oct 31, 96 10,440 9,940 10,480
- --------------------------------------------------------------------------------
</TABLE>
-----------------------------------
Average Annual Total Return
-----------------------------------
One Year Since Inception/(b)/
--------------------------------------------------------
Class A, excluding
sales charge 6.13% 5.27%
--------------------------------------------------------
Class A, including
sales charge 1.35% 3.80%
--------------------------------------------------------
Class B, excluding
redemption charge N/A 4.40%/(c)/
--------------------------------------------------------
Class B, including
redemption charge N/A (0.60%)/(c)/
--------------------------------------------------------
/(a)/For comparative purposes, Class A initial investment is assumed to be made
on the first day of the month following the Fund's commencement of
operations.
/(b)/Class A and Class B commenced operations July 20, 1993 and May 1, 1996,
respectively.
/(c)/An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
21
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Debt Obligations--102.2%
Arizona--5.1%
Maricopa County, AZ Unified School District No. 41 GO
(FSA)(AAA/Aaa)
$2,500,000 6.25% 07/01/15 $ 2,653,300
- --------------------------------------------------------------------------------
California--8.1%
Contra Costa, CA Water District Series G RB (MBIA)
(AAA/Aaa)
$2,000,000 5.75% 10/01/14 $ 2,022,980
San Buenaventura, CA Sewer Revenue RB (FGIC)
(AAA/Aaa)
2,255,000 5.50 03/01/15 2,231,435
- --------------------------------------------------------------------------------
$ 4,254,415
- --------------------------------------------------------------------------------
Colorado--4.8%
Englewood MFH RB (BBB)
$2,500,000 6.65% 12/01/26 $ 2,499,750
- --------------------------------------------------------------------------------
Connecticut--3.9%
Mashantucket Western Pequot Tribe RB (BBB/Baa)
$2,000,000 6.50% 09/01/05 $ 2,072,220
- --------------------------------------------------------------------------------
Florida--2.8%
Escambia County, FL Housing Authority, Single Family
(GNMA/FNMA)(Aaa)
$1,390,000 6.80% 10/01/15 $ 1,464,949
- --------------------------------------------------------------------------------
Illinois--19.1%
Chicago, IL GO Series A-2 (AMBAC) (AAA/Aaa) (e)
$1,750,000 6.25% 01/01/14 $ 1,877,873
Cook County, IL GO(FGIC) (AAA/Aaa)
2,000,000 5.75 11/15/12 2,015,720
Lake County, IL Unified School District No. 116 GO (FSA) (AAA/Aaa)
2,000,000 7.60 02/01/14 2,428,340
1,525,000 6.10 02/01/16 1,588,089
O'Hare International Airport RB (MBIA)(AAA/Aaa)
2,000,000 6.38 01/01/15 2,109,780
- --------------------------------------------------------------------------------
$10,019,802
- --------------------------------------------------------------------------------
Indiana--9.5%
East Allen, IN Elementary School Building Corp. RB (FSA)
(AAA/Aaa)
$3,115,000 5.88% 07/01/12 $ 3,178,079
Indiana Transportation Finance Authority RB Series A
(MBIA) (AAA/Aaa)
1,500,000 7.25 06/01/15 1,789,305
- --------------------------------------------------------------------------------
$ 4,967,384
================================================================================
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Kentucky--2.0%
Nelson County, KY Industrial Building RB for Mabex
Universal Corp. Project AMT (A3)
$1,000,000 6.50% 04/01/05 $ 1,066,790
- --------------------------------------------------------------------------------
Maine--1.5%
Maine Educational Loan Authority RB Series A-1 (Aaa)
$ 725,000 6.80% 12/01/07 $ 765,462
- --------------------------------------------------------------------------------
Michigan--3.6%
Detroit, MI GO (BBB-)
$1,885,000 5.70% 05/01/02 $ 1,907,714
- --------------------------------------------------------------------------------
New York--9.0%
New York State Municipal Bond Agency RB, Series A (BBB+)
$1,610,000 6.60% 03/15/01 $ 1,699,854
New York State Thruway Authority Highway & Bridges RB
(BBB/Baa1)
1,000,000 5.25 04/01/03 1,004,630
Syracuse, NY IDA RB (AA)
2,000,000 5.13 10/15/02 2,005,600
- --------------------------------------------------------------------------------
$ 4,710,084
- --------------------------------------------------------------------------------
North Dakota--3.8%
Mercer County, ND PCRB for Basin Electric Power 2nd
Series (AMBAC) (AAA/Aaa) (e)
$2,000,000 6.05% 01/01/19 $ 2,055,380
- --------------------------------------------------------------------------------
Ohio--8.9% Akron, OH COPs (a) (BBB) (c)
$2,000,000 6.90% 12/01/16 $ 1,438,500
Kent State University RB (MBIA) (AAA/Aaa)
2,280,000 5.50 05/01/28 2,181,504
Trumbull County, OH GO (AMBAC) (AAA/Aaa)
1,000,000 5.75 12/01/03 1,061,870
- --------------------------------------------------------------------------------
$ 4,681,874
- --------------------------------------------------------------------------------
Texas--8.8%
Denison, TX Waterworks & Sewer RB (AAA/Aaa)
$1,250,000 5.50% 09/01/08 $ 1,258,525
1,250,000 5.40 09/01/09 $ 1,258,475
East Texas Criminal Justice Facilities Financing Corp. RB
(AMBAC) (AAA/Aaa)
$2,000,000 5.75 11/01/09 $ 2,032,560
Fort Bend, TX Independent School District RB (AAA/Aaa)
50,000 5.00 02/15/18 46,226
- --------------------------------------------------------------------------------
$ 4,595,786
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
22
22
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Debt Obligations(continued)
Washington--7.1%
Chelan County, WA Public Utility RB (AAA/Aaa)/c/
$2,500,000 6.35% 07/01/28 $ 2,540,125
Washington State Series C GO (AA/Aa)
1,155,000 6.50 07/01/00 1,232,373
- --------------------------------------------------------------------------------
$ 3,772,498
- --------------------------------------------------------------------------------
Wisconsin--4.2%
Wisconsin Housing & Economic Development Authority RB,
Series B (AA/Aa)/e/
$2,060,000 7.10% 09/01/15 $ 2,181,623
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $52,677,902) $53,669,031
- --------------------------------------------------------------------------------
Short-Term Obligations--8.4%
Alabama--6.5%
Columbia County, AL IDB/b/ (A/A2)
$1,200,000 3.65% 11/01/96 $ 1,200,000
Parrish, AL IDB/b/ (A/A1)
2,200,000 3.65 11/01/96 2,200,000
- --------------------------------------------------------------------------------
$ 3,400,000
- --------------------------------------------------------------------------------
Wyoming--1.9%
Converse, WY PCRB/b/ (AAA)
$1,000,000 3.65% 11/01/96 $ 1,000,000
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $4,400,000) $ 4,400,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $57,077,902/d/) $58,069,031
================================================================================
- --------------------------------------------------------------------------------
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $ 1,018,643
Gross unrealized loss for investments in which cost
exceeds value (27,514)
- --------------------------------------------------------------------------------
Net unrealized gain $ 991,129
================================================================================
/a/The interest rate disclosed for these securities represents effective
yields to maturity.
/b/Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next interest reset dates.
/c/When-issued security.
/d/The amount stated also represents aggregate cost for federal income tax
purposes.
/e/Portions of these securities are being segregated for when-issued securities.
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.
COPS --Certificates of Participation
FGIC --Insured by Financial Guaranty
Insurance Co.
FSA --Financial Security Assurance Co.
GO --General Obligation
IDA --Industrial Development Authority
IDB --Industrial Development Bond
MBIA --Insured by Municipal Bond Investors
Assurance
MFH --Multi-Family Housing
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
================================================================================
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
23
23
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
========================================
<S> <C> <C> <C>
Assets:
Investments in securities, at value (cost $38,555,545, $245,280,587
and $57,077,902) $38,632,147 $249,732,500 $58,069,031
Receivables:
Investment securities sold 3,011,458 -- --
Interest 255,950 4,572,733 688,717
Forward foreign currency exchange contracts -- 1,073,237 --
Fund shares sold 38,729 23,757 12,145
Foreign tax withheld -- 100,251 --
Cash 17,149 248 48,127
Variation margin 6,788 -- --
Deferred organization expenses, net 23,998 -- 30,090
Other assets 65,284 31,883 29,773
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets 42,051,503 255,534,609 58,877,883
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased 11,129,422 -- 6,076,685
Forward foreign currency exchange contracts -- 1,816,332 --
Fund shares repurchased 14,381 124,500 128,184
Investment adviser fees 6,423 94,713 18,124
Administration fees -- 32,334 6,857
Authorized dealer service fees 6,166 44,409 9,224
Distribution fees 151 35,488 154
Accrued expenses and other liabilities 57,538 211,388 116,255
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 11,214,081 2,359,164 6,355,483
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets:
Paid in capital 30,678,648 247,410,169 52,495,830
Accumulated undistributed net investment income 53,331 6,704,225 60,331
Accumulated net realized loss on investment transactions (45,759) (4,636,687) (1,024,890)
Accumulated net realized foreign currency gain -- 43,634 --
Net unrealized gain on investments and futures 151,202 4,864,862 991,129
Net unrealized loss on translation of assets and liabilities denominated in foreign
currencies -- (1,210,758) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets $30,837,422 $253,175,445 $52,522,400
==================================================================================================================================
Net asset value, offering /(a)/ and redemption price per share
Class A $14.36 $14.53 $14.37
Class B $14.37 $14.53 $14.37
Institutional -- $14.52 --
==================================================================================================================================
Shares Outstanding
Class A 2,131,467 13,670,270 3,637,437
Class B 16,317 17,603 17,778
Institutional -- 3,735,251 --
- ----------------------------------------------------------------------------------------------------------------------------------
Total shares outstanding, $.001 par value (unlimited number of shares authorized) 2,147,784 17,423,124 3,655,215
==================================================================================================================================
</TABLE>
/(a)/Maximum public offering price per share (NAV per share x 1.0471) for Class
A shares is $15.04, $15.21 and $15.05 for Government Income, Global Income
and Municipal Income, respectively. At redemption, Class B shares are
subject to a contingent deferred sales charge, assessed on the amount equal
to the lesser of the current net asset value or the original purchase price
of the shares.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Goldman Sachs Trust
- ------------------------------------------------------------------------------
Statements of Operations
For the Year Ended October 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
======================================
<S> <C> <C> <C>
Investment income:
Interest/(a)/ $2,048,891 $18,287,214 $2,869,729
- ------------------------------------------------------------------------------
Total income 2,048,891 18,287,214 2,869,729
- ------------------------------------------------------------------------------
Expenses:
Investment adviser fees 148,120 1,965,605 211,283
Administration fees 44,433 393,263 79,231
Authorized dealer service fees 74,171 549,289 132,051
Distribution fees 74,281 549,538 132,304
Custodian fees 44,987 210,420 36,172
Transfer agent fees 72,237 121,212 90,284
Professional fees 58,897 92,538 60,094
Registration fees 14,992 63,673 32,549
Amortization of deferred organization
expenses 18,848 46,256 17,593
Trustee fees 478 3,073 707
Other 8,763 78,430 27,214
- ------------------------------------------------------------------------------
Total expenses 560,207 4,073,297 819,482
Less--expenses reimbursable and fees
waived by Goldman Sachs (411,644) (1,241,452) (370,128)
- ------------------------------------------------------------------------------
Net expenses 148,563 2,831,845 449,354
- ------------------------------------------------------------------------------
Net investment income 1,900,328 15,455,369 2,420,375
- ------------------------------------------------------------------------------
Realized and unrealized gain (loss)
on investment, options, futures and
foreign currency transactions:
Net realized gain (loss) from:
Investment transactions 115,970 9,268,666 1,390,846
Futures transactions (68,389) -- (151,156)
Foreign currency related transactions -- (2,192,328) --
Net change in unrealized gain (loss) on:
Investments and options (332,205) 54,149 (513,085)
Futures 74,600 -- --
Translation of assets and liabilities
denominated in foreign currencies -- 4,948,769 --
- ------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investment, options, futures and
foreign currency transactions (210,024) 12,079,256 726,605
- ------------------------------------------------------------------------------
Net increase in net assets resulting
from operations $1,690,304 $27,534,625 $3,146,980
==============================================================================
</TABLE>
/(a)/Net of $96,252 in foreign withholding tax for the Global Income
Fund.
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
=============================================
<S> <C> <C> <C>
From operations:
Net investment income $ 1,900,328 $ 15,455,369 $ 2,420,375
Net realized gain from investment transactions 47,581 9,268,666 1,239,690
Net realized loss from foreign currency related transactions -- (2,192,328) --
Net change in unrealized gain (loss) on investments, futures and options (257,605) 54,149 (513,085)
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- 4,948,769 --
- ------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,690,304 27,534,625 3,146,980
- ------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (1,898,372) (22,455,377) (2,418,570)
Class B (3,324) (3,052) (1,805)
Institutional Class -- (4,050,770) --
- ------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,901,696) (26,509,199) (2,420,375)
- ------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 8,922,548 39,747,372 6,389,765
Reinvestment of dividends and distributions 1,614,587 16,968,046 1,484,778
Cost of shares repurchased (8,990,920) (82,019,748) (9,875,982)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 1,546,215 (25,304,330) (2,001,439)
- ------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 1,334,823 (24,278,904) (1,274,834)
Net assets:
Beginning of year 29,502,599 277,454,349 53,797,234
- ------------------------------------------------------------------------------------------------------------------------
End of year $ 30,837,422 $ 253,175,445 $ 52,522,400
========================================================================================================================
Accumulated undistributed net investment income $ 53,331 $ 6,704,225 $ 60,331
========================================================================================================================
Summary of share transactions:
Shares sold 624,626 2,811,314 449,496
Reinvestment of dividends and distributions 112,977 1,198,568 104,201
Shares repurchased (628,175) (5,784,097) (694,794)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 109,428 (1,774,215) (141,097)
========================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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.
27
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
October 31, 1996
- --------------------------------------------------------------------------------
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 non-diversified portfolio. As of October 31, 1996, the Funds offer
Class A and Class B shares. In addition, Global Income offers Institutional and
Service shares. As of October 31, 1996, there outstanding no Service 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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that may affect the reported amounts.
A. Investment Valuation
- -----------------------
Investments in debt securities, other than money market instruments, held by the
Funds 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 Government Income and Municipal
Income 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 Government Income and Municipal
Income, 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. Security Transactions and Investment Income
- ----------------------------------------------
Security transactions are recorded on the trade date. Realized gains and losses
on sales of portfolio securities are calculated on the identified cost basis.
Interest income is recorded on the basis of interest accrued. Premiums on
interest-only securities and on collateralized mortgage obligations with nominal
- --------------------------------------------------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 for
distribution and are classified as interest income in the accompanying
Statements of Operations. Original issue discounts ("OID") 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. OID amortization on
mortgage backed REMIC securities is initially recorded based on estimates of
principal paydowns using the most recent OID factors available from the issuer.
Recorded amortization amounts are adjusted when actual OID factors are received.
For Municipal Income, market premiums on other long-term debt securities are
amortized to interest income while for Global Income, 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
- ----------------------------------------------
Global Income 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. Global Income may also purchase and sell forward contracts to seek to
increase total return. 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
- ------------------------
Government Income and Global Income 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.
- --------------------------------------------------------------------------------
29
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
F. Option Accounting Principles
- -------------------------------
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 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.
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.
G. Futures Contracts
- --------------------
The Funds may enter into futures transactions in order to hedge against changes
in interest rates, securities prices, currency exchange rates in the case of
Global Income or to seek to increase total return. A Fund will engage in futures
transactions only for bona fide hedging purposes as defined in regulations of
the CFTC or to seek to increase total return to the extent permitted by such
regulations. 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.
Payments for futures contracts ("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. The predominant
risk is that changes in the value of the futures contract that may not directly
correlate with changes in the value of the underlying securities. The risk may
decrease the effectiveness of the Funds' hedging strategies and may also result
in a loss to the Funds.
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.
- --------------------------------------------------------------------------------
30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
At October 31, 1996, the Funds had approximately the following amounts of
capital loss carryforward for U.S. Federal tax purposes:
<TABLE>
<CAPTION>
Year of
Fund Amount Expiration
- ----------------------------------- ------------ ----------------
<S> <C> <C>
Global Income $4,471,734 2002
Municipal Income $1,534,884 2002
</TABLE>
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 and Class B shareholders of the Funds bear all expenses and fees
relating to their respective distribution and authorized dealer service plans as
well as other expenses which are directly attributable to such shares. Transfer
agent fees are subject to separate arrangements for each class.
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 Global Income. 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 Government Income, Global
Income and Municipal Income, respectively. As compensation for the services
rendered pursuant to the Subadvisory Agreement, GSAM International is entitled
to a subadvisory fee from Global Income of .50% of the average daily net assets.
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.
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 Global Income, transfer agent fees) to the extent
such expenses exceed .00%, .06% and .05% per annum of Government Income, Global
Income and Municipal Income, respectively.
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, 1996,
Goldman Sachs retained approximately $17,300, $52,600 and $24,900 of sales loads
related to Government Income, Global Income and Municipal Income, 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% and .75% of each Fund's average
daily net assets attributable to Class A and Class B shares, respectively.
- --------------------------------------------------------------------------------
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
The Trust, on behalf of each Fund, has 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, on an annual basis, up to .25% of the
average daily net assets attributable to the Class A and Class B shares. Goldman
Sachs also serves as the Transfer Agent of the Funds for a fee.
For the year ended October 31, 1996, the advisors, administrators and
distributor have voluntarily agreed to waive certain fees and reimburse other
expenses as follows (in thousands):
<TABLE>
<CAPTION>
Waivers
--------------------------------------
Reimburse-
Admin- Class A Reimburse- ment
Fund Advisor istrator 12b-1 ment Outstanding
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Government
Income 74 44 74 220 27
Global
Income 848 -- 56 337 7
Municipal
Income -- -- 132 238 30
</TABLE>
The Investment Advisors and Administrator may discontinue or modify such waivers
and limitations in the future at their discretion.
For the year ended October 31, 1996, Government Income and Municipal Income
incurred commissions expense of approximately $1,200 and $2,750 respectively, in
connection with futures contracts entered into with Goldman Sachs. At October
31, 1996, Goldman Sachs owes approximately $7,000 to Government Income related
to variation margin on futures contracts.
4. Line of Credit Facility
The Funds participate in a $100,000,000 uncommitted, unsecured revolving line of
credit facility. In addition, Global Income participates in a $50,000,000
committed, unsecured revolving line of credit facility. Both facilities are 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 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, 1996, 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, 1996, were as follows:
<TABLE>
<CAPTION>
================================================================================
Government Global Municipal
Fund Income Income Income
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchases of U.S.
Government and
agency obligations $133,097,699 $117,740,548 $ --
- --------------------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) 9,741,716 410,144,747 184,788,273
- --------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 136,922,990 102,151,633 --
- --------------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and
agency obligations) 3,909,735 446,269,068 189,391,870
================================================================================
</TABLE>
For the year ended October 31, 1996, option transactions in Global Income were
as follows:
<TABLE>
<CAPTION>
Options Purchased Cost
- --------------------------------------------------------------------------------
<S> <C>
Balance outstanding, beginning of period $ --
Options purchased 202,160
Options expired (202,160)
- --------------------------------------------------------------------------------
Balance outstanding, end of period $ --
================================================================================
</TABLE>
32
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
At October 31, 1996, Global Income had outstanding forward foreign currency
exchange contracts to sell foreign currencies as follows:
<TABLE>
<CAPTION>
===============================================================================
Value on
Foreign Currency Settlement Current Unrealized
Sale Contracts Date Value Gain/(Loss)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Danish Krone
Expiring 1/22/97 $ 6,348,652 $ 6,443,676 $ (95,024)
Deutschemark
Expiring 11/27/96 37,735,809 38,044,516 (308,707)
Expiring 2/27/97 12,671,000 12,775,513 (104,513)
British Pound Sterling
Expiring 11/14/96 15,423,575 16,184,359 (760,784)
Irish Pound
Expiring 1/8/97 6,842,743 6,964,425 (121,682)
Italian Lira
Expiring 1/29/97 1,326,853 1,335,737 (8,884)
Japanese Yen
Expiring 1/24/97 23,059,781 22,755,697 304,084
Netherlands Guilder
Expiring 1/9/97 6,442,727 6,510,658 (67,931)
Spanish Peseta
Expiring 1/16/97 6,543,897 6,612,046 (68,149)
Swedish Krona
Expiring 1/28/97 4,708,899 4,736,457 (27,558)
Swiss Franc
Expiring 1/29/97 12,952,107 12,453,735 498,372
Expiring 1/29/97 12,083,214 12,109,196 (25,982)
- -------------------------------------------------------------------------------
Total Foreign Currency
Sale Contracts $146,139,257 $146,926,015 $(786,758)
===============================================================================
</TABLE>
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, 1996, Global Income had sufficient cash and/or securities to
cover any commitments under these contracts.
Global Income 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 $1,073,237 and $1,816,332 respectively, in the accompanying
Statement of Assets and Liabilities. Included in the "Receivable and Payable for
forward foreign currency exchange contracts" are $270,781 and $227,118
respectively, related to forward contracts closed but not settled as of
October 31, 1996.
6. Summary of Share Transactions
Share activity for the year ended October 31, 1996 is as follows:
<TABLE>
<CAPTION>
Government Income Fund Dollars Shares
===============================================================================
<S> <C> <C>
Class A Shares:
Shares sold $8,675,868 607,156
Reinvestment of dividends and
distributions 1,611,387 112,752
Shares repurchased (8,971,389) (626,797)
----------------------------------
1,315,866 93,111
----------------------------------
Class B Shares
Shares sold 246,680 17,470
Reinvestment of dividends
and distributions 3,200 225
Shares repurchased (19,531) (1,378)
----------------------------------
230,349 16,317
- -------------------------------------------------------------------------------
$1,546,215 109,428
===============================================================================
<CAPTION>
Global Income Fund Dollars Shares
===============================================================================
<S> <C> <C>
Class A Shares:
Shares sold $ 15,545,777 1,089,521
Reinvestment of dividends
and distributions 13,419,614 947,846
Shares repurchased (76,216,894) (5,376,065)
----------------------------------
(47,251,503) (3,338,698)
----------------------------------
Class B Shares
Shares sold 265,053 18,628
Reinvestment of dividends
and distributions 1,708 119
Shares repurchased (16,373) (1,144)
----------------------------------
250,388 17,603
----------------------------------
Institutional Shares:
Shares sold 23,936,542 1,703,165
Reinvestment of dividends
and distributions 3,546,724 250,603
Shares repurchased (5,786,481) (406,888)
----------------------------------
21,696,785 1,546,880
- -------------------------------------------------------------------------------
$(25,304,330) (1,774,215)
================================================================================
</TABLE>
33
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Municipal Income Fund Dollars Shares
================================================================================
<S> <C> <C>
Class A Shares:
Shares sold $ 6,139,212 431,736
Reinvestment of dividends
and distributions 1,482,976 104,074
Shares repurchased (9,874,431) (694,685)
------------------------------------
(2,252,243) (158,875)
------------------------------------
Class B Shares
Shares sold 250,553 17,760
Reinvestment of dividends
and distributions 1,802 127
Shares repurchased (1,551) (109)
------------------------------------
250,804 17,778
- --------------------------------------------------------------------------------
$ (2,001,439) (141,097)
================================================================================
</TABLE>
Share activity for the year ended October 31, 1995 is as follows:
<TABLE>
<CAPTION>
Global Income Fund Dollars Shares
================================================================================
<S> <C> <C>
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
- -------------------------------------------------------------------------------
$(141,736,340) (10,321,532)
===============================================================================
</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 Funds' custodian, or at subcustodians. GSAM monitors the
market value of the underlying securities by pricing them daily.
8. Joint Repurchase Agreement Account
Government Income, 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, 1996, Government Income had a 0.3% undivided interest in the
repurchase agreement in the joint account which equaled $8,400,000 in principal
amount. As of October 31, 1996, 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:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
===============================================================================
<S> <C> <C> <C>
Bear Stearns & Co., dated 10/31/96, repurchase price $700,108,500 (FNMA:
$555,686,102, 5.50%-8.50%, 2/1/09-6/1/26; FHLMC: $166,359,033, 5.50%-8.50%,
9/1/98-8/1/26)
$700,000,000 5.58% 11/01/96 $700,000,000
Lehman Brothers, Inc. dated 10/31/96, repurchase price $924,843,329 (Treasury
Notes: $942,903,967, 4.38%-8.50%, 11/15/96-8/15/03)
924,700,00 5.58 11/01/96 924,700,000
Nomura Securities International, Inc. dated 10/31/96, repurchase price
$700,108,500 (FNMA: $256,658,433, 5.50%-8.00%, 6/1/03-10/1/26; FHLMC:
$465,441,174, 6.00%-9.00%, 9/1/1-10/1/26)
700,000,000 5.58 11/01/96 700,000,000
Smith Barney, Inc. dated 10/31/96, repurchase price $170,026,161 (U.S
Treasury Interest Only Stripped Securities: $11,653,277, 2/15/98-5/15/02; U.S.
Treasury Notes: $85,997,728, 5.25%-7.75%, 5/15/97-10/15/06; U.S. Treasury
Principal Only Stripped Securities: $33,993,571, 5/15/97-5/15/05; U.S.
Treasury Bills: $41,756,285, 12/12/96-3/20/97)
170,000,000 5.54 11/01/96 170,000,000
Union Bank of Switzerland, Inc. dated 10/31/96, repurchase price $175,026,979
(U.S. Treasury Notes: $178,694,649, 6.88%-7.75%, 8/31/99-1/31/00)
175,000,000 5.55 11/01/96 175,000,000
- -------------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $2,669,700,000
===============================================================================
</TABLE>
34
<PAGE>
- --------------------------------------------------------------------------------
9. Certain Reclassifications
In accordance with Statement of Position 93-2, the Government Income, Global
Income and Municipal Income Funds have reclassified $18,448, $46,256 and
$17,593, respectively, from paid-in capital to accumulated undistributed net
investment income. Additionally, the Global Income Fund has reclassified
$862,007, $207,585 and $380 from accumulated net realized gain, accumulated net
realized foreign currency gain and paid in capital, respectively to accumulated
undistributed net investment income. These reclassifications have no impact on
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, 1996, the Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 14% of the
outstanding shares of Global Income.
- --------------------------------------------------------------------------------
35
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(a)/ 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 and of net
beginning investment futures related investment investment futures investment
of period income transactions transactions operations income transactions income
GOVERNMENT INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares $14.47 $0.92 $(0.11) -- $0.81 $(0.92) -- --
1996-Class B shares/(c)/ 14.11 0.41 0.26 -- 0.67 (0.41) -- --
1995-Class A shares 13.47 0.94 1.00 -- 1.94 (0.94) -- --
1994-Class A shares 14.90 0.85 (1.28) -- (0.43) (0.85) (0.12) (0.02)
For the Period February 10, 1993/(d)/ through October 31,
=========================================================
1993-Class A shares 14.32 0.56 0.58 -- 1.14 (0.56) -- --
GLOBAL INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended October 31,
=========================================================
1996-Class A shares $14.45 $0.71 $0.62 $0.18 $1.51 $(1.43) -- --
1996-Class B shares/(c)/ 14.03 0.34 0.41 0.11 0.86 (0.36) -- --
1996-Institutional
shares 14.45 1.15 0.32 0.10 1.57 (1.50) -- --
1995-Class A shares 13.43 0.89 0.92 0.15 1.96 (0.94) -- --
1995- Institutional
shares/(f)/ 14.09 0.22 0.34 0.06 0.62 (0.26) -- --
1994-Class A shares 15.07 0.84 (1.37) (0.12) (0.65) (0.22) (0.16) --
1993-Class A shares 14.69 0.85 1.07 (0.42) 1.50 (0.85) (0.27) --
1992-Class A shares 14.60 1.14 0.45 (0.36) 1.23 (1.14) -- --
For the Period August 2, 1991/(d)/ through October 31,
=========================================================
1991-Class A shares 14.55 0.25 0.23 (0.19) 0.29 (0.24) -- --
<CAPTION>
In excess of
net realized Net
gain on increase
investment, From Total (decrease) Net asset
option and paid distributions in net value at
futures in to asset end of
transactions capital shareholders value period
- -----------------------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares -- -- $(0.92) $(0.11) $14.36
1996-Class B shares/(c)/ -- -- (0.41) 0.26 14.37
1995-Class A shares -- -- (0.94) 1.00 14.47
1994-Class A shares (0.01) -- (1.00) (1.43) 13.47
For the Period February 10, 1993 /(d)/ through October 31,
==========================================================
1993-Class A shares -- -- (0.56) 0.58 14.90
GLOBAL INCOME FUND
- -----------------------------------------------------------------------------------------------------
For the Years Ended October 31,
===========================================================
1996-Class A shares -- -- $(1.43) $0.08 $14.53
1996-Class B shares/(c)/ -- -- (0.36) 0.50 14.53
1996-Institutional
shares -- -- (1.50) 0.07 14.52
1995-Class A shares -- -- (0.94) 1.02 14.45
1995-Institutional
shares/(f)/ -- -- (0.26) 0.36 14.45
1994-Class A shares -- (0.61) (0.99) (1.64) 13.43
1993-Class A shares -- -- (1.12) 0.38 15.07
1992-Class A shares -- -- (1.14) 0.09 14.69
For the Period August 2, 1991 (d) through October 31,
============================================================
1991-Class A shares -- -- (0.24) 0.05 14.60
<CAPTION>
Ratio of Net
Ratio of net assets
net investment at end
expenses income Portfolio of
Total to average to average turnover period
return /(b/) net assets net assets rate /(h)/ (in 000s)
===================================================================================================
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares 5.80% 0.50% 6.42% 485.09% $30,603
1996-Class B shares/(c)/ 4.85/(g)/ 1.25/(e)/ 5.65/(e)/ 485.09 234
1995-Class A shares 14.90 0.47 6.67 449.53 29,503
1994-Class A shares (2.98) 0.11 6.06 654.90 14,452
For the Period February 10, 1993/(d)/ through October 31,
=========================================================
1993-Class A shares 8.03/(g)/ 0.00/(e)/ 4.87/(e)/ 725.41/(g/ 12,860
- ---------------------------------------------------------------------------------------------------
For the Years Ended October 31,
=========================================================
1996-Class A shares 11.05% 1.16% 5.81% 232.15% $198,665
1996-Class B shares/(c)/ 6.24/(g)/ 1.70/(e)/ 5.16/(e)/ 232.15 256
1996-Institutional
shares 11.55 0.65 6.35 232.15 54,254
1995-Class A shares 15.08 1.29 6.23 265.86 245,835
1995-Institutional
shares/(f)/ 4.42/(g)/ 0.65/(e)/ 6.01/(e)/ 265.86 31,619
1994-Class A shares (4.49) 1.28 5.73 343.74 396,584
1993-Class A shares 10.75 1.30 5.78 313.88 675,662
1992-Class A shares 8.77 1.37 7.85 270.75 588,893
For the Period August 2, 1991 (d) through October 31,
=========================================================
1991- Class A shares 2.00 0.38 /(g)/ 1.72 /(g)/ 34.22 /(g)/ 388,744
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
------------------------------
Ratio of
net
Ratio of investment
expenses income
to average to average
net assets net assets
==============================================================
- --------------------------------------------------------------
<S> <C> <C>
For the Years Ended October 31,
==========================================================
1996-Class A shares 1.89% 5.03%
1996-Class B shares/(c)/ 2.39/(e)/ 4 .51/(e)/
1995-Class A shares 2.34 4.80
1994-Class A shares 2.86 3.31
For the Period February 10, 1993 /(d)/ through October 31,
==========================================================
1993-Class A shares 4.00/(e)/ 0.87/(e)/
- ------------------------------------------------------------
For the Years Ended October 31,
==========================================================
1996-Class A shares 1.64% 5.33%
1996-Class B shares/(c)/ 2.14 /(e)/ 4.72/(e)/
1996-Institutional
shares 1.11 5.89
1995-Class A shares 1.58 5.94
1995-Institutional
shares/(f)/ 1.08/(e)/ 5.58/(e)/
1994-Class A shares 1.53 5.48
1993-Class A shares 1.55 5.53
1992-Class A shares 1.62 7.60
For the Period August 2, 1991 (d) through October 31,
==========================================================
1991-Class A shares 0.44/(g)/ 1.66/(g)/
- ------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations (a) 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 and of net
beginning investment futures related investment investment futures investment
of period income transactions transactions operations income transactions income
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares $14.17 $0.65 $0.20 -- $0.85 $(0.65) -- --
1996- Class B shares /(c)/ 14.03 0.27 0.34 -- 0.61 (0.27) -- --
1995- Class A shares 13.08 0.67 1.09 -- 1.76 (0.67) -- --
1994- Class A shares 14.64 0.73 (1.51) -- (0.78) (0.73) (0.05) --
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 14.32 0.22 0.32 -- 0.54 (0.22) -- --
<CAPTION>
Distributions to shareholders
----------------------------------------
In excess of
net realized Net
gain on increase
investment, From Total (decrease) Net asset
option and paid distributions in net value at
futures in to asset end of
transactions capital shareholders value period
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares -- -- $(0.65) $0.20 $14.37
1996- Class B shares /(c)/ -- -- (0.27) 0.34 14.37
1995- Class A shares -- -- (0.67) 1.09 14.17
1994- Class A shares -- -- (0.78) (1.56) 13.08
For the Period July 20, 1993
1993- Class A shares -- -- (0.22) 0.32 14.64
<CAPTION>
Ratio of
Ratio of net
net investment
expenses income Portfolio
Total to average to average turnover
return /(b/) net assets net assets rate /(h)/
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares 6.13% 0.85% 4.58% 344.13%
1996- Class B shares /(c)/ 4.40 /(g)/ 1.60 /(e)/ 3.55 /(e)/ 344.13
1995- Class A shares 13.79 0.76 4.93 335.55
1994- Class A shares (5.51) 0.45 5.28 357.54
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 3.73 /(g)/ 0.00 /(e)/ 5.15 /(e)/ 99.99 /(g)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
---------------------
Net Ratio of
assets net
at end Ratio of investment
of expenses income
period to average to average
(in 000s) net assets net assets
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares $52,267 1.55% 3.88%
1996- Class B shares /(c)/ 255 2.05 /(e)/ 3.10 /(e)/
1995- Class A shares 53,797 1.49 4.20
1994- Class A shares 47,373 1.55 4.18
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 30,166 2.42 /(e)/ 2.73 /(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 distributions, a complete redemption of the investment
at the net asset value at the end of period and no sales charge. Total
return would be reduced if a sales charge for Class A shares or a contingent
deferred sales charge for Class B shares were taken into account.
(c) Class B shares commenced operations on May 1, 1996.
(d) Commencement of operations.
(e) Annualized.
(f) Institutional shares commenced operations on June 1, 1995.
(g) Not annualized.
(h) Includes the effect of mortgage dollar roll transactions for the Government
Income Fund.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
37
<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, 1996, 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, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of the
Goldman Sachs Government Income Fund, Goldman Sachs Global Income Fund and
Goldman Sachs Municipal Income Fund as of October 31, 1996, 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 12, 1996
- --------------------------------------------------------------------------------
38
<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.
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
- -------------------------------------
Annual Report
October 31, 1996
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
[LOGO OF GOLDMAN SACHS APPEARS HERE]
================================================================================
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
- -------------------------
Annual Report
October 31, 1996
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
[GOLDMAN SACHS LOGO APPEARS HERE]
================================================================================
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS, INCLUDING MUNICIPAL BONDS/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 edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than 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.
BA: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
- ----------
/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 do not
necessarily represent ratings which will be given to these securities on the
date of a Fund's fiscal year end.
1-A
<PAGE>
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
CA: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
UNRATED: 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 or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issuer 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 judgment to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designed by the symbols
Aa1, A1, Baa1 and B1.
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.
2-A
<PAGE>
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 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.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
STANDARD & POOR'S RATINGS GROUP
AAA: Bonds and debt rated AAA have the highest rating assigned by Standard
& Poor's. Capacity to pay interest and repay principal is extremely strong.
3-A
<PAGE>
AA: Bonds and debt 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 and debt 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 and debt 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.
BB, B, CCC, CC, C: Bonds and debt rated BB, B, CCC, CC and C are regarded,
on balance, as predominately speculative with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and
C the highest. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
BB: Bonds and debt rated BB have less near-term vulnerability to default
than other speculative issues. However, such securities face major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for bonds that are subordinated
to senior debt assigned an actual or implied BBB- rating.
B: Bonds and debt rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal.
The B rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied BB or BB-rating.
CCC: Bonds and debt rated CCC have currently identifiable vulnerability to
default, and are dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, such
securities are not likely to have the capacity to pay interest and repay
principal.
The CCC rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied B or B-rating.
4-A
<PAGE>
CC: The rating CC is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC rating.
C: The rating C is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC-debt rating. The
C rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
C1: The rating C1 is reserved for income bonds on which no interest is
being paid.
D: Bonds and debt rated D are in default and payment of interest and/or
repayment of principal is in arrears. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
N.R.: Not rated.
Notes: Bonds which are unrated expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative obligations. The Fund is dependent on the Investment
Adviser's judgment, analysis and experience in the evaluation of such bonds.
Investors should note that credit factors affecting high yield, fixed
income securities change quickly and the assignment of a rating to a particular
bond by a rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
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 plus sign (+) 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.
5-A
<PAGE>
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.
A-3: Issued carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable t the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B: Issues rated B are regarded as having only speculative capacity
for timely payment.
C: This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D: Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes such
payments will be made during such grace period.
FITCH INVESTORS SERVICE, L.P.
Bond Ratings
- ------------
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings
take into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA: Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA: Bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories
6-A
<PAGE>
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.
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified, which
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Bonds have certain identifiable characteristics that, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or reorganization of the
obligor. DDD represents the highest potential for recovery on these bonds, and D
represents the lowest potential for recovery.
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, DDD, DD, or D Categories.
7-A
<PAGE>
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+.
F-2: Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned F-1+ and F-1 ratings.
F-3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is
adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
F-S: Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D: Default. Issues assigned this rating are in actual or imminent
payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
8-A
<PAGE>
DUFF & PHELPS
-------------
Long-Term Debt and Preferred Stock
- ----------------------------------
AAA: Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong.
Risk is modest but may vary slightly from time to time because of economic
conditions.
BBB+, BBB, BBB-: Below average protection factors but still
considered sufficient for prudent investment. Considerable variability in risk
during economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that
obligations will not be met when due. Financial protection factors will
fluctuate widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable
uncertainty exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable company
developments.
Commercial Paper/Certificates of Deposits
- -----------------------------------------
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.
DUFF 1 MINUS: High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
9-A
<PAGE>
DUFF 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets
is good. Risk factors are small.
DUFF 3: Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
DUFF 4: Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
DUFF 5: Issuer failed to meet scheduled principal and/or interest
payments.
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 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.
10-A
<PAGE>
MIG-2/VMIG-2: This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG-3/VMIG-3: This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG-4/VMIG-4: This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
SG: This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
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 three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
- - Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
- - Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3: Speculative capacity to pay principal and interest.
11-A
<PAGE>
APPENDIX B
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 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-B
<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
partners' capital of approximately $5.3 billion as of November 29, 1996.
.. Thirty-four offices worldwide where professionals focus on identifying
financial opportunities.
.. The number one underwriter of all international equity issues for 1993,
1994 and 1995.*
.. Premier lead manager of negotiated municipal bond offerings over the past
six years (1990-1995).
.. The number one lead manager of U.S. common stock offerings from (1989-
1995).*
* Source: Securities Data Corporation. Ranking excludes REITS, Trusts and
-----------------------------------
Rights.
2-B
<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
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1991 Provides advisory services for the largest privatization in the region
of the sale of Telefonos de Mexico
1995 Dow Jones Industrial Average breaks 5000
1996 Goldman Sachs takes Deutsche Telekom public
Dow Jones Industrial Average breaks 6000
1997 Dow Jones Industrial Average breaks 7000
3-B
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration becomes effective.
This Statement of Additional Information does not constitute a prospectus.
SUBJECT TO COMPLETION -- JULY 13, 1997
GOLDMAN SACHS MONEY MARKET FUNDS
GOLDMAN SACHS--INSTITUTIONAL LIQUID ASSETS
4900 Sears Tower
Chicago, Illinois 60606
________________________________________________________________________________
STATEMENT OF ADDITIONAL INFORMATION -- _______, 1997
ILA SERVICE UNITS
ILA CLASS B UNITS
ILA CLASS C UNITS
________________________________________________________________________________
Goldman Sachs Trust(the "Trust") is an open-end management investment company
(or mutual fund) which includes the Goldman Sachs - Institutional Liquid Assets
portfolios. This Statement of Additional Information relates solely to the
offering of ILA Class B Units and Class C Units of Prime Obligations Portfolio
and ILA Service Units of:
Prime Obligations Portfolio;
Money Market Portfolio;
Treasury Obligations Portfolio;
Treasury Instruments Portfolio;
Government Portfolio;
Federal Portfolio;
Tax-Exempt Diversified Portfolio;
Tax-Exempt California Portfolio; and
Tax-Exempt New York Portfolio (individually, a "Portfolio" and
collectively the "Portfolios").
Goldman Sachs Asset Management ("GSAM" or the "Adviser"), a separate operating
division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the Portfolios'
investment adviser. Goldman Sachs serves as distributor and transfer agent to
the Portfolios.
The Goldman Sachs Funds offer banks, corporate cash managers, investment
advisers and other institutional investors a family of professionally-managed
mutual funds, including money market, fixed income and equity funds, and a range
of related services. All products are designed to provide clients with the
benefit of the expertise of GSAM and its affiliates in security selection, asset
allocation, portfolio construction and day-to-day management.
The hallmark of the Goldman Sachs Funds is personalized service, which reflects
the priority that Goldman Sachs places on serving clients' interests. As
Goldman Sachs clients, Service Organizations, as defined below, will be assigned
an Account
<PAGE>
Administrator ("AA"), who is ready to help with questions concerning their
accounts. During business hours, Service Organizations can call their AA
through a toll-free number to place purchase or redemption orders or to obtain
Portfolio and account information. The AA can also answer inquiries about rates
of return and portfolio composition/ holdings, and guide Service Organizations
through operational details. A Goldman Sachs client can also utilize the SMART
personal computer software system which allows Service Organizations to purchase
and redeem units and also obtain Portfolio and account information directly.
This Statement of Additional Information is not a prospectus and should be read
in conjunction with each Prospectus relating to the ILA Service Units, ILA Class
B Units and ILA Class C Units each dated ___, 1997, as amended and supplemented
from time to time. A copy of each Prospectus may be obtained without charge
from Service Organizations, as defined herein, or by calling Goldman, Sachs &
Co. at 800-621-2550 or by writing Goldman, Sachs & Co., 4900 Sears Tower,
Chicago, Illinois 60606.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page in
Statement of
Additional
Information
------------
<S> <C>
Investment Policies and
Practices of the Portfolios...... 4
Investment Limitations........... 43
Trustees and Officers............ 46
The Adviser, Distributor and
Transfer Agent................... 52
Portfolio Transactions........... 58
Net Asset Value.................. 60
Redemptions...................... 62
Calculation of Yield Quotations.. 62
Tax Information.................. 67
Organization and Capitalization.. 73
Custodian and Subcustodian....... 79
Independent Accountants.......... 79
Financial Statements............. 79
Service and Distribution Plans... 80
Appendix A (Description of
Securities Ratings).............. A-1
</TABLE>
3
<PAGE>
INVESTMENT POLICIES AND PRACTICES
OF THE PORTFOLIOS
The following discussion elaborates on the description of each Portfolio's
investment policies and practices contained in the Prospectus:
U.S. GOVERNMENT SECURITIES
Each Portfolio may invest in separately traded principal and interest
components of securities issued or guaranteed by the U.S. Treasury. The
principal and interest components of selected securities are traded
independently under the Separate Trading of Registered Interest and Principal of
Securities program ("STRIPS"). Under the STRIPS program, the principal and
interest components are individually numbered and separately issued by the U.S.
Treasury at the request of depository financial institutions, which then trade
the component parts independently.
CUSTODIAL RECEIPTS
Each Portfolio (other than Treasury Obligations Portfolio, Treasury
Instruments Portfolio, Federal Portfolio and Government Portfolio) may also
acquire custodial receipts that evidence owner ship of future interest payments,
principal payments or both on certain U.S. Government notes or bonds. Such
notes and bonds are held in custody by a bank on behalf of the owners. These
custodial receipts are known by various names, including "Treasury Receipts,"
"Treasury Investors Growth Receipts" ("TIGR's"), and "Certificates of Accrual on
Treasury Securities" ("CATS"). Although custodial receipts are not considered
U.S. Government Securities for certain securities law purposes, they are
indirectly issued or guaranteed as to principal and interest by the U.S.
Government, its agencies, authorities or instrumentalities.
BANK AND CORPORATE OBLIGATIONS
Each Portfolio (other than Treasury Obligations Portfolio, Government
Portfolio, Federal Portfolio and Treasury Instruments Portfolio) may invest in
commercial paper. Commercial paper represents short-term unsecured promissory
notes issued in bearer form by banks or bank holding companies, corporations,
and finance companies. The commercial paper purchased by the Portfolios
consists of direct U.S. dollar denominated obligations of domestic or, in the
case of Money Market Portfolio, foreign issuers. Bank obligations in which the
Portfolios may invest include certificates of deposit, bankers' acceptances,
fixed time deposits and bank notes. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return.
Bankers' acceptances are negotiable drafts or bills of exchange, normally
drawn by an importer or exporter to pay for specific merchandise, which are
"accepted" by a bank, meaning, in
4
<PAGE>
effect, that the bank unconditionally agrees to pay the face value of the
instrument on maturity. Fixed time deposits are bank obligations payable at a
stated maturity date and bearing interest at a fixed rate. Fixed time deposits
may be withdrawn on demand by the investor, but may be subject to early
withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits. Bank notes and bankers'
acceptances rank junior to domestic deposit liabilities of the bank and pari
passu with other senior, unsecured obligations of the bank. Bank notes are not
insured by the Federal Deposit Insurance Corporation or any other insurer.
Deposit notes are insured by the Federal Deposit Insurance Corporation only to
the extent of $100,000 per depositor per bank.
The Prime Obligations Portfolio and Money Market Portfolio may invest in
short-term funding agreements. A funding agreement is a contract between an
issuer and a purchaser that obligates the issuer to pay a guaranteed rate of
interest on a principal sum deposited by the purchaser. Funding agreements will
also guarantee the return of principal and may guarantee a stream of payments
over time. A funding agreement has a fixed maturity date and may have either a
fixed or variable interest rate that is based on an index and guaranteed for a
set time period. Because there is no secondary market for these investments,
any such funding agreement purchased by a Portfolio will be regarded as
illiquid.
REPURCHASE AGREEMENTS
Each Portfolio (other than the Treasury Instruments Portfolio) may enter
into repurchase agreements only with primary dealers in U.S. Government
Securities. A repurchase agreement is an arrangement under which the purchaser
(i.e., the Portfolio) purchases a U.S. Government security or other high quality
short-term debt obligation (the "Obligation") and the seller agrees, at the time
of sale, to repurchase the Obligation at a specified time and price.
Custody of the Obligation will be maintained by the Portfolios' custodian
or subcustodian. The repurchase price may be higher than the purchase price,
the difference being income to the Portfolio, or the purchase and repurchase
prices may be the same, with interest at a stated rate due to the Portfolio
together with the repurchase price on repurchase. In either case, the income to
the Portfolio is unrelated to the interest rate on the Obligation subject to the
repurchase agreement.
Repurchase agreements pose certain risks for all entities, including the
Portfolios, that utilize them. Such risks are not unique to the Portfolios but
are inherent in repurchase agreements. The Portfolios seek to minimize such
risks by, among others, the means indicated below, but because of the inherent
legal
5
<PAGE>
uncertainties involved in repurchase agreements, such risks cannot be
eliminated.
For purposes of the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and generally, for tax purposes, a repurchase
agreement is deemed to be a loan from the Portfolio to the seller of the
Obligation. It is not clear whether for other purposes a court would consider
the Obligation purchased by the Portfolio subject to a repurchase agreement as
being owned by the Portfolio or as being collateral for a loan by the Portfolio
to the seller.
If in the event of bankruptcy or insolvency proceedings against the seller
of the Obligation, a court holds that the Portfolio does not have a perfected
security interest in the Obligation, the Portfolio may be required to return the
Obligation to the seller's estate and be treated as an unsecured creditor of the
seller. As an unsecured creditor, a Portfolio would be at risk of losing some
or all of the principal and income involved in the transaction. To minimize
this risk, the Portfolios utilize custodians and subcustodians that the Adviser
believes follow cus tomary securities industry practice with respect to
repurchase agreements, and the Adviser analyzes the creditworthiness of the
obligor, in this case the seller of the Obligation. But because of the legal
uncertainties, this risk, like others associated with repurchase agreements,
cannot be eliminated.
Also, in the event of commencement of bankruptcy or insolvency proceedings
with respect to the seller of the Obligation before repurchase of the Obligation
under a repurchase agreement, a Portfolio may encounter delay and incur costs
before being able to sell the security. Such a delay may involve loss of
interest or a decline in price of the Obligation.
Apart from risks associated with bankruptcy or insolvency proceedings,
there is also the risk that the seller may fail to repurchase the security.
However, if the market value of the Obligation subject to the repurchase
agreement becomes less than the repurchase price (including accrued interest),
the Portfolio will direct the seller of the Obligation to deliver additional
securities so that the market value of all securities subject to the repurchase
agreement equals or exceeds the repurchase price.
Certain repurchase agreements which mature in more than seven days can be
liquidated before the nominal fixed term on seven days or less notice. Such
repurchase agreements will be regarded as liquid instruments.
In addition, each Portfolio (other than the Treasury Instruments
Portfolio), together with other registered investment companies having advisory
agreements with the Adviser or any of its affiliates, may transfer uninvested
cash balances into a single joint account, the daily aggregate balance of which
will be invested in one or more repurchase agreements.
6
<PAGE>
FOREIGN SECURITIES
The Money Market Portfolio may invest in foreign securities and in
certificates of deposit, bankers' acceptances and fixed time deposits and other
obligations issued by major foreign banks, foreign branches of U.S. banks, U.S.
branches of foreign banks and foreign branches of foreign banks. The Tax-Exempt
Diversified, Tax-Exempt California and Tax-Exempt New York Portfolios may also
invest in municipal instruments backed by letters of credit issued by certain of
such banks. Under current Securities and Exchange Commission ("SEC") rules
relating to the use of the amortized cost method of portfolio securities
valuation, the Money Market Portfolio is restricted to purchasing U.S. dollar
denominated securities, but it is not otherwise precluded from purchasing secu
rities of foreign issuers.
Investments in foreign securities and bank obligations may involve
considerations different from investments in domestic securities due to limited
publicly available information; non-uniform accounting standards; the possible
imposition of with holding or confiscatory taxes; the possible adoption of
foreign governmental restrictions affecting the payment of principal and
interest; expropriation; or other adverse political or economic developments.
In addition, it may be more difficult to obtain and enforce a judgment against a
foreign issuer or a foreign branch of a domestic bank.
ASSET-BACKED AND RECEIVABLES-BACKED SECURITIES
The Prime Obligations and Money Market Portfolios may invest in asset-
backed and receivables-backed securities. Asset-backed and receivables-backed
securities represent participations in, or are secured by and payable from,
pools of assets such as motor vehicle installment sale contracts, installment
loan contracts, leases of various types of real and personal property,
receivables from revolving credit (credit card) agreements, corporate
receivables and other categories of receivables. Such asset pools are
securitized through the use of privately-formed trusts or special purpose
vehicles. Payments or distributions of principal and interest may be guaranteed
up to certain amounts and for a certain time period by a letter of credit or a
pool insurance policy issued by a financial institution or other credit
enhancements may be present. The value of a Portfolio's investments in asset-
backed and receivables-backed securities may be adversely affected by prepayment
of the underlying obligations. In addition, the risk of prepayment may cause
the value of these investments to be more volatile than a Portfolio's other
investments.
Through the use of trusts and special purpose corporations, various types
of assets, including automobile loans, computer leases, trade receivables and
credit card receivables, are being securitized in pass-through structures
similar to the mortgage pass-through structures. Consistent with their
respective investment objectives and policies, the Portfolios may invest in
7
<PAGE>
these and other types of asset-backed securities that may be developed in the
future. This Statement of Additional Information will be amended or supplemented
as necessary to reflect the Prime Obligations and Money Market Portfolios'
intention to invest in asset-backed securities with characteristics that are
materially different from the securities described in the preceding paragraph.
However, a Portfolio will generally not invest in an asset-backed security if
the income received with respect to its investment constitutes rental income or
other income not treated as qualifying income under the 90% test described in
"Tax Information" below. In general, the collateral supporting these securities
is of shorter maturity than mortgage loans and is less likely to experience
substantial prepayments in response to interest rate fluctuations.
As set forth below, several types of asset-backed and receivables-backed
securities have already been offered to investors, including for example,
Certificates for Automobile Receivables/sm/ ("CARS/sm/") and interests in pools
of credit card receivables. CARS/sm/ represent undivided fractional interests
in a trust ("CAR Trust") whose assets consist of a pool of motor vehicle retail
installment sales contracts and security interests in the vehicles securing the
contracts. Payments of principal and interest on CARS/sm/ are passed through
monthly to certificate holders, and are guaranteed up to certain amounts and for
a certain time period by a letter of credit issued by a financial institution
unaffiliated with the trustee or originator of the CAR Trust. An investor's
return on CARS/sm/ may be affected by early prepayment of principal on the
underlying vehicle sales contracts. If the letter of credit is exhausted, the
CAR Trust may be prevented from realizing the full amount due on a sales
contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage or loss of a vehicle,
the application of federal and state bankruptcy and insolvency laws, or other
factors. As a result, certificate holders may experience delays in payments or
losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. There is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support payments
on these securities.
Asset-backed securities are often backed by a pool of assets representing
the obligations of a number of different parties. To lessen the effect of
failures by obligors on underlying assets to make payments, the securities may
contain elements of credit support which fall into two categories: (i) liquidity
protection, and (ii) protection against losses resulting from ultimate default
8
<PAGE>
by an obligor or servicer. Liquidity protection refers to the provision of
advances, generally by the entity administering the pool of assets, to ensure
that the receipt of payments on the losses results from payment of the insurance
obligations on at least a portion of the assets in the pool. This protection
may be provided through guarantees, policies or letters of credit obtained by
the issuer or sponsor from third parties, through various means of structuring
the transactions or through a combination of such approaches. The degree of
credit support provided for each issue is generally based on historical
information reflecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the value of or return on an investment in
such a security.
The availability of asset-backed securities may be affected by legislative
or regulatory developments. It is possible that such developments could require
the Prime Obligations and Money Market Portfolios to dispose of any then
existing holdings of such securities.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES
Each Portfolio may purchase securities on a when-issued basis or purchase
or sell securities on a forward commitment basis. These transactions involve a
commitment by the Portfolio to purchase or sell securities at a future date.
The price of the un derlying 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 trans-actions are negotiated directly with the
other party, and such commitments are not traded on exchanges, but may be traded
over-the-counter.
A Portfolio will purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis only with the intention of
completing the transaction and actually purchasing or selling the securities.
If deemed advisable as a matter of investment strategy, however, a Portfolio may
dispose of or negotiate a commitment after entering into it. A Portfolio also
may sell securities it has committed to purchase before those securities are
delivered to the Portfolio on the settlement date. The Portfolio may realize a
capital gain or loss in connection with these transactions; distributions from
any net capital gains would be taxable to its unitholders. For purposes of
determining a Portfolio's average dollar weighted maturity, the maturity of
when-issued or forward commitment securities will be calculated from the
commitment date.
When a Portfolio purchases securities on a when-issued or forward
commitment basis, the Portfolio's custodian or subcustodian will maintain in a
segregated account cash or liquid assets having a value (determined daily) at
least equal to the amount of the Portfolio's purchase commitments. In the case
of a forward
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commitment to sell portfolio securities subject to such commitment, the
custodian or subcustodian will hold the portfolio securities in a segregated
account while the commitment is outstanding. These procedures are designed to
ensure that the Portfolio will maintain sufficient assets at all times to cover
its obligations under when-issued purchases and forward commitments.
VARIABLE AMOUNT MASTER DEMAND NOTES
Each Portfolio (other than the Treasury Obligations, Federal and Treasury
Instruments Portfolios) may purchase variable amount master demand notes. These
obligations permit the investment of fluctuating amounts at varying rates of
interest pursuant to direct arrangements between a Portfolio, as lender, and the
borrower. Variable amount master demand notes are direct lending arrangements
between the lender and borrower and are not generally transferable, nor are they
ordinarily rated. A Portfolio may invest in them only if the Adviser believes
that the notes are of comparable quality to the other obligations in which that
Portfolio may invest.
VARIABLE RATE AND FLOATING RATE DEMAND INSTRUMENTS
Each Portfolio (other than the Treasury Obligations, Federal and Treasury
Instruments Portfolios) may purchase variable and floating rate demand
instruments that are tax exempt municipal obligations or other debt securities
that possess a floating or variable interest rate adjustment formula. These
instruments permit a Portfolio to demand payment of the principal balance plus
unpaid accrued interest upon a specified number of days' notice to the issuer or
its agent. The demand feature may be backed by a bank letter of credit or
guarantee issued with respect to such instrument.
The terms of the variable or floating rate demand instruments that a
Portfolio may purchase provide that interest rates are adjustable at intervals
ranging from daily up to six months, and the adjustments are based upon current
market levels, the prime rate of a bank or other appropriate interest rate
adjustment index as provided in the respective instruments. Some of these
instruments are payable on demand on a daily basis or on not more than seven
days' notice. Others, such as instruments with quarterly or semiannual
interest rate adjustments, may be put back to the issuer on designated days on
not more than thirty days' notice. Still others are automatically called by the
issuer unless the Portfolio instructs otherwise. The Trust, on behalf of the
Portfolios, intends to exercise the demand only (1) upon a default under the
terms of the debt security, (2) as needed to provide liquidity to a Portfolio,
(3) to maintain the respective quality standards of a Portfolio's investment
portfolio, or (4) to attain a more optimal portfolio structure. A Portfolio
will determine the variable or floating rate demand instruments that it will
purchase in accordance with procedures approved by the Trustees to minimize
credit risks. To be eligible for purchase by a Portfolio, a variable or
floating rate demand instrument which is unrated must have high quality
characteristics similar to other obligations in
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which the Portfolio may invest. The Adviser may determine that an unrated
variable or floating rate demand instrument meets a Portfolio's quality criteria
by reason of being backed by a letter of credit or guarantee issued by a bank
that meets the quality criteria for the Portfolio. Thus, either the credit of
the issuer of the obligation or the guarantor bank or both will meet the quality
standards of the Portfolio.
The maturity of the variable or floating rate demand instruments held by a
Portfolio will ordinarily be deemed to be the longer of (1) the notice period
required before the Portfolio is entitled to receive payment of the principal
amount of the instrument or (2) the period remaining until the instrument's next
interest rate adjustment. The acquisition of variable or floating rate demand
notes for a Portfolio must also meet the requirements of rules issued by the SEC
applicable to the use of the amortized cost method of securities valuation. The
Portfolios will also consider the liquidity of the market for variable and
floating rate instruments, and in the event that such instruments are illiquid,
the Portfolios' investments in such instruments will be subject to the
limitation on illiquid investments.
A Portfolio (other than Treasury Obligations Portfolio, Treasury
Instruments Portfolio, Government Portfolio and Federal Portfolio) may invest in
participation interests in variable or floating rate tax-exempt obligations held
by financial institutions (usually commercial banks). Such participation
interests provide the Portfolio with a specific undivided interest (up to 100%)
in the underlying obligation and the right to demand payment of its proportional
interest in the unpaid principal balance plus accrued interest from the
financial institution upon a specific number of day's notice. In addition, the
participation interest generally is backed by an irrevocable letter of credit or
guarantee from the institution. The financial institution usually is entitled
to a fee for servicing the obligation and providing the letter of credit.
RESTRICTED AND OTHER ILLIQUID SECURITIES
A Portfolio may purchase securities that are not registered ("restricted
securities") under the Securities Act of 1933 (the "1933 Act"), including
restricted securities that can be offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act. However, a Portfolio will not
invest more than 10% of the value of its net assets in securities which are
illiquid, which includes fixed time deposits and repurchase agreements maturing
in more than seven days that cannot be traded on a secondary market and
restricted securities, unless, in the case of restricted securities, the
Trust's Board of Trustees determines, based upon a continuing review of the
trading markets for the specific restricted security, that such restricted
securities are liquid. The Board of Trustees may adopt guidelines and delegate
to the Adviser the daily function of determining and monitoring liquidity of
restricted securities. The Board, however, will retain sufficient oversight and
be ultimately responsible for the
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determinations. Since it is not possible to predict with assurance that the
market for securities eligible for resale under Rule 144A will continue to be
liquid, the Board will carefully monitor each Portfolio's investments in these
securities, focusing on such important factors, among others, as valuation,
liquidity and availability of information. This investment practice could have
the effect of increasing the level of illiquidity in a Portfolio to the extent
that qualified institutional buyers become for a time uninterested in purchasing
these restricted securities.
MUNICIPAL OBLIGATIONS
The Prime Obligations, Money Market, Tax-Exempt Diversified, Tax-Exempt
California and Tax-Exempt New York Portfolios may invest in municipal
obligations. Municipal obligations are issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies, authorities and instrumentalities and the District of
Columbia to obtain funds for various public purposes. The interest on most of
these obligations is generally exempt from regular federal income tax. The two
principal classifications of municipal obligations are "notes" and "bonds".
Notes. Municipal notes are generally used to provide for short-term
capital needs and generally have maturities of one year or less. Municipal
notes include tax anticipation notes, revenue anticipation notes, bond
anticipation notes, tax and revenue an ticipation notes, construction loan
notes, tax-exempt commercial paper and certain receipts for municipal
obligations.
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. They are frequently general obligations of the
issuer, secured by the taxing power for payment of principal and interest.
Revenue anticipation notes are issued in expectation of receipt of other types
of revenue such as federal or state aid. Tax anticipation notes and revenue
anticipation notes are generally issued in anticipation of various seasonal
revenues such as income, sales, use, and business taxes. Bond anticipation
notes are sold to provide interim financing in anticipation of long-term
financing in the market. In most cases, these monies provide for the repayment
of the notes. Tax-exempt commercial paper consists of short-term unsecured
promissory notes issued by a state or local government or an authority or agency
thereof. The Portfolios which invest in municipal obligations may also acquire
securities in the form of custodial receipts which evidence ownership of future
interest payments, principal payments or both on certain state and local
governmental and authority obligations when, in the opinion of bond counsel,
interest payments with respect to such custodial receipts are excluded from
gross income for federal income tax purposes, and in the case of the Tax-Exempt
California and Tax-Exempt New York Portfolios, exempt from California and New
York (city and state) personal income taxes, respectively. Such obligations are
held in custody by a bank on behalf of the holders of the receipts. These
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custodial receipts are known by various names, including "Municipal Receipts"
("MRs") and "Municipal Certificates of Accrual on Tax-Exempt Securities" ("M-
CATS"). There are a number of other types of notes issued for different
purposes and secured differently from those described above.
Bonds. Municipal bonds, which generally meet longer term capital needs and
have maturities of more than one year when issued, have two principal
classifications, "general obligation" bonds and "revenue" bonds.
General obligation bonds are issued by entities such as states, counties,
cities, towns and regional districts and are used to fund a wide range of public
projects including the construction or improvement of schools, highways and
roads, water and sewer systems and a variety of other public purposes. The
basic security of general obligation bonds is the issuer's pledge of its faith,
credit, and taxing power for the payment of principal and interest. The taxes
that can be levied for the payment of debt service may be limited or unlimited
as to rate or amount or special assessments.
Revenue bonds have been issued to fund a wide variety of capital projects
including: electric, gas, water and sewer systems; highways, bridges and
tunnels; port and airport facilities; colleges and universities; and hospitals.
The principal security for a revenue bond is generally the net revenues derived
from a particular facility or group of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully insured, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund, some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are secured by annual lease rental payments from the state or
locality to the authority sufficient to cover debt service on the authority's
obligations.
Private activity bonds (a term that includes certain types of bonds the
proceeds of which are used to a specified extent for the benefit of persons
other than governmental units), although nominally issued by municipal
authorities, are generally not secured by the taxing power of the municipality
but are secured by the revenues of the authority derived from payments by the
industrial user. The Tax-Exempt Diversified Portfolio and the Tax-Exempt
California Portfolio do not intend to invest in private activity bonds if the
interest from such bonds would be an item of tax preference to unitholders under
the federal alternative minimum tax.
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Municipal bonds with a series of maturity dates are called serial bonds.
The serial bonds which the Portfolios may purchase are limited to short-term
serial bonds---those with original or remaining maturities of thirteen months or
less. The Portfolios may purchase long-term bonds provided that they have a
remaining maturity of thirteen months or less or, in the case of bonds called
for redemption, the date on which the redemption payment must be made is within
thirteen months. The Portfolios may also purchase long-term bonds (sometimes
referred to as "Put Bonds"), which are subject to a Portfolio's commitment to
put the bond back to the issuer at par at a designated time within thirteen
months and the issuer's commitment to so purchase the bond at such price and
time.
The Portfolios which invest in municipal obligations may invest in tender
option bonds. A tender option bond is a municipal obligation (generally held
pursuant to a custodian arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than prevailing short-term
tax-exempt rates. The bond is typically issued in conjunction with the
agreement of a third party, such as a bank, broker-dealer or other financial
institutions, pursuant to which such institution grants the security holder the
option, at periodic intervals, to tender its securities to the institution and
receive the face value thereof. As consideration for providing the option, the
financial institution receives periodic fees equal to the difference between the
bond's fixed coupon rate and the rate, as determined by a remarketing or similar
agent at or near the commencement of such period, that would cause the bond,
coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term, tax-
exempt rate. However, an institution will not be obligated to accept tendered
bonds in the event of certain defaults by, or a significant downgrading in the
credit rating assigned to, the issuer of the bond.
The tender option will be taken into consideration in determining the
maturity of tender option bonds and the average portfolio maturity of a
Portfolio. The liquidity of a tender option bond is a function of the credit
quality of both the bond issuer and the financial institution providing
liquidity. Consequently, tender option bonds are deemed to be liquid unless, in
the opinion of the Adviser, the credit quality of the bond issuer and the
financial institution is deemed, in light of the relevant Portfolio's credit
quality requirements, to be inadequate.
Although the Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt
New York Portfolios intend to invest in tender option bonds the interest on
which will, in the opinion of counsel for the issuer and sponsor or counsel
selected by the Adviser, be excluded from gross income for federal income tax
purposes, there is no assurance that the Internal Revenue Service will agree
with such counsel's opinion in any particular case. Consequently, there is a
risk that a Portfolio will not be considered the owner of such
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tender option bonds and thus will not be entitled to treat such interest as
exempt from such tax. A similar risk exists for certain other investments
subject to puts or similar rights. Additionally, the federal income tax
treatment of certain other aspects of these investments, including the proper
tax treatment of tender options and the associated fees, in relation to various
regulated investment company tax provisions is unclear. The Tax-Exempt
Diversified, Tax-Exempt California and Tax-Exempt New York Portfolios intend to
manage their respective portfolios in a manner designed to eliminate or minimize
any adverse impact from the tax rules applicable to these investments.
In addition to general obligation bonds, revenue bonds and serial bonds,
there are a variety of hybrid and special types of municipal obligations as well
as numerous differences in the security of municipal obligations both within and
between the two principal classifications above.
The Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt New York
Portfolios may purchase municipal instruments that are backed by letters of
credit issued by foreign banks that have a branch, agency or subsidiary in the
United States. Such letters of credit, like other obligations of foreign banks,
may involve credit risks in addition to those of domestic obligations, including
risks relating to future political and economic developments, nationalization,
foreign governmental restrictions such as exchange controls and difficulties in
obtaining or enforcing a judgment against a foreign bank (including branches).
For the purpose of investment restrictions of the Portfolios, the
identification of the "issuer" of municipal obligations that are not general
obligation bonds is made by the Adviser on the basis of the characteristics of
the obligation as described above, the most significant of which is the source
of funds for the payment of principal of and interest on such obligations.
An entire issue of municipal obligations may be purchased by one or a small
number of institutional investors such as one of the Portfolios. Thus, the
issue may not be said to be publicly offered. Unlike securities which must be
registered under the Securities Act of 1933 prior to offer and sale, municipal
obligations which are not publicly offered may nevertheless be readily
marketable.
Municipal obligations purchased for a Portfolio may be subject to the
Portfolio's policy on holdings of illiquid securities. The Adviser determines
whether a municipal obligation is liquid based on whether it may be sold in a
reasonable time consistent with the customs of the municipal markets (usually
seven days) at a price (or interest rate) which accurately reflects its value.
The Adviser believes that the quality standards applicable to each Portfolio's
investments enhance liquidity. In addition, stand-by commitments and demand
obligations also enhance liquidity.
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Yields on municipal obligations depend on a variety of factors, including
money market conditions, municipal bond market conditions, the size of a
particular offering, the maturity of the obligation and the quality of the
issue. High quality municipal obligations tend to have a lower yield than lower
rated obligations. Municipal obligations are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or municipalities to levy taxes. There is also the
possibility that as a result of litigation or other conditions the power or
ability of any one or more issuers to pay when due principal of and interest on
its or their municipal obligations may be materially affected.
INVESTING IN CALIFORNIA
The financial condition of the State of California ("California"), its
public authorities and local governments could affect the market values and
marketability of, and therefore the net asset value per unit and the interest
income of, the Tax-Exempt California Portfolio, or result in the default of
existing obligations, including obligations which may be held by the Tax-Exempt
California Portfolio. The following section provides only a brief summary of
the complex factors affecting the financial condition of California, and is
based on information obtained from California, as publicly available prior to
the date of this Statement of Additional Information. The information contained
in such publicly available documents has not been independently verified. It
should be noted that the creditworthiness of obligations issued by local issuers
may be unrelated to the creditworthiness of California, and that there is no
obligation on the part of California to make payment on such local obligations
in the event of default in the absence of a specific guarantee or pledge
provided by California.
During the early 1990's, California experienced significant financial
difficulties, which reduced its credit standing, but the State's finances have
improved since 1995. The ratings of certain related debt of other issuers for
which California has an outstanding lease purchase, guarantee or other
contractual obligation (such as for state-insured hospital bonds) are generally
linked directly to California's rating. Should the financial condition of
California deteriorate again, its credit ratings could be further reduced, and
the market value and marketability of all outstanding notes and bonds issued by
California, its public authorities or local governments could be adversely
affected.
Economic Factors. California's economy is the largest among the 50
----------------
states (accounting for almost 13% of the nation's output of goods and services)
and one of the largest in the world. California's population of more than 32.6
million represents over 12% of the total United States population and grew by
27% in the
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1980s. While California's substantial population growth during the 1980's
stimulated local economic growth and diversification and sustained a real estate
boom between 1984 and 1990, it increased strains on California's limited water
resources and demands for government services. Population growth slowed since
1991 even while substantial immigration has continued, due to a significant
increase in outmigration by California residents. However, with the California
economy improving, the recent net outmigration within the Continental U.S. is
expected to decrease or be reversed.
From mid-1990 to late 1993, California's economy suffered its worst
recession since the 1930s, with over 700,000 jobs lost. The largest job losses
were in Southern California, led by declines in the aerospace and construction
industries. Significantly related to cuts in lost federal defense spending.
Since the start of 1994, the California economy has been in a steady
recovery in all parts of the State. The State Department of Finance reports net
job growth, particularly in construction and related manufacturing, wholesale
and retail trade, electronics, exports, transportation, recreation and services.
This growth has offset the continuing but slowing job losses in the aerospace
industry and restructuring of the finance and utility sectors. Prerecession job
levels were reached in 1996. Unemployment in California is down more than three
percent from its 10% peak in January, 1994, but still remains higher than the
national average rate.
Constitutional Limitations on Taxes, Other Changes and Appropriations
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Limitations on Property Taxes. Certain California Instruments may be
-----------------------------
obligations of issuers which rely in whole or in part, directly or indirectly,
on ad valorem property taxes as a source of revenue. The taxing power of
California local governments and districts is limited by Article XIIIA of the
California constitution, also known as "Proposition 13." Briefly, Article XIIIA
limits to 1% of full cash value the rate of ad valorem property taxes on real
property and generally restricts the reassessment of property to 2% per year,
except upon new construction or change of ownership (subject to a number of
exemptions). Taxing entities may, however, raise ad valorem taxes above the 1%
limit to pay debt service on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied against
the assessed value of property as of the owner's date of acquisition (or as of
March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits have been filed challenging the acquisition-based
assessment system of Proposition 13, and on June 18, 1992 the U.S. Supreme Court
announced a decision upholding Proposition 13.
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Article XIIIA prohibits local governments from raising revenues through ad
valorem property taxes above the 1% limit; it also requires voters of any
governmental unit to give two-thirds approval to levy any "special tax". Court
decisions, however, allowed non-voter approved levy of "general taxes" which
were not dedicated to a specific use. In response to these decisions, the
voters of the State in 1986 adopted an initiative statute which imposed
significant new limits on the ability of local entities to raise or levy
general taxes, except by receiving majority local voter approval. Significant
elements of this initiative, "Proposition 62", have been overturned in recent
court cases. An initiative proposed to re-enact the provisions of Proposition
62 as a constitutional amendment was defeated by the voters in November 1990,
but such a proposal may be renewed in the future.
Limitations on Other Taxes, Fees and Charges. On November 5, 1996, the
--------------------------------------------
voters of the State approved Proposition 218, called the "Right to Vote on Taxes
Act." Proposition 218 added Articles XIIIC and XIIID to the State Constitution,
which contain a number of provisions affecting the ability of local agencies to
levy and collect both existing and future taxes, assessments, fees and charges.
Article XIIIC requires that all new or increased local taxes be
submitted to the electorate before they become effective. Taxes for general
governmental purposes require a majority vote and taxes for specific purposes
require a two-thirds vote. Further, any general purpose tax which was imposed,
extended or increased without voter approval after December 31, 1994 must be
approved by a majority vote within two years.
Article XIIID contains several new provisions making it generally more
difficult for local agencies to levy and maintain "assessments" for municipal
services and programs. Article XIIID also contains several new provisions
affecting "fees" and "charges", defined for purposes of Article XIIID to mean
"any levy other than an ad valorem tax, a special tax, or an assessment, imposed
by a [local government] upon a parcel or upon a person as an incident of
property ownership, including a user fee or charge for a property related
service." All new and existing property related fees and charges must conform
to requirements prohibiting, among other things, fees and charges which generate
revenues exceeding the funds required to provide the property related service or
are used for unrelated purposes. There are new notice, hearing and protest
procedures for levying or increasing property related fees and charges, and,
except for fees or charges for sewer, water and refuse collection services (or
fees for electrical and gas service, which are not treated as "property related"
for purposes of Article XIIID), no property related fee or charge may be imposed
or increased without majority approval by the property owners subject to the fee
or charge or, at the option of the local agency, two-thirds voter approval by
the electorate residing in the affected area.
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In addition to the provisions described above, Article XIIIC removes
limitations on the initiative power in matters of local taxes, assessments, fees
and charges. Consequently, local voters could, by future initiative, repeal,
reduce or prohibit the future imposition or increase of any local tax,
assessment, fee or charge. It is unclear how this right of local initiative may
be used in cases where taxes or charges have been or will be specifically
pledged to secure debt issues.
The interpretation and application of Proposition 218 will ultimately
be determined by the courts with respect to a number of matters, and it is not
possible at this time to predict with certainly the outcome of such
determinations. Proposition 218 is generally viewed as restricting the fiscal
flexibility of local governments, and for this reason, some ratings of
California cities and counties have been, and others may be, reduced.
Appropriation Limits. The State and its local governments are
--------------------
subject to an annual "appropriations limit" imposed by Article XIIIB of the
California Constitution, enacted by the voters in 1979 and significantly amended
by Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB
prohibits the State or any covered local government from spending
"appropriations subject to limitation" in excess of the appropriations limit
imposed. "Appropriations subject to limitation" are authorizations to spend
"proceeds of taxes," which consist of tax revenues and certain other funds,
including proceeds from regulatory licenses, user charges or other fees, to the
extent that such proceeds exceed the cost of providing the product or service,
but "proceeds of taxes" excludes most State subventions to local governments.
No limit is imposed on appropriations of funds which are not "proceeds of
taxes," such as reasonable user charges or fees, and certain other non-tax
funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized prior to
January 1, 1979, or subsequently authorized by the voters, (2) appropriations
arising from certain emergencies declared by the Governor, (3) appropriations
for certain capital outlay projects, (4) appropriations by the State of post
1989 increases in gasoline taxes and vehicle weight fees, and (5) appropriations
made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population and any transfer of service
responsibilities between governmental units. The definitions for such
adjustments were liberalized in 1990 to follow more closely growth in the
State's economy.
"Excess" revenues are measured over a two year cycle. Local governments
must return any excess to taxpayers by rate reductions. The State must refund
50% paid to schools and community colleges. With more liberal annual
adjustment factors since 1988, and depressed revenues since 1990 because of the
recession, few governments, including the State, are currently operating near
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their spending limits, but this condition may change over time. The State's
1996-97 Budget Act provides for State appropriations more than $7 billion under
the Article XIIIB limit. Local governments may by voter approval exceed their
spending limits for up to four years.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and XIIID of
the California Constitution, the ambiguities and possible inconsistencies of
their terms, and the impossibility of predicting future appropriations or
changes in population and cost of living, and the probability of continuing
legal challenges, it is not currently possible to determine fully the impact of
these articles on California Instruments. It is not presently possible to
predict the outcome of any pending litigation with respect to the ultimate
scope, impact or constitutionality of these articles, or the impact of any such
determinations upon State agencies or local governments, or upon their ability
to pay debt service or their obligations. Future initiatives or legislative
changes in laws or the California Constitution may also affect the ability of
the State or local issuers to repay their obligations.
State Debt. Under the California Constitution, debt service on outstanding
----------
general obligation bonds is the second charge to the General Fund after support
of the public school system and public institutions of higher education. Total
outstanding general obligation bonds and lease purchase debt of California
increased from $9.4 billion at June 30, 1987 to $23.8 billion at March 1, 1997.
The State also had outstanding at March 1, 1997 $358 million of general
obligation commercial paper notes which will be refunded into long-term bonds
at a later date. In FY1995-96, debt service on general obligation bonds and
lease purchase debt was approximately 5.2% of General Fund revenues. State
voters approved $6.4 billion of new general obligation bond authorizations on
the 1996 ballots.
Recent Financial Results. The principal sources of General Fund revenues
------------------------
in 1995-1996 were the California personal income tax (45% of total revenues),
the sales tax (34%), bank and corporation taxes (13%), and the gross premium tax
on insurance (3%). California maintains a Special Fund for Economic
Uncertainties (the "SFEV"), derived from General Fund revenues, as a reserve to
meet cash needs of the General Fund.
General. Throughout the 1980s, California state spending increased rapidly
-------
as California's population and economy also grew rapidly, including increased
spending for many assistance programs to local governments, which were
constrained by Proposition 13 and other laws. The largest state program is
assistance to local public school districts. In 1988, an initiative
(Proposition 98) was enacted which (subject to suspension by a two-thirds vote
of the Legislature and the Governor) guarantees local school districts and
community college districts a minimum share of California General Fund revenues
(currently about 35%).
Beginning at the start of the 1990-91 Fiscal Year, California faced adverse
economic, fiscal and budget conditions. The economic
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recession seriously affected California's tax revenues. It also caused
increased expenditures for health and welfare programs. Even though the economy
is recovering, California is still facing a structural imbalance in its budget
with the largest programs supported by the General Fund (education, health,
welfare and corrections) growing at rates higher than the growth rates for the
principal revenue sources of the General Fund. These structural concerns will
be exacerbated in coming years by the expected need to substantially increase
capital and operating funds for corrections as a result of a "Three Strikes" law
enacted in 1994.
Recent Budgets. As a result of these factors, among others, from the late
--------------
1980's until 1992-93, the State had a period of nearly chronic budget imbalance,
with expenditures exceeding revenues in four out of six years, and the State
accumulated and sustained a budget deficit in the budget reserve, the SFEU,
approaching $2.8 billion at its peak at June 30, 1993. Starting in the 1990-91
Fiscal Year and for each year thereafter, each budget required multibillion
dollar actions to bring projected revenues and expenditures into balance and to
close large "budget gaps" which were identified. The Legislature and Governor
eventually agreed on a number of different steps to produce Budget Acts in the
Fiscal Years 1991-92 to 1995-96, including the following (not all of these
actions were taken each year):
. significant cuts in health and welfare program expenditures;
. transfers of program responsibilities and some funding sources from the
State to local governments, coupled with some reduction in mandates on local
government;
. transfer of about $3.6 billion in annual local property tax revenues
from cities, counties, redevelopment agencies and some other districts to local
school districts, thereby reducing state funding for schools;
. reduction in growth of support for higher education programs, coupled
with increases in student fees;
. revenue increases (particularly in the 1991-92 Fiscal Year budget), most
of which were for a short duration;
. increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare services to
undocumented aliens (although these efforts have produced much less federal aid
than the State Administration had requested); and
. various one-time adjustment and accounting changes.
Despite these budget actions, the effects of the recession led to large
unanticipated deficits in the SFEU, as compared to projected positive balances.
By the start of the 1993-94 Fiscal
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Year, the accumulated deficit was so large (almost $2.8 billion) that it was
impractical to budget to retire it in one year, so a two-year program was
implemented, using the issuance of revenue anticipation warrants to carry a
portion of the deficit over the end of the fiscal year. When the economy failed
to recover sufficiently in 1993-94, a second two-year plan was implemented in
1994-95, to carry the final retirement of the deficit into 1995-96.
The combination of stringent budget actions cutting State expenditures,
and the turnaround of the economy by late 1993, finally led to the restoration
of positive financial results. While General Fund revenues and expenditures
were essentially equal in FY 1992-93 (following two years of excess expenditures
over revenues), the General Fund had positive operating results in FY 1993-94
and 1995-96, which reduced the accumulated budget deficit to less than $100
million as of June 30, 1996. The State Department of Finance estimated that the
General Fund received revenues of about $46.3 billion in FY 1995-96, more than
$2 billion higher than was originally expected, as a result of the strengthening
economy. Expenditures totaled about $45.4 billion, also about $2 billion higher
than budgeted, because, among other factors, the State Constitution requires
disbursement of a percentage of revenues to local school districts and federal
actions to reduce welfare costs and to pay for costs of illegal immigrants were
not forthcoming to the extent expected.
A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. When the Legislature and the Governor failed to adopt
a budget for the 1992-93 Fiscal Year by July 1, 1992, which would have allowed
the State to carry out its normal annual cash flow borrowing to replenish its
cash reserves, the State Controller was forced to issue approximately $3.8
billion of registered warrants ("IOUs") over a 2-month period to pay a variety
of obligations representing prior years' or continuing appropriations, and
mandates from court orders. Available funds were used to make constitutionally-
mandated payments, such as debt service on bonds and warrants.
The State's cash condition became so serious that from late spring 1992
until 1995, the State had to rely on issuance of short-term notes which matured
in a subsequent fiscal year to finance its ongoing deficit and pay current
obligations. With the repayment of the last of these deficit notes in April,
1996, the State does not plan to rely further on external borrowing across
fiscal years, but will continue its normal cash flow borrowing during a fiscal
year.
Current Budget. The 1996-97 Budget Act was signed by the Governor on July
--------------
15, 1996, along with various implementing bills. The Legislature rejected the
Governor's proposed 15% cut in personal income taxes (to be phased over three
years), but did approve a 5% cut in bank and corporation taxes, to be effective
for
22
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income years starting on January 1, 1997. As a result, revenues for the Fiscal
Year are estimated to total $47.643 billion, a 3.3 percent increase over the
final estimated 1995-96 revenues. The Budget Act contains General Fund
appropriations totaling $47.251 billion, a 4.0 percent increase over the final
estimated 1995-96 expenditures.
The following are principal features of the 1996-97 Budget Act:
1. Funding for schools and community college districts increased by
$1.65 billion total above revised 1995-96 levels. Almost half of this money was
budgeted to fund class-size reductions in kindergarten and grades 1-3. Also,
for the second year in a row, the full cost of living allowance (3.2 percent)
was funded. The funding increases have brought K-12 expenditures to almost
$4,800 per pupil, an almost 15% increase over the level prevailing during the
recession years.
2. Proposed cuts in health and welfare totaling $660 million. All
of these cuts required federal law changes (including welfare reform, which was
enacted), federal waivers, or federal budget appropriations in order to be
achieved. Ultimate federal actions after enactment of the Budget Act will allow
the State to save only about $360 million of this amount.
3. A 4.9 percent increase in funding for the University of
California and the California State University system, with no increases in
student fees for the second consecutive year.
4. The Budget Act assumed the federal government would provide
approximately $700 million in new aid for incarceration and health care costs of
illegal immigrants. These funds reduce appropriations in these categories that
would otherwise have to be paid from the General Fund.
With signing of the Budget Act, the State implemented its regular cash flow
borrowing program with the issuance of $3.0 billion of Revenue Anticipation
Notes to mature on June 30, 1997. The Budget Act appropriated a modest budget
reserve in the SFEU of $305 million, as of June 30, 1997. The General Fund fund
balance, however, still reflects $1.6 billion of "loans" which the General Fund
made to local schools in the recession years, representing cash outlays above
the mandatory minimum funding level. Settlement of litigation over these
transactions in July 1996 calls for repayment of these loans over the period
ending in 2001-02, about equally split between outlays from the General Fund and
from schools' entitlements. The 1996-97 Budget Act contained a $150 million
appropriation from the General Fund toward this settlement.
The Department of Finance projected, when the Budget Act was passed, that,
on June 30, 1997, the State's available internal borrowable (cash) resources
will be $2.9 billion, after payment of all obligations due by that date, so that
no external cross-fiscal year borrowing will be needed. The State will continue
to rely on
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internal borrowing and intra-year external note borrowing to meet its cash flow
requirements.
The Department of Finance has reported that, based on stronger than
expected revenues during the first six months of the 1996-97 fiscal year,
reflecting the continued strength of the State's economic recovery, General Fund
revenues for the full 1996-97 fiscal year will be almost $800 million above
projections, at about $48.4 billion. This is expected to be offset by required
increased payments to schools, and lower than expected savings resulting from
federal welfare reform actions and federal aid for illegal immigrants. As a
result, the expected balance of the SFEU at June 30, 1997 has been slightly
reduced to about $197 million, still the first positive balance in the decade of
the 90's. The State has not yet given any prediction of how the federal
welfare reform law will impact the State's finances, or those of its local
agencies; the State is in the midst of making many decisions concerning
implementation of the new welfare law.
Proposed 1997-98 Budget On January 9, 1997, the Governor released his
-----------------------
proposed budget for FY 1997-98. Assuming continuing strength in the economy,
the Governor projects General Fund revenues of $50.7 billion, and proposes
expenditures of $50.3 billion, to leave a budget reserve in the SFEU of $550
million at June 30, 1998. The Governor proposed further programs to reduce
class size in lower primary grades, using excess revenues from FY 1996-97. He
also proposed a further cut in corporate taxes, and sweeping changes in public
assistance programs to respond to the new federal welfare reform law.
Although the State's strong economy is producing record revenues to the
State government, the State's budget continues to be under stress from mandated
spending on education, a rising prison population, and social needs of a growing
population with many immigrants. These factors which limit State spending
growth also put pressure on local governments. There can be no assurances that,
if economic conditions weaken, or other factors intercede, the State will not
experience budget gaps in the future.
Bond Ratings. The ratings on California's long-term general obligation
------------
bonds were reduced in the early 1990's from "AAA" levels which had existed prior
to the recession. In 1996, Fitch and Standard & Poor's raised their ratings of
California's general obligation bonds, which are currently assigned ratings of
"A+" from Standard & Poor's, "A1" from Moody's and "A+" from Fitch. There can be
no assurance that such ratings will be maintained in the future. It should be
noted that the creditworthiness of obligations issued by local California
issuers may be unrelated to the creditworthiness of obligations issued by the
State of California, and that there is no obligation on the part of California
to make payment on such obligations in the event of default.
Legal Proceedings. California is involved in certain legal proceedings
------------------
(described in California's recent financial statements) that, if decided against
California, may require California to make
24
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significant future expenditures or may substantially impair revenues. Courts
have recently entered decisions which could overturn several parts of the
state's recent budget compromises. The matters covered by these lawsuits
include a deferral of payments by California to the Public Employees Retirement
System, reductions in welfare payments and the use of certain cigarette tax
funds for health costs. All of these cases are subject to further proceedings
and appeals, and if California eventually loses, the final remedies may not have
to be implemented in one year.
Obligations of Other Issuers
----------------------------
Other Issuers of California Instruments. There are a number of state
---------------------------------------
agencies, instrumentalities and political subdivisions of the State of
California that issue municipal obligations, some of which may be conduit
revenue obligations payable from payments from private borrowers. These
entities are subject to various economic risks and uncertainties, and the credit
quality of the securities issued by them may vary considerably from the credit
quality of obligations backed by the full faith and credit of the State of
California.
State Assistance. Property tax revenues received by local governments
----------------
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of
California's General Fund surplus to local agencies, the reallocation of certain
state revenues to local agencies and the assumption of certain governmental
functions by the State of California to assist municipal issuers to raise
revenues. Through 1990-91, local assistance (including public schools)
accounted for around 75% of General Fund spending. To reduce California General
Fund support for school districts, the 1992-93 and 1993-94 Budget Acts caused
local governments to transfer a total of $3.9 billion of property tax revenues
to school districts, representing loss of all the post-Proposition 13 "bailout"
aid. The largest share of these transfers came from counties, and the balance
from cities, special districts and redevelopment agencies. In order to make up
part of this shortfall, the Legislature proposed, and voters approved in 1993,
dedicating 0.5% of the sales tax to counties and cities for public safety
purposes. In addition, the Legislature has changed laws to relieve local
governments of certain mandates, allowing them to reduce costs.
To the extent that California should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of state
assistance to local governments may continue to be reduced. Any such reductions
in state aid could compound the serious fiscal constraints already experienced
by many local governments, particularly counties. A number of counties have
indicated that their budgetary condition is extremely serious. In the 1995-96
and 1996-97 fiscal years, Los Angeles County, the largest in the State, had to
make significant cuts in services and personnel, particularly in the health care
system in order to
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balance its budget. The County's debt was downgraded by Moody's and S&P in the
summer of 1995. Orange County, which recently emerged from federal bankruptcy
protection, has substantially reduced services and personnel in order to live
within much reduced means.
Counties and cities may face further budgetary pressures as a result of
changes in welfare and public assistance programs, which will have to be enacted
by June, 1997 in order to comply with the federal welfare reform law. It is now
yet known how the State's legislation will turn out and what its overall impact
will be on local government finances.
Assessment Bonds. California Instruments which are assessment bonds may be
----------------
adversely affected by a general decline in real estate values or a slowdown in
real estate sales activity. In many cases, such bonds are secured by land which
is undeveloped at the time of issuance but anticipated to be developed within a
few years after issuance. In the event of such reduction or slowdown, such
development may not occur or may be delayed, thereby increasing the risk of a
default on the bonds. Because the special assessments or taxes securing these
bonds are not the personal liability of the owners of the property assessed, the
lien on the property is the only security for the bonds. Moreover, in most
cases the issuer of these bonds is not required to make payments on the bonds in
the event of delinquency in the payment of assessments or taxes, except from
amounts, if any, in a reserve fund established for the bonds.
California Long-Term Lease Obligations. Certain California long-term lease
--------------------------------------
obligations, though typically payable from the general fund of the municipality,
are subject to "abatement" in the event the facility being leased is unavailable
for beneficial use and occupancy by the municipality during the term of the
lease. Abatement is not a default, and there may be no remedies available to
the holders of the certificates evidencing the lease obligation in the event
abatement occurs. The most common cases of abatement are failure to complete
construction of the facility before the end of the period during which lease
payments have been capitalized and uninsured casualty losses to the facility
(e.g. due to earthquake). In the event abatement occurs with respect to a lease
obligation, lease payments may be interrupted (if all available insurance
proceeds and reserves are exhausted) and the certificates may not be paid when
due.
Several years ago the Richmond Unified School District (the "District")
entered into a lease transaction in which certain existing properties of the
District were sold and leased back in order to obtain funds to cover operating
deficits. Following a fiscal crisis in which the District's finances were taken
over by a state receiver (including a brief period under bankruptcy court
protection), the District failed to make rental payments on this lease,
resulting in a lawsuit by the Trustee for the Certificate of Participation
holders, in which the State of California was a named defendant (on the grounds
that it controlled the District's finances). One of the defenses raised in
answer to this lawsuit
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was the invalidity of the District's lease. The trial court upheld the validity
of the lease, and the case was subsequently settled. Any ultimate judgment in
any future case against the position taken by the Trustee may have adverse
implications for lease transactions of a similar nature by other California
entities.
Other Considerations
--------------------
The repayment of industrial development securities secured by real property
may be affected by California laws limiting foreclosure rights of creditors.
Securities backed by health care and hospital revenues may be affected by
changes in state regulations governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program), including risks
related to the policy of awarding exclusive contracts to certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g. because of major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity which
increased such tax rate to repay that entity's general obligation indebtedness.
As a result, redevelopment agencies (which typically are the issuers of tax
allocation securities) no longer receive an increase in tax increment when taxes
on property in the project area are increased to repay voter-approved bonded
indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and principal
on their obligations remains unclear. Furthermore, other measures affecting the
taxing or spending authority of California or its political subdivisions may be
approved or enacted in the future. Legislation has been or may be introduced
which would modify existing taxes or other revenue raising measures or which
either would further limit or, alternatively, would increase the abilities of
state and local governments to impose new taxes or increase existing taxes. It
is not presently possible to predict the extent to which any such legislation
will be enacted. Nor is it presently possible to determine the impact of any
such legislation on California Instruments in which the California Portfolio may
invest, future allocations of state revenues to local governments or the
abilities of state or local governments to pay the interest on, or repay the
principal of, such California Instruments.
27
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Substantially all of California is within an active geologic region subject
to major seismic activity. Northern California in 1989 and Southern California
in 1994 experienced major earthquakes causing billions of dollars in damages.
The federal government provided more than $13 billion in aid for both
earthquakes, and neither event is expected to have any long-term negative
economic impact. Any security in the Tax-Exempt California Portfolio could be
affected by an interruption of revenues because of damaged facilities, or,
consequently, income tax deductions for casualty losses or property tax
assessment reductions. Compensatory financial assistance could be constrained by
the inability of (i) an issuer to have obtained earthquake insurance coverage at
reasonable rates; (ii) an insurer to perform on its contracts of insurance in
the event of widespread losses; or (iii) the federal or state government to
appropriate sufficient funds within their respective budget limitations.
INVESTING IN NEW YORK
- ---------------------
Some of the significant financial considerations relating to the Tax-
Exempt New York Portfolio's investments in New York Instruments are summarized
below. This summary information is not intended to be a complete description
and is principally derived from official statements relating to issues of New
York Instruments that were available prior to the date of this Statement of
Additional Information. The accuracy and completeness of the information
contained in those official statements have not been independently verified.
STATE ECONOMY. New York is the third most populous state in the nation and has
- -------------
a relatively high level of personal wealth. The State's economy is diverse with
a comparatively large share of the nation's finance, insurance, transportation,
communications and services employment, and a very small share of the nation's
farming and mining activity. The State has a declining proportion of its
workforce engaged in manufacturing, and an increasing proportion engaged in
service industries. New York City (the "City"), which is the most populous city
in the State and nation and is the center of the nation's largest metropolitan
area, accounts for a large portion of the State's population and personal
income.
The State has historically been one of the wealthiest states in the
nation. For decades, however, the State has grown more slowly than the nation
as a whole, gradually eroding its relative economic position.
There can be no assurance that the State economy will not experience
worse-than-predicted results in the 1996-97 fiscal year, with corresponding
material and adverse effects on the State's projections of receipts and
disbursements.
State per capita personal income has historically been significantly
higher than the national average, although the ratio has varied substantially.
State per capita income for 1994 was estimated at $25,999, which was 19.2% above
the 1994 estimated
28
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national average of $21,809. Between 1975 and 1990 total employment grew by
21.3 percent while the labor force grew only by 15.7 percent. During this
period, unemployment fell from 9.5 percent to 5.2 percent of the labor force.
In 1991 and 1992, however, total employment in the State fell by 5.5 percent.
As a result, the unemployment rate rose to 8.5 percent reflecting a recession
that has had a particularly strong impact on the entire Northeast. Calendar
years 1993 and 1994 saw only a partial recovery.
STATE BUDGET. The State Constitution requires the governor (the "Governor") to
- ------------
submit to the State legislature (the "Legislature") a balanced executive budget
which contains a complete plan of expenditures for the ensuing fiscal year and
all moneys and revenues estimated to be available therefor, accompanied by bills
containing all proposed appropriations or reappropriations and any new or
modified revenue measures to be enacted in connection with the executive budget.
The entire plan constitutes the proposed State financial plan for that fiscal
year. The Governor is required to submit to the Legislature quarterly budget
updates which include a revised cash-basis state financial plan, and an
explanation of any changes from the previous state financial plan.
The Governor presented his 1996-97 Executive Budget to the Legislature
on December 15, 1995, and subsequently amended it.
The Governor's Executive Budget projected balance on a cash basis in
the General Portfolio. It reflected a continuing strategy of substantially
reduced State spending, including program restructurings, reductions in social
welfare spending, and efficiency and productivity initiatives.
On March 15, 1996, the Governor presented amendments to the 1996-97
Executive Budget to provide for balancing the 1996-97 state financial plan if
the federal government failed to adopt entitlement changes assumed to produce
savings in the State's 1996-97 Executive Budget.
The State's budget for the 1996-97 fiscal year was enacted by the
Legislature on July 13, 1996, more than three months after the start of the
fiscal year. Prior to adoption of the budget, the Legislature enacted
appropriations for disbursements considered to be necessary for State operations
and other purposes, including necessary appropriations for all State-supported
debt service. The State Financial Plan for the 1996-97 fiscal year was
formulated on July 25, 1996 and was based on the State's budget as enacted by
the Legislature and signed into law by the Governor, as well as actual results
for the first quarter of the current fiscal year (the "1996-97 State Financial
Plan").
The 1996-97 State Financial Plan was projected to be balanced on a
cash basis. As compared to the Governor's proposed budget as revised on March
20, 1996, the 1996-97 State Financial Plan increases General Portfolio spending
by $842 million, primarily from funding increased for education, special
education and higher education ($563 million). The balance represented funding
increases
29
<PAGE>
to a variety of other programs, including community projects and increased
assistance to fiscally distressed cities. Resources used to fund these
additional expenditures include $540 million in increased revenues projected for
1996-97 based on higher-than-projected tax collections during the first half of
calendar 1996, $110 million in projected receipts from a new State tax amnesty
program, and other resources including certain non-recurring resources.
The State issued its first update to the 1996-97 State Financial Plan
(the "Mid-Year Update") on October 25, 1996. Revisions have been made to
estimates of both receipts and disbursements based on: (1) updated economic
forecasts for both the nation and the State, (2) an analysis of actual receipts
and disbursements through the first six months of the fiscal year, and (3) an
assessment of changing program requirements. The Mid-Year Update reflected a
balanced 1996-97 State Financial Plan, with a reserve for contingencies in the
General Portfolio of $300 million. This reserve will be utilized to help offset
a variety of potential risks and other unexpected contingencies that the State
may face during the balance of the 1996-97 fiscal year.
Although revisions to the 1996-97 State Financial Plan contained in
the Mid-Year Update are favorable, the State faces certain risks which could
potentially cost the State up to one-half billion dollars. The Division of the
Budget believes these risks are balanced by reserves in the 1996-97 State
Financial Plan, including the $300 million reserve created in the Mid-Year
Update. However, there can be no assurance that these reserves will fully
offset litigation or other risks to the 1996-97 State Financial Plan.
One major uncertainty to the 1996-97 State Financial Plan continues to
be risks related to the economy and tax collections, which could produce either
favorable or unfavorable variances during the balance of the year. An
additional risk to the 1996-97 State Financial Plan arises from the potential
impact of certain litigation now pending against the State, which could produce
adverse effects on the State's projections of receipts and disbursements.
Similarly, certain litigation which by itself did not produce a
material judgment against the State could have an adverse impact on the 1996-97
State Financial Plan because of the precedential nature of the court's decision.
Specifically, the State Court of Appeals has denied a motion to appeal a lower
court decision in the so-called "GTE Spacenet" case, in which the court ruled
that GTE Spacenet was not subject to the 3.5 percent tax on gross receipts
imposed under section 186-a of the tax law. The court decision is limited to
provisions of section 186-a as it existed prior to the 1995 amendments, and has
little prospective effect. While this litigation in and of itself carries only
a small judgment in favor of GTE Spacenet and similar companies, the
consequences of the ruling could eventually entail refunds to other taxpayers of
several hundred million dollars. Refund claims of over $300 million have been
filed which, with interest and assuming a
30
<PAGE>
similar exposure for open years for which claims have yet to be filed, could
approach $600 million in potential claims.
On August 13, 1996, the State Comptroller released a report in which
he identified several risks to the 1996-97 State Financial Plan and estimated
that the State faces a potential imbalance in receipts and disbursements of
approximately $3 billion for the State's 1997-98 fiscal year and approximately
$3.2 billion for the State's 1998-99 fiscal year.
The Governor is required to submit a balanced budget to the State
Legislature and has indicated he will close any potential imbalance in the 1997-
98 State Financial Plan primarily through General Portfolio expenditure
reductions and without increases in taxes or deferrals of scheduled tax
reductions. It is expected that the 1997-98 State Financial Plan will reflect a
continuing strategy of substantially reduced State spending, including agency
consolidations, reductions in the State workforce, and efficiency and
productivity initiatives.
On August 22, 1996, the President signed into law the Personal
Responsibility and Work Opportunity Reconciliation Act of 1996. This federal
legislation fundamentally changed the programmatic and fiscal responsibilities
for administration of welfare programs at the federal, state and local levels.
The new law abolishes the federal Aid to Families with Dependent Children
program (AFDC), and creates a new Temporary Assistance to Needy Families program
(TANF) funded with a fixed federal block grant to states. The new law also
imposes (with certain exceptions) a five-year durational limit on TANF
recipients, requires that virtually all recipients be engaged in work or
community service activities within two years of receiving benefits, and limits
assistance provided to certain immigrants and other classes of individuals.
States are required to meet work activity participation targets for their TANF
caseload; these requirements are phased in over time. States that fail to meet
these federally mandated job participation rates, or that fail to conform with
certain other federal standards, face potential sanctions in the form of a
reduced federal block grant.
On October 16, 1996, the Governor submitted the State's TANF
implementation plan to the federal government as required under the new federal
welfare law. Submission of this plan to the federal government requires New
York State to begin compliance with certain time limits on welfare benefits and
permits the State to become eligible for approximately $2.36 billion in federal
block grant funding. Legislation will be required to implement the State's TANF
plan. The Governor has indicated that he plans to introduce legislation
necessary to conform with federal law shortly, and that he may submit amendments
to the State plan if necessary.
States are required to comply with the new federal welfare reform law
no later than July 1, 1997. Given the size and scope of the changes required
under federal law, it is likely that these proposals will produce extensive
public discussions. There can be
31
<PAGE>
no assurances that the State Legislature will enact welfare reform proposals as
submitted by the Governor and as required under federal law.
The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. Those factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the federal government, that
are not under the control of the State. In addition, the 1996-97 State
Financial Plan is based upon forecasts of national and State economic activity.
Economic forecasts have frequently failed to predict accurately the timing and
magnitude of changes in the national and the State economies. The Division of
Budget believes that its projections of receipts and disbursements relating to
the current State Financial Plan, and the assumptions on which they are based,
are reasonable. Actual results, however, could differ materially and adversely
from the projections set forth therein, and those projections may be changed
materially and adversely from time to time. There are also risks and
uncertainties concerning the future-year impact of actions taken in the 1996-97
budget.
In the State's 1997 fiscal year and in certain recent fiscal years,
the State has failed to enact a budget prior to the beginning of the State's
fiscal year.
RECENT FINANCIAL RESULTS. The General Portfolio is the principal operating
- ------------------------
Portfolio of the State and is used to account for all financial transactions,
except those required to be accounted for in another Portfolio. It is the
State's largest Portfolio and receives almost all State taxes and other
resources not dedicated to particular purposes.
The General Portfolio is projected to be balanced on a cash basis for
the 1996-97 fiscal year. Total receipts and transfers from other Portfolios are
projected to be $33.17 billion, an increase of $365 million from the prior
fiscal year. Total General Portfolio disbursements and transfers to other
Portfolios are projected to be $33.12 billion, an increase of $444 million from
the total in the prior fiscal year.
Total revenues for 1994-95 were $31.455 billion. Revenues decreased
by $173 million over the prior fiscal year, a decrease of less than one percent.
Total expenditures for 1994-95 totaled $33.079 billion, an increase of $2.083
billion, or 6.7 percent over the prior fiscal year.
The State's financial position on a GAAP (generally accepted
accounting principles) basis as of March 31, 1995 showed an accumulated deficit
in its combined governmental Portfolios of $1.666 billion, reflecting
liabilities of $14.778 billion and assets of $13.112 billion.
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DEBT LIMITS AND OUTSTANDING DEBT. There are a number of methods by which the
- --------------------------------
State of New York may incur debt. Under the State Constitution, the State may
not, with limited exceptions for emergencies, undertake long-term general
obligation borrowing (i.e., borrowing for more than one year) unless the
----
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State.
The State may undertake short-term borrowings without voter approval
(i) in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes, and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued general obligation bonds, by
issuing bond anticipation notes. The State may also, pursuant to specific
constitutional authorization, directly guarantee certain obligations of the
State of New York's authorities and public benefit corporations ("Authorities").
Payments of debt service on New York State general obligation and New York
State-guaranteed bonds and notes are legally enforceable obligations of the
State of New York.
The State employs additional long-term financing mechanisms, lease-
purchase and contractual-obligation financings, which involve obligations of
public authorities or municipalities that are State-supported but are not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a contractual-
obligation financing arrangement with the Local Government Assistance
Corporation ("LGAC") in an effort to restructure the way the State makes certain
local aid payments.
In 1990, as part of a State fiscal reform program, legislation was
enacted creating LGAC, a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments traditionally funded
through New York State's annual seasonal borrowing. The legislation empowered
LGAC to issue its bonds and notes in an amount not in excess of $4.7 billion
(exclusive of certain refunding bonds) plus certain other amounts. Over a
period of years, the issuance of these long-term obligations, which are to be
amortized over no more than 30 years, was expected to eliminate the need for
continued short-term seasonal borrowing. The legislation also dedicated
revenues equal to one-quarter of the four cent State sales and use tax to pay
debt service on these bonds. The legislation also imposed a cap on the annual
seasonal
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borrowing of the State at $4.7 billion, less net proceeds of bonds issued by
LGAC and bonds issued to provide for capitalized interest, except in cases where
the Governor and the legislative leaders have certified the need for additional
borrowing and provided a schedule for reducing it to the cap. If borrowing
above the cap is thus permitted in any fiscal year, it is required by law to be
reduced to the cap by the fourth fiscal year after the limit was first exceeded.
As of June 1995, LGAC had issued bonds to provide net proceeds of $4.7 billion,
completing the program. The impact of LGAC's borrowing is that the State is
able to meet its cash flow needs in the first quarter of the fiscal year without
relying on short-term seasonal borrowings.
In June 1994, the Legislature passed a proposed constitutional
amendment that would significantly change the long-term financing practices of
the State and its public authorities. The proposed amendment would permit the
State, within a formula-based cap, to issue revenue bonds, which would be debt
of the State secured solely by a pledge of certain State tax receipts (including
those allocated to State Portfolios dedicated for transportation purposes), and
not by the full faith and credit of the State. In addition, the proposed
amendment would (i) permit multiple purpose general obligation bond proposals to
be proposed on the same ballot, (ii) require that State debt be incurred only
for capital projects included in a multi-year capital financing plan, and (iii)
prohibit, after its effective date, lease-purchase and contractual-obligation
financing mechanisms for State facilities.
Before the approved constitutional amendment could be presented to the
voters for their consideration, it had to be passed by a separately elected
legislature. The amendment was passed by the Senate and Assembly in June 1995.
The Amendment was thereafter submitted to voters in November 1995, where it was
defeated.
On January 13, 1992, S&P reduced its ratings on the State's general
obligation bonds from A to A- and, in addition, reduced its ratings on the
State's moral obligation, lease purchase, guaranteed and contractual obligation
debt. S&P also continued its negative rating outlook assessment on State
general obligation debt. On April 26, 1993, S&P revised the rating outlook
assessment to stable. On February 14, 1994, S&P raised its outlook to positive
and, on February 28, 1994, confirmed its A- rating. On January 6, 1992, Moody's
reduced its ratings on outstanding limited-liability State lease purchase and
contractual obligations from A to Baa1. On February 28, 1994, Moody's
reconfirmed its A rating on the State's general obligation long-term
indebtedness.
The State anticipated that its capital programs would be financed, in
part, by State and public authorities borrowings in 1996-97. The State expected
to issue $411 million in general obligation bonds (including $153.6 million for
purposes of redeeming outstanding bond anticipation notes) and $154 million in
general obligation commercial paper. The Legislature had also authorized the
issuance of up to $101 million in certificates of participation during the
State's 1996-97 fiscal year for equipment purchases. The
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projection of the State regarding its borrowings for the 1996-97 fiscal year may
change if circumstances require.
In the 1996 legislative session, the Legislature approved the
Governor's proposal to present to the voters in November 1996 a $1.75 billion
State general obligation bond referendum to finance various environmental
improvement and remediation projects. The Clean Water, Clean Air Bond Act was
approved by the voters in November 1996. As a result, the amount of general
obligation bonds issued during the 1996-97 fiscal year may increase above the
$411 million currently included in the 1996-97 borrowing plan to finance a
portion of this new program.
Principal and interest payments on general obligation bonds and
interest payments on bond anticipation notes were $735 million for the 1995-96
fiscal year, and were estimated to be $719 million for the 1996-97 fiscal year.
Principal and interest payments on fixed rate and variable rate bonds issued by
LGAC were $340 million for the 1995-96 fiscal year, and were estimated to be
$323 million for 1996-97.
New York State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees.
LITIGATION. Certain litigation pending against the State or its officers or
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employees could have a substantial or long-term adverse effect on State
finances. Among the more significant of these cases are those that involve (1)
the validity of agreements and treaties by which various Indian tribes
transferred title to New York State of certain land in central and upstate New
York; (2) certain aspects of New York State's Medicaid policies, including its
rates, regulations and procedures; (3) action against New York State and New
York City officials alleging inadequate shelter allowances to maintain proper
housing; (4) challenges to the practice of reimbursing certain Office of Mental
Health patient care expenses from the client's Social Security benefits; (5)
alleged responsibility of New York State officials to assist in remedying racial
segregation in the City of Yonkers; (6) challenges by commercial insurers,
employee welfare benefit plans, and health maintenance organizations to the
imposition of 13%, 11% and 9% surcharges on inpatient hospital bills; (7)
challenges to certain aspects of petroleum business taxes; (8) action alleging
damages resulting from the failure by the State's Department of Environmental
Conservation to timely provide certain data; (9) a challenge to the
constitutionality of a State lottery game; and (10) an action seeking
reimbursement from the State for certain costs arising out of the provision of
pre-school services and programs for children with handicapped conditions.
Several actions challenging the constitutionality of legislation
enacted during the 1990 legislative session which changed actuarial funding
methods for determining state and local contributions to state employee
retirement systems have been decided
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against the State. As a result, the Comptroller developed a plan to restore the
State's retirement systems to prior funding levels. Such funding is expected to
exceed prior levels by $116 million in fiscal 1996-97, $193 million in fiscal
1997-98, peaking at $241 million in fiscal 1998-99. Beginning in fiscal 2001-
02, State contributions required under the Comptroller's plan are projected to
be less than that required under the prior funding method. As a result of the
United States Supreme Court decision in the case of State of Delaware v. State
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of New York, on January 21, 1994, the State entered into a settlement agreement
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with various parties. Pursuant to all agreements executed in connection with
the action, the State was required to make aggregate payments of $351.4 million.
Annual payments to the various parties will continue through the State's 2002-03
fiscal year in amounts which will not exceed $48.4 million in any fiscal year
subsequent to the State's 1994-95 fiscal year. Litigation challenging the
constitutionality of the treatment of certain moneys held in a reserve Portfolio
was settled in June 1996 and certain amounts in a Supplemental Reserve Portfolio
previously credited by the State against prior State and local pension
contributions will be paid in 1998.
The legal proceedings noted above involve State finances, State
programs and miscellaneous tort, real property and contract claims in which the
State is a defendant and the monetary damages sought are substantial. These
proceedings could affect adversely the financial condition of the State.
Adverse developments in these proceedings or the initiation of new proceedings
could affect the ability of the State to maintain a balanced 1996-97 State
Financial Plan. An adverse decision in any of these proceedings could exceed
the amount of the 1996-97 State Financial Plan reserve for the payment of
judgments and, therefore, could affect the ability of the State to maintain a
balanced 1996-97 State Financial Plan. In its audited financial statements for
the fiscal year ended March 31, 1996, the State reported its estimated liability
for awarded and anticipated unfavorable judgments to be $474 million.
Although other litigation is pending against New York State, except as
described herein, no current litigation involves New York State's authority, as
a matter of law, to contract indebtedness, issue its obligations, or pay such
indebtedness when it matures, or affects New York State's power or ability, as a
matter of law, to impose or collect significant amounts of taxes and revenues.
AUTHORITIES. The fiscal stability of New York State is related, in part, to the
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fiscal stability of its Authorities, which generally have responsibility for
financing, constructing and operating revenue-producing public benefit
facilities. Authorities are not subject to the constitutional restrictions on
the incurrence of debt which apply to the State itself, and may issue bonds and
notes within the amounts of, and as otherwise restricted by, their legislative
authorization. The State's access to the public credit markets could be
impaired, and the market price of its outstanding debt may be materially and
adversely affected, if any of the Authorities were to default on their
respective obligations,
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particularly with respect to debt that is State-supported or State-related. As
of September 30, 1995, date of the latest data available, there were 17
Authorities that had outstanding debt of $100 million or more. The aggregate
outstanding debt, including refunding bonds, of these 17 Authorities was $73.45
billion.
Authorities are generally supported by revenues generated by the
projects financed or operated, such as fares, user fees on bridges, highway
tolls and rentals for dormitory rooms and housing. In recent years, however,
New York State has provided financial assistance through appropriations, in some
cases of a recurring nature, to certain of the 18 Authorities for operating and
other expenses and, in fulfillment of its commitments on moral obligation
indebtedness or otherwise, for debt service. This operating assistance is
expected to continue to be required in future years. In addition, certain
statutory arrangements provide for State local assistance payments otherwise
payable to localities to be made under certain circumstances to certain
Authorities. The State has no obligation to provide additional assistance to
localities whose local assistance payments have been paid to Authorities under
these arrangements. However, in the event that such local assistance payments
are so diverted, the affected localities could seek additional State Portfolios.
NEW YORK CITY AND OTHER LOCALITIES. The fiscal health of the State of New York
- ----------------------------------
may also be impacted by the fiscal health of its localities, particularly the
City of New York, which has required and continues to require significant
financial assistance from New York State. The City depends on State aid both to
enable the City to balance its budget and to meet its cash requirements. The
City has achieved balanced operating results for each of its fiscal years since
1981 as reported in accordance with the then-applicable GAAP.
In 1975, New York City suffered a fiscal crisis that impaired the
borrowing ability of both the City and New York State. In that year the City
lost access to the public credit markets. The City was not able to sell short-
term notes to the public again until 1979.
In 1975, S&P suspended its A rating of City bonds. This suspension
remained in effect until March 1981, at which time the City received an
investment grade rating of BBB from S&P. On July 2, 1985, S&P revised its
rating of City bonds upward to BBB+ and on November 19, 1987, to A-. On July 2,
1993, S&P reconfirmed its A-rating of City bonds, continued its negative rating
outlook assessment and stated that maintenance of such rating depended upon the
City's making further progress towards reducing budget gaps in the outlying
years. Moody's ratings of City bonds were revised in November 1981 from B (in
effect since 1977) to Ba1, in November 1983 to Baa, in December 1985 to Baa1, in
May 1988 to A and again in February 1991 to Baa1. On July 10, 1995, S&P
downgraded its rating on the City's $23 billion of outstanding general
obligation bonds to "BBB+" from "A-", citing to the City's chronic structural
budget problems and weak economic outlook. S&P stated that New York City's
reliance on one-time revenue measures to close annual budget gaps,
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a dependence on unrealized labor savings, overly optimistic estimates of
revenues and state and federal aid and the City's continued high debt levels
also contributed to its decision to lower the rating. Moody's currently has the
City's rating under review for a possible downgrade.
New York City is heavily dependent on New York State and federal
assistance to cover insufficiencies in its revenues. There can be no assurance
that in the future federal and State assistance will enable the City to make up
its budget deficits. To help alleviate the City's financial difficulties, the
Legislature created the Municipal Assistance Corporation ("MAC") in 1975. Since
its creation, MAC has provided, among other things, financing assistance to the
City by refunding maturing City short-term debt and transferring to the City
proceeds received from sales of MAC bonds and notes. MAC is authorized to issue
bonds and notes payable from certain stock transfer tax revenues, from the
City's portion of the State sales tax derived in the City and, subject to
certain prior claims, from State per capita aid otherwise payable by the State
to the City. Failure by the State to continue the imposition of such taxes, the
reduction of the rate of such taxes to rates less than those in effect on July
2, 1975, failure by the State to pay such aid revenues and the reduction of such
aid revenues below a specified level are included among the events of default in
the resolutions authorizing MAC's long-term debt. The occurrence of an event of
default may result in the acceleration of the maturity of all or a portion of
MAC's debt. MAC bonds and notes constitute general obligations of MAC and do
not constitute an enforceable obligation or debt of either the State or the
City. As of December 31, 1995, MAC had outstanding an aggregate of
approximately $4.684 billion of its bonds. MAC is authorized to issue bonds and
notes to refunds its outstanding bonds and notes and to fund certain reserves,
without limitation as to principal amount, and to finance certain capital
commitments to the Transit Authority and the New York City School Construction
Authority for the 1992 through 1997 fiscal years in the event the City fails to
provide such financing.
The City and MAC have reached an agreement in principle under which
MAC will develop and implement a debt restructuring program which will provide
the City with $125 million in budget relief in fiscal year 1996, in addition to
the $20 million of additional budget relief provided by MAC to the City since
January 1996. The City has agreed with MAC that it will reduce certain
expenditures by $125 million in each of the four fiscal years starting in fiscal
year 1997. The proposed refinancing, which must satisfy MAC refinancing
criteria, is subject to market conditions.
Since 1975, the City's financial condition has been subject to
oversight and review by the New York State Financial Control Board (the "Control
Board") and since 1978 the City's financial statements have been audited by
independent accounting firms. To be eligible for guarantees and assistance, the
City is required during a "control period" to submit annually for Control Board
approval, and when a control period is not in effect for Control Board review, a
financial plan for the next four fiscal
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years covering the City and certain agencies showing balanced budgets determined
in accordance with GAAP. New York State also established the Office of the
State Deputy Comptroller for New York City ("OSDC") to assist the Control Board
in exercising its powers and responsibilities. On June 30, 1986, the City
satisfied the statutory requirements for termination of the control period.
This means that the Control Board's powers of approval are suspended, but the
Board continues to have oversight responsibilities.
From time to time, the Control Board staff, OSDC, the City comptroller
and others issue reports and make public statements regarding the City's
financial condition, commenting on, among other matters, the City's financial
plans, projected revenues and expenditures and actions by the City to eliminate
projected operating deficits. Some of these reports and statements have warned
that the City may have underestimated certain expenditures and overestimated
certain revenues and have suggested that the City may not have adequately
provided for future contingencies. Certain of these reports have analyzed the
City's future economic and social conditions and have questioned whether the
City has the capacity to generate sufficient revenues in the future to meet the
costs of its expenditure increases and to provide necessary services.
On January 31, 1996, the City published the financial plan for the
1996-1999 fiscal years (the "City Financial Plan"), which is a modification to a
financial plan submitted to the Control Board on July 11, 1995. The City
Financial Plan set forth proposed actions by the City for the 1996 fiscal year
to close substantial projected budget gaps resulting from lower than projected
tax receipts and other revenues and greater than projected expenditures. In
addition to substantial proposed agency expenditure reductions, the City
Financial Plan reflected a strategy to substantially reduce spending for
entitlements for the 1996 and subsequent fiscal years, and to decrease the
City's costs for Medicaid in the 1997 fiscal year and thereafter by increasing
the federal share of Medicaid costs otherwise paid by the City. This strategy
has been the subject of substantial debate, and implementation of this strategy
will be significantly affected by State and federal budget proposals currently
being considered. It is likely that the City Financial Plan will be changed
significantly in connection with the preparation of the Executive Budget for the
1997 fiscal year as a result of the status of State and federal budget proposals
and other factors.
The City Financial Plan also set forth projections for the 1997
through 1999 fiscal years and outlined a proposed gap-closing program to
eliminate a projected gap of $2.0 billion for the 1997 fiscal year, and to
reduce projected gaps of $3.3 billion and $4.1 billion for the 1998 and 1999
fiscal years, respectively, assuming successful implementation of the gap-
closing program for the 1996 fiscal year.
The proposed gap-closing actions for the 1997 through 1999 fiscal
years included: (i) additional agency actions, totaling between $643 million
and $691 million in each of the 1997 through
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1999 fiscal years; (ii) additional savings resulting from State and federal aid
and cost containment in entitlement programs to reduce City expenditures and
increase revenues by $650 million in the 1997 fiscal year and by $727 million in
each of the 1998 and 1999 fiscal years; (iii) additional proposed federal aid of
$50 million in the 1997 fiscal year and State aid of $100 million in each of the
1997 through 1999 fiscal years; (iv) the receipt of $300 million in the 1997
fiscal year from privatization or other initiatives, certain of which actions is
expected to require legislative action by the City Council; and (v) the assumed
receipt of revenues relating to rent payments for the City's airports, totaling
$244 million, $226 million and $70 million in the 1997 through 1999 fiscal
years, respectively, which are currently the subject of a dispute with the Port
Authority and the collection of which may depend on the successful completion of
negotiations with the Port Authority or the enforcement of the City's remedies
under the leases through pending legal actions. The City was also preparing an
additional contingency gap-closing program for the 1997 fiscal year to be
comprised of $200 million in additional agency actions.
The federal and State budgets, when adopted, may result in substantial
reductions in revenues for the City, as well as a reduction in projected
expenditures in entitlement programs, including Medicare, Medicaid and welfare
programs. The nature and extent of the impact on the City of the federal and
State budgets, when adopted, is uncertain, and no assurance can be given that
federal or State actions included in the federal and State adopted budgets may
not have a significant adverse impact on the City's budget and the City
Financial Plan.
The projections for the 1996 through 1999 fiscal years reflected the
costs of the proposed settlement with the teachers union and the recent
settlement with a coalition of municipal unions, and assumed that the City will
reach agreement with its remaining municipal unions under terms which are
generally consistent with such settlements.
The City's financial plans have been the subject of extensive public
comment and criticism. The City comptroller has issued reports identifying
risks ranging between $440 million and $560 million in the 1996 fiscal year
before taking into account the availability of $160 million in the general
reserve, and between $2.05 billion and $2.15 billion in the 1997 fiscal year
after implementation of the City's proposed gap-closing actions. With respect
to the 1997 fiscal year, the report noted that the City Financial Plan assumed
the implementation of highly uncertain State and federal actions, most of which
are unlikely to be implemented, that would provide between $1.2 billion and $1.4
billion in relief to the City, and identified additional risks. The report
concluded that the magnitude of the budget risk for the 1997 fiscal year, after
two years of large agency cutbacks and workforce reductions, indicated the
seriousness of the City's continuing budget difficulties, and that the City
Financial Plan would require substantial revision in order to provide a credible
program for
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dealing with the large projected budget gap for the 1997 fiscal year.
The City since 1981 has fully satisfied its seasonal financing needs
in the public credit markets, repaying all short-term obligations within their
fiscal year of issuance. The City has issued $2.4 billion of short-term
obligations in fiscal year 1996 to finance the City's current estimate of its
seasonal cash flow needs for the 1996 fiscal year. Seasonal financing
requirements for the 1995 fiscal year increased to $2.2 billion from $1.75
billion and $1.4 billion in the 1994 and 1993 fiscal years, respectively.
Certain localities, in addition to the City, could have financial
problems leading to requests for additional New York State assistance. The
potential impact on the State of such requests by localities was not included in
the State's projections of its receipts and disbursements.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the creation of the Financial Control Board for the City of Yonkers
(the "Yonkers Board") by New York State in 1984. The Yonkers Board is charged
with oversight of the fiscal affairs of Yonkers. Future actions taken by the
Governor or the Legislature to assist Yonkers could result in allocation of New
York State resources in amounts that cannot yet be determined.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the city of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding.
Seventeen municipalities received extraordinary assistance during the
1996 legislative session through $50 million in special appropriations targeted
for distressed cities.
Municipalities and school districts have engaged in substantial short-
term and long-term borrowings. In 1994, the total indebtedness of all
localities in New York State other than New York City was approximately $17.7
billion. A small portion (approximately $82.9 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
enabling New York State legislation. State law requires the comptroller to
review and make recommendations concerning the budgets of those local government
units other than New York City authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding.
Seventeen localities had outstanding indebtedness for deficit financing at the
close of their fiscal year ending in 1994.
From time to time, federal expenditure reductions could reduce, or in
some cases eliminate, federal funding of some local programs and accordingly
might impose substantial increased
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expenditure requirements on affected localities. If New York State, New York
City or any of the Authorities were to suffer serious financial difficulties
jeopardizing their respective access to the public credit markets, the
marketability of notes and bonds issued by localities within New York State
could be adversely affected. Localities also face anticipated and potential
problems resulting from certain pending litigation, judicial decisions and long-
range economic trends. Long-range potential problems of declining urban
population, increasing expenditures and other economic trends could adversely
affect localities and require increasing New York State assistance in the
future.
STANDBY COMMITMENTS
In order to enhance the liquidity, stability or quality of municipal
obligations, the Prime Obligations, Money Market, Tax-Exempt Diversified, Tax-
Exempt California and Tax-Exempt New York Portfolios each may acquire the right
to sell a security to another party at a guaranteed price and date. Such a
right to resell may be referred to as a put, demand feature or "standby
commitment", depending on its characteristics. The aggregate price which a
Portfolio pays for securities with standby commitments may be higher than the
price which otherwise would be paid for the securities. Standby commitments may
not be available or may not be available on satisfactory terms.
Standby commitments may involve letters of credit issued by domestic or
foreign banks supporting the other party's ability to purchase the security from
the Portfolio. The right to sell may be exercisable on demand or at specified
intervals, and may form part of a security or be acquired separately by the
Portfolio. In considering whether a security meets a Portfolio's quality
standards, the Adviser will look to the creditworthiness of the party providing
the Portfolio with the right to sell.
The Portfolios value municipal obligations which are subject to standby
commitments at amortized cost. The exercise price of the standby commitments is
expected to approximate such amortized cost. No value is assigned to the
standby commitments for purposes of determining a Portfolio's net asset value.
Since the value of a standby commitment is dependent on the ability of the
standby commitment writer to meet its obligation to repurchase, the policy of
each Portfolio that may enter into standby commitment transactions is to enter
into such transactions only with banks, brokers or dealers which represent a
minimal risk of default. The duration of standby commitments will not be a
factor in determining the weighted average maturity of a Portfolio.
Management of the Trust understands that the Internal Revenue Service has
issued a favorable revenue ruling to the effect that, under specified
circumstances, a registered investment company will be the owner of tax-exempt
municipal obligations acquired subject to a put option. Institutional Tax-
Exempt Assets, the predecessor company of which Tax-Exempt Diversified Portfolio
and Tax-Exempt
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California Portfolio were series, has received a ruling from the Internal
Revenue Service to the effect that it is considered the owner of the municipal
obligations subject to standby commitments so that the interest on such
instruments will be tax-exempt income to it. The Internal Revenue Service has
subsequently announced that it will not ordinarily issue advance ruling letters
as to the identity of the true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation interest therein, to be purchased by
either the seller or a third party. Each of the Tax-Exempt Diversified, Tax-
Exempt California and Tax-Exempt New York Portfolios intends to take the
position that it is the owner of any municipal obligations acquired subject to a
standby commitment or acquired or held with certain other types of put rights
and that its distributions of tax-exempt interest earned with respect to such
municipal obligations will be tax-exempt for its unitholders. There is no
assurance that standby commitments will be available to a Portfolio nor has any
Portfolio assumed that such commitments will continue to be available under all
market conditions.
INVESTMENT LIMITATIONS
The following restrictions may not be changed with respect to any Portfolio
without the approval of the majority of outstanding voting securities of that
Portfolio (which, under the Investment Company Act and the rules thereunder and
as used in the Prospectus and this Statement of Additional Information, means
the lesser of (1) 67% of the units of that Portfolio present at a meeting if the
holders of more than 50% of the outstanding units of that Portfolio are present
in person or by proxy, or (2) more than 50% of the outstanding units of that
Portfolio). Investment restrictions that involve a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an acquisition
or encumbrance of securities or assets of, or borrowings by or on behalf of, a
Portfolio, with the exception of borrowings permitted by Investment Restriction
(3).
Accordingly, the Trust may not, on behalf of any Portfolio:
(1) make any investment inconsistent with the Portfolio's
classification as a diversified company under the Investment Company Act of
1940, as amended ("the Act"). This restriction does not, however, apply to
any Portfolio classified as a non-diversified company under the Act.
(2) purchase securities if such purchase would cause more than 25% in
the aggregate of the market value of the total assets of a Portfolio to be
invested in the securities of one or more issuers having their principal
business activities in the same industry, provided that there is no
limitation with respect to, and each Portfolio reserves freedom of action,
when
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otherwise consistent with its investment policies, to concentrate its
investments in obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, obligations (other than commercial paper)
issued or guaranteed by U.S. banks and U.S. branches of U.S. or foreign
banks and repurchase agreements and securities loans collateralized by such
U.S. Government obligations or such bank obligations. For the purposes of
this restriction, state and municipal governments and their agencies,
authorities and instrumentalities are not deemed to be industries;
telephone companies are considered to be a separate industry from water,
gas or electric utilities; personal credit finance companies and business
credit finance companies are deemed to be separate industries; and wholly
owned finance companies are considered to be in the industry of their
parents if their activities are primarily related to financing the
activities of their parents. Notwithstanding the foregoing, the ILA Money
Market Portfolio will invest more than 25% of the value of its total assets
in bank obligations (whether foreign or domestic) except that if adverse
economic conditions prevail in the banking industry the ILA Money Market
Portfolio may, for defensive purposes, temporarily invest less than 25% of
the value of its total assets in bank obligations.
(3) borrow money, except (a) that the Portfolio may borrow from banks
(as defined in the Act) or through reverse repurchase agreements in amounts
up to 33 1/3% of its total assets (including the amount borrowed), (b) the
Portfolio may, to the extent permitted by applicable law, borrow up to an
additional 5% of its total assets for temporary purposes, (c) the Portfolio
may obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities and (d) the Portfolio may
purchase securities on margin to the extent permitted by applicable law.
(4) make loans, except (a) through the purchase of debt obligations in
accordance with each Portfolio's investment objective and policies, (b)
through repurchase agreements with banks, brokers, dealers and other
financial institutions, and (c) loans of securities.
(5) underwrite securities issued by others, except to the extent that
the sale of portfolio securities by the Portfolio may be deemed to be an
underwriting.
(6) purchase, hold or deal in real estate, although the Portfolio may
purchase and sell securities that are secured by real estate or interests
therein, securities of real estate investment trusts and mortgage-related
securities and may hold and sell real estate acquired by the Portfolio as a
result of the ownership of securities.
(7) invest in commodities or commodity contracts, except that the
Portfolio may invest in currency and financial
44
<PAGE>
instruments and contracts that are commodities or commodity contracts.
(8) issue senior securities to the extent such issuance would violate
applicable law.
Each Portfolio may, notwithstanding any other fundamental investment
restriction or policy, invest some or all of its assets in a single open-end
investment company or series thereof with substantially the same investment
objectives, restrictions and policies as the Portfolio.
As money market funds, the Portfolios must also comply with Rule 2a-7 under
the Investment Company Act. Amendments to Rule 2a-7 have been proposed and are
expected to be effective at some time in 1997. The following assumes that such
amendments are in effect as currently proposed. While a detailed and technical
Rule, Rule 2a-7 has three basic requirements: portfolio maturity, portfolio
quality and portfolio diversification. Portfolio maturity. Rule 2a-7 requires
that the maximum maturity of any security in a Portfolio's portfolio may not
exceed 397 days and a Portfolio's average portfolio maturity may not exceed 90
days. Portfolio quality. A money market fund may only invest in First Tier and
Second Tier securities (as defined in the Rule and the Prospectus). Each
Portfolio, other than the Tax-Exempt Portfolios, as a matter of non-fundamental
policy only invests in First Tier securities. Portfolio diversification. The
Prime Obligations, Government, Treasury Obligations, Money Market, Federal,
Treasury Instruments and Tax-Exempt Diversified Portfolios may not invest more
than 5% of their total assets in the securities of any one issuer (except U.S.
Government securities, repurchase agreements collateralized by such securities
and certain securities subject to a guarantee or unconditional demand feature).
Each of such Portfolios may, however, invest up to 25% of its total assets in
the First Tier Securities of a single issuer for a period of up to three
business days after the purchase thereof. Tax-Exempt New York and Tax-Exempt
California Portfolios, with respect to 75% of their respective total assets, may
not invest more than 5% of their total assets in the securities of any one
issuer (except U.S. Government securities, repurchase agreements collateralized
by such securities and certain securities subject to a guarantee or
unconditional demand feature); provided that such funds may not invest more than
5% of their respective total assets in the securities of a single issuer unless
the securities are First Tier securities. Immediately after the acquisition of
any put (i.e., the right to sell the security within a specified period at a
price equal to its amortized cost), with respect to 75% of the assets of a
Portfolio, no more than 10% of the Portfolio's total assets may be invested in
securities issued by or subject to puts issued by the same issuer. In the case
of the Tax-Exempt Portfolios (which are the only Portfolios that invest in
Second Tier securities), immediately after the acquisition of a put that is a
Second Tier security, no more than 5% of the Tax-Exempt Portfolio's total assets
may be invested in securities or puts issued by the institution that issued the
put. The Tax-Exempt Portfolios' investment in Second Tier securities that are
conduit
45
<PAGE>
securities, which are municipal securities involving an agreement or arrangement
other than the issuer of the municipal security, that are not subject to an
unconditional demand feature, may not exceed 5% of the Portfolio's total assets
and the Portfolio's investment in such conduit securities issued by any issuer
may not exceed 1% of the Portfolio's total assets. Securities which are rated
in the highest short-term rating category by at least two Nationally Recognized
Statistical Rating Organizations ("NRSROs"), or if only one NRSRO has assigned a
rating, by that NRSRO, are "First Tier Securities". Securities rated in the top
two short-term rating categories by at least two NRSROs, but which are not First
Tier Securities are "Second Tier Securities." NRSROs include S&P, Moody's,
Fitch Investors Services, Inc., Duff and Phelps, Inc., IBCA Limited and its
affiliate IBCA Inc., and Thomson BankWatch, Inc. For a description of their
rating categories, see Appendix A.
"Value" for the purposes of all investment restrictions shall mean the
value used in determining a Portfolio's net asset value. "U.S. Government
securities" shall mean securities issued or guaranteed by the U.S. Government or
any of its agencies, authorities or instrumentalities.
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers of the Trust is set
forth below. Trustees and officers deemed to be "interested persons" of the
Trust for purposes of the Investment Company Act are indicated by an asterisk.
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ---------------------------------- ------------------------------------------------------ --------------------------------
<S> <C> <C>
Ashok N. Bakhru, 53 Chairman Executive Vice President -
1325 Ave. of Americas & Trustee Finance and Administration
NY, NY 10019 Chief Financial Officer, Coty Inc.
(since April 1996); President, ABN
Associates (June 1994 to April 1996);
Senior Vice President of Scott Paper
Company until June 1994;
Director of Arkwright Mutual
Insurance Company; Trustee of
International House of
Philadelphia; Member of Cornell
University Council; Trustee of
the Walnut Street Theater.
*David B. Ford, 51 Trustee Managing Director, Goldman
One New York Plaza Sachs (since 1996); General
New York, NY 10004 Partner, Goldman Sachs (1986-1996); Co-
Head of GSAM (since December 1994).
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ---------------------- ---------- ---------------------------
<S> <C> <C>
*John P. McNulty, 44 Trustee Managing Director, Goldman
One New York Plaza Sachs (since 1996); General
New York, NY 10004 Partner of Goldman Sachs (1990-1994 and
1995-1996); Co-Head of GSAM (since November
1995); Limited Partner of Goldman Sachs
(1994 to November 1995).
*Mary P. McPherson, 60 Trustee President of Bryn Mawr College
Taylor Hall (since 1978); Director of Josiah
Bryn Mawr, PA 19010 Macy, Jr. Foundation (since
1977); Director of the Philadelphia
Contributionship (since 1985); Director of
Amherst College (since 1986); Director of
Dayton Hudson Corporation (since 1988);
Director of the Spencer Foundation (since
1993); and member of PNC Advisory Board
(since 1993).
*Alan A. Shuch, 48 Trustee Limited Partner, Goldman Sachs
One New York Plaza (since 1994); Director and
New Yor, NY 10004 Vice President of Goldman Sachs Funds
Management, Inc. (from April 1990 to
November 1994); President and Chief
Operating Officer, GSAM (from September
1988 to November 1994).
Jackson W. Smart, 66 Trustee Chairman, Executive Committee, One
Plaza Northfield First Commonwealth, Inc. (a
#218 managed dental care company),
Northfield, IL 60093 (since January 1996); Chairman and Chief
Executive Officer, MSP Communications Inc.
(a company engaged in radio broadcasting)
(since November 1988); Director, Federal Ex
press Corporation (since 1976), Evanston
Hospital Cor poration (since 1980), First
Commonwealth, Inc. (since 1988) and North
American Pri vate Equity Group (a venture
capital fund).
William H. Springer, 67 Trustee Vice Chairman and Chief
701 Morningside Drive Financial and Administrative
Lake Forest, IL 60045 Officer of Ameritech (a tele
communications holding
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
company) (February 1987 to June 1991);
Director, Walgreen Co. (a retail drug store
business); Director of Baker, Fentress & Co.
(a closed-end, management investment company).
Richard P. Strubel, 57 Trustee Managing Director, Tandem Partners, Inc.
70 West Madison St. (since 1990); President and Chief Executive
Suite 1400 Officer, Microdot, Inc. (a diversified
Chicago, IL 60602 manufacturer of fastening systems and
connectors)(January 1984 to October 1994).
*Douglas C. Grip, 35 Trustee Vice President, Goldman Sachs
One New York Plaza & President (since May 1996); President,
New York, NY 10004 MFS Retirement Services Inc.,
of Massachusetts Financial
Services(prior thereto).
*Scott M. Gilman, 37 Treasurer Director, Mutual Funds Admin-
One New York Plaza istration, GSAM (since April
New York, NY 10004 1994); Assistant Treasurer,
Goldman Sachs Funds Management,
Inc. (since March 1993); Vice
President, Goldman Sachs (since
March 1990).
*John M. Perlowski, 32 Assistant Vice President, Goldman Sachs
One New York Plaza Treasurer (since July 1995); Director,
New York, NY 10004 Investors Bank and Trust
Company (November 1993 to July
1995); Audit Manager of Arthur
Andersen LLP (prior thereto).
*Pauline Taylor, 50 Vice Vice President of Goldman
4900 Sears Tower President Sachs (since June 1992);
Chicago, IL 60606 Director, Shareholder
Servicing of GSAM (since June 1992).
*John W. Mosior, 58 Vice Vice President, Goldman Sachs
4900 Sears Tower President and Manager of Shareholder
Chicago, IL 60606 Servicing of GSAM (since November 1989).
*Nancy L. Mucker, 47 Vice Vice President, Goldman Sachs;
4900 Sears Tower President Manager of Shareholder Ser-
Chicago, IL 60606 vicing of GSAM (since November 1989).
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
*Michael J. Richman, 36 Secretary Associate General Counsel of
85 Broad Street GSAM (since February 1994);
New York, NY 10004 Vice President and Assistant
General Counsel of Goldman Sachs (since June
1992); Coun sel to the Funds Group, GSAM
(since June 1992); Partner, Hale and Dorr
(September 1991 to June 1992).
*Howard B. Surloff, 31 Assistant Assistant General Counsel and
85 Broad Street Secretary Vice President, Goldman Sachs
New York, NY 10004 (since November 1993 and May 1994,
respectively ); Counsel to the Funds Group,
GSAM (since November 1993); Associate of
Shereff, Friedman, Hoffman & Goodman (prior
thereto).
*Valerie A. Zondorak, 31 Assistant Vice President, Goldman Sachs
85 Broad Street Secretary (since March 1997); Counsel to
New York, NY 10004 the Funds Group, GSAM (since
March 1997); Associate of Shereff Friedman,
Hoffman & Goodman (prior thereto).
*Steven E. Hartstein, 33 Assistant Legal Products Analyst,
85 Broad Street Secretary Goldman Sachs (June 1993 to
New York, NY 10004 present); Funds Compliance
Officer, Citibank Global Asset Management
(August 1991 to June 1993).
*Deborah Farrell, 25 Assistant Legal Assistant, Goldman
85 Broad Street Secretary Sachs (since January 1994).
New York, NY 10004 Formerly at Cleary Gottlieb,
Steen and Hamilton.
*Kaysie P. Uniacke, 36 Assistant Vice President and Senior
One New York Plaza Secretary Portfolio Manager, GSAM
New York, NY 10004 (since 1988).
*Elizabeth D.
Anderson, 27 Assistant Portfolio Manager, GSAM (since
One New York Plaza Secretary April 1996); Junior Portfolio
New York, NY 10004 Manager, GSAM (1995-1996);
Funds Trading Assistant, GSAM (1993-1995);
Compliance Analyst, Prudential Insurance
(1991-1993).
</TABLE>
49
<PAGE>
Each interested Trustee and officer holds comparable positions with
certain other investment companies of which Goldman Sachs, GSAM or an affiliate
thereof is the investment adviser, administrator and/or distributor. As of
April 1, 1997, the Trustees and officers of the Trust as a group owned less than
1% of the outstanding units of beneficial interest of each of the Portfolios.
The Trust pays each of its Trustees, other than those who are "interested
persons" of Goldman Sachs a fee for each Trustee meeting attended and an annual
fee. Such Trustees are also reimbursed for travel expenses incurred in
connection with attending such meetings.
50
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the fiscal year ended December 31,
1996:
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits from Goldman
Aggregate Accrued as Sachs Funds
Compensation Part of (including
from the Portfolios' the
Name of Trustee Portfolios Expenses Portfolios)*
- --------------- ---------- -------- ------------
<S> <C> <C> <C>
Paul C. Nagel, Jr.** $18,150 $0 $62,450
Ashok N. Bakhru $22,729 $0 $69,299
Marcia L. Beck*** $ 0 $0 $ 0
David B. Ford $ 0 $0 $ 0
Alan A. Shuch $ 0 $0 $ 0
Jackson W. Smart $18,893 $0 $58,954
William H. Springer $18,893 $0 $58,954
Richard P. Strubel $18,893 $0 $58,954
- --------------
</TABLE>
* The Goldman Sachs Funds consisted of 29 mutual funds, including the
nine portfolios, on December 31, 1996.
** Retired as of June 30, 1996.
*** Resigned as President and Trustee Trust on May 1, 1996.
51
<PAGE>
THE ADVISER, DISTRIBUTOR AND
TRANSFER AGENT
THE ADVISER
GSAM, a separate operating division of Goldman Sachs, acts as the
investment adviser to the Portfolios. Under the Advisory Agreement between
Goldman Sachs on behalf of GSAM and the Trust on behalf of the Portfolios, GSAM,
subject to the supervision of the Board of Trustees of the Trust and in
conformity with the stated policies of each Portfolio, acts as investment
adviser and directs the investments of the Portfolios. In addition, GSAM
administers the Portfolios' business affairs and, in connection therewith,
furnishes the Trust with office facilities and (to the extent not provided by
the Trust's custodian, transfer agent, or other organizations) clerical
recordkeeping and bookkeeping services and maintains the financial and account
records required to be maintained by the Trust. As compensation for these
services and for assuming expenses related thereto, the Trust pays GSAM a fee,
computed daily and paid monthly at an annual rate of .35% of each Portfolio's
average daily net assets. GSAM has agreed to reduce or otherwise limit certain
other expenses (excluding fees payable to Service Organizations, taxes,
interest, brokerage and litigation, indemnification and other extraordinary
expenses) of each Portfolio, on an annualized basis, to .06% of the average
daily net assets of the Treasury Instruments, Money Market, Federal, Tax-Exempt
Diversified and Tax-Exempt New York Portfolios; and to .07% of the average daily
net assets of the Prime Obligations, Treasury Obligations, Government and Tax-
Exempt California Portfolios. The amount of such reductions or limits, if any,
are calculated monthly and are based on the cumulative difference between a
Portfolio's estimated annualized expense ratio and the expense limit for that
Portfolio. This amount shall be reduced by any prior payments related to the
current fiscal year. GSAM has also voluntarily agreed to waive a portion of its
advisory fee for the Treasury Instruments, Money Market, Federal, Tax-Exempt
Diversified and Tax-Exempt New York Portfolios during the fiscal year ended
December 31, 1996.
The Trust, on behalf of each Portfolio, is responsible for all
expenses other than those expressly borne by GSAM under the Portfolios' Advisory
Agreement. The expenses borne by Units of each Portfolio include, without
limitation, the fees payable to GSAM, the fees and expenses of the Portfolios'
custodian, fees and expenses of the Portfolios' transfer agent, filing fees for
the registration or qualification of Units under federal or state securities
laws, expenses of the organization of the Portfolios, taxes (including income
and excise taxes, if any), interest, costs of liability insurance, fidelity
bonds, indemnification or contribution, any costs, expenses or losses arising
out of any liability of, or claim for damages or other relief asserted against,
the Portfolios for violation of any law, legal and auditing and tax fees and
expenses (including the cost of legal and certain accounting services rendered
by employees of Goldman Sachs with respect to the
52
<PAGE>
Portfolios), expenses of preparing and setting in type prospectuses, statements
of additional information, proxy material, reports and notices, the printing and
distribution of the same to Unitholders and regulatory authorities, its
proportionate share of the compensation and expenses of its "non-interested"
Trustees, and extraordinary expenses incurred by the Portfolios.
The Advisory Agreement entered into on behalf of the Portfolios was
most recently approved by the Board of Trustees, including the"non-interested"
Trustees, on April 23, 1997 and by the unitholders of each Portfolio (other than
the Treasury Instruments and Tax-Exempt New York Portfolios) on April 19, 1990
and by the unitholders of the Treasury Instruments and Tax-Exempt New York
Portfolios on June 3, 1991. The Advisory Agreement will remain in effect until
June 30, 1998, and will continue in effect thereafter only if such continuance
is specifically approved at least annually by a majority of the Trustees or by a
vote of a majority of the outstanding voting securities of the particular
Portfolio, as defined in the Investment Company Act, and, in either case, by a
majority of "non-interested" Trustees.
For the fiscal years ended December 31, 1996, December 31, 1995 and
December 31, 1994 the amount of the advisory fee incurred by each Portfolio was
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Prime Obligations Portfolio $5,185,990 $6,728,074 $9,135,344
Money Market Portfolio 2,955,074 2,618,275 2,663,551
Treasury Obligations Portfolio 3,157,511 3,206,490 3,545,307
Treasury Instruments Portfolio 1,555,342 1,079,236 687,965
Government Portfolio 2,509,206 3,259,056 4,804,362
Federal Portfolio 5,426,430 4,543,196 3,396,214
Tax-Exempt Diversified Portfolio 3,850,742 3,795,451 4,372,766
Tax-Exempt California Portfolio 1,410,751 1,030,447 867,058
Tax-Exempt New York Portfolio 266,835 234,853 150,735
</TABLE>
GSAM agreed not to impose a portion of its advisory fees for the fiscal years
ended December 31, 1996, December 31, 1995 and December 31, 1994 with respect to
the Money Market, Treasury Instruments, Federal, Tax-Exempt Diversified and Tax-
Exempt New York Portfolios. Had such fees been imposed, the following
additional fees would have been incurred for the periods indicated:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Money Market Portfolio $ 492,512 $ 436,325 $ 443,925
Treasury Instruments Portfolio 2,073,789 1,438,992 917,292
Federal Portfolio 4,069,823 3,407,655 2,547,168
Tax-Exempt Diversified Portfolio 1,540,297 1,518,129 1,749,116
Tax-Exempt New York Portfolio 92,366 109,464 123,050
</TABLE>
53
<PAGE>
In addition, GSAM assumed certain expenses related to the operations of each
Portfolio during various periods of 1996, 1995 and 1994 to the extent such
expenses would have caused each Portfolio's total expenses to exceed, on an
annualized basis, certain contractual or voluntary expense limitations. Had
these expenses not been assumed, the following additional expenses would have
been incurred for such years:
1996 1995 1994
---- ---- ----
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Prime Obligations Portfolio $234,432 $347,317 $635,085
Money Market Portfolio 243,590 135,715 301,326
Treasury Obligations Portfolio 212,886 203,882 371,456
Treasury Instruments Portfolio 220,794 223,652 150,525
Government Portfolio 231,536 276,785 526,310
Federal Portfolio 452,463 302,153 326,417
Tax-Exempt Diversified Portfolio 24,367 239,829 217,296
Tax-Exempt California Portfolio 22,092 19,625 34,612
Tax-Exempt New York Portfolio 16,029 32,403 51,675
</TABLE>
The Advisory Agreement provides that GSAM shall not be liable to a
Portfolio for any error of judgment by GSAM or for any loss sustained by the
Portfolio except in the case of GSAM's willful misfeasance, bad faith, gross
negligence or reckless disregard of duty. Each Portfolio may use any name
derived from the name "Goldman Sachs" only so long as the Advisory Agreement
remains in effect. The Advisory Agreement also provides that it shall terminate
automatically if assigned and that it may be terminated with respect to any
particular Portfolio without penalty by vote of a majority of the Trustees or a
majority of the outstanding voting securities of that Portfolio on 60 days'
written notice to GSAM or by GSAM without penalty at any time on 90 days'
written notice to the Trust.
Under the Advisory Agreement, GSAM is also responsible for the
administration of each Portfolio's business affairs subject to the supervision
of the Trustees and, in connection therewith, furnishes each Portfolio with
office facilities and is responsible for ordinary clerical, recordkeeping and
bookkeeping functions, to the extent not provided pursuant to the Portfolios'
custodian agreements; preparation and filing of documents required to comply
with federal and state securities laws; supervising the activities of the
Portfolios' custodian and transfer agent; providing assistance in connection
with meetings of the Trustees and unitholders; and other administrative services
necessary to conduct the Trust's business.
In managing the Tax-Exempt Diversified Portfolio, the Tax-Exempt California
Portfolio and the Tax-Exempt New York Portfolio, GSAM will draw upon the
extensive research generated by Goldman Sachs' Municipal Credit Group. The
Credit Group's research team continually reviews current information regarding
the issuers of municipal and other tax-exempt securities, with particular focus
on long-term creditworthiness, short-term liquidity, debt service
54
<PAGE>
costs, liability structures, and administrative and economic characteristics.
THE DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs acts as principal underwriter and distributor of each
Portfolio's units. The Distribution Agreement between Goldman Sachs and the
Trust was most recently approved by the Trustees on April 23, 1997. Goldman
Sachs retained approximately $300 of commissions on redemptions of Class B
shares during 1996. Goldman Sachs also serves as the Portfolios' transfer
agent. Goldman Sachs provides customary transfer agency services to the
Portfolios, including the handling of unitholder communications, the processing
of unitholder transactions, the maintenance of unitholder account records,
payment of dividends and distributions and related functions. For these
services, Goldman Sachs receives .04% (on an annualized basis) of the average
daily net assets with respect to each Portfolio (other than the Prime
Obligations Portfolio). With respect to the Prime Obligations Portfolio,
Goldman Sachs is entitled to receive a fee from the Portfolio equal to the
classes proportionate share of the total transfer agency fees borne by the
Portfolio, which are equal to $12,000 per year plus $7.50 per account, together
with out-of-pocket expenses (including those out of pocket expenses payable to
servicing agents) applicable to ILA Class B and ILA Class C Units and .04% of
the average daily net assets of the other classes of the Prime Obligations
Portfolio. Goldman Sachs may from time to time agree that the fee it would
otherwise be entitled to receive under its transfer agency agreement will be
reduced.
For the fiscal years ended December 31, 1996, December 31, 1995 and December 31,
1994 the Portfolios incurred transfer agency fees as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Prime Obligations Portfolio $ 592,685 $768,923 $1,044,039
Money Market Portfolio 394,010 349,060 355,140
Treasury Obligations Portfolio 360,858 366,456 405,178
Treasury Instruments Portfolio 414,758 287,798 183,457
Government Portfolio 286,766 372,463 549,070
Federal Portfolio 1,085,286 908,708 679,243
Tax-Exempt Diversified Portfolio 616,119 607,252 699,643
Tax-Exempt California Portfolio 161,229 117,765 99,092
Tax-Exempt New York Portfolio 41,051 39,298 32,139
</TABLE>
Goldman Sachs is one of the largest international investment banking firms
in the United States. Founded in 1869, Goldman Sachs is a major investment
banking and brokerage firm providing a broad range of financing and investment
services both in the United States and abroad. As of November 29, 1996, Goldman
Sachs and its consolidated subsidiaries had assets of approximately $152 billion
and partners' capital of $5.2 billion. Goldman Sachs became registered as an
investment adviser in 1981. As of March 24, 1997, Goldman Sachs, together with
its affiliates, acted as investment
55
<PAGE>
adviser, administrator or distributor for approximately $104.9 billion in total
assets.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED
-------------------------------------------------------------------------
BY GOLDMAN SACHS. The involvement of the Adviser 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.
Goldman Sachs and its affiliates, including, without limita-tion, the
Adviser and its advisory affiliates have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
objectives similar to those of the Portfolios and/or which engage in
transactions in the same types of securities, currencies and instruments as the
Portfolios. Goldman Sachs and its affiliates are major partici pants 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,
curren cies, and instruments in which the Portfolios invest. Such activities
could affect the prices and availability of the securities, currencies, and
instruments in which the Portfolios invest, which could have an adverse impact
on each Portfolio's performance. Such transactions, particularly in respect of
proprietary accounts or customer accounts other than those included in the
Adviser's and its advisory affiliates' asset management activities, will be
executed independently of the Portfolios' transactions and thus at prices or
rates that may be more or less favorable. When the Adviser and its advisory
affiliates seek to purchase or sell the same assets for their managed accounts,
including the Portfolios, the assets actually purchased or sold may be allocated
among the accounts on a basis determined in its good faith discretion to be
equitable. In some cases, this system may adversely affect the size or the
price of the assets purchased or sold for the Portfolios.
From time to time, the Portfolios' 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 peri ods, for example, when the Adviser, and/or its 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 Adviser and/or its affiliates are performing services or when
position limits have been reached.
In connection with their management of the Portfolios, the Adviser may have
access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Adviser will not be under
any obligation, however, to effect transactions on behalf of the Portfolios in
accordance with such analysis and models. In addition, neither Goldman Sachs
56
<PAGE>
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 Portfolios and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Portfolios. The proprietary activities or portfolio strategies of Goldman Sachs
and its affiliates or the activities or strategies used for accounts managed by
them or other customer accounts could conflict with the transactions and
strategies employed by the Adviser in managing the Portfolios.
The results of each Portfolio's investment activities may differ
significantly from the results achieved by the Adviser and its affiliates for
their proprietary accounts or accounts (includ ing 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 Portfolio. Moreover, it is possible that a Portfolio 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 Portfolio's
activities, but will not be involved in the day-to-day management of such
Portfolio. In such instances, those individuals may, as a result, obtain
information regarding the Portfolio's proposed investment activities which is
not generally available to the public. In addition, by virtue of their affili
ation 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 Portfolio invests.
In addition, certain principals and certain of the employees of the Adviser
are also principals or employees of Goldman Sachs or its 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 Adviser may enter into transactions and invest in instru ments 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 Portfolios, and such party may have no incentive to assure
that the Portfolios 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 Portfolios invest or which may be based on the
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<PAGE>
performance of a Portfolio. The Portfolios 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 Portfolios. At times,
these activities may cause departments of the Firm to give advice to clients
that may cause these clients to take actions adverse to the interest of the
client. To the extent affiliated transactions are permitted, the Portfolios
will deal with Goldman Sachs and its affiliates on an arm's-length basis.
Each Portfolio will be required to establish business relationships with
its counterparties based on the Portfolio'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 Portfolio's establishment of its business
relationships, nor is it expected that a Portfolio's counterparties will rely on
the credit of Goldman Sachs or any of its affiliates in evaluating the
Portfolio'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 Portfolio in order to increase the
assets of the Portfolio. Increasing a Portfolio's assets may enhance investment
flexibility and diversification and may contribute to economies of scale that
tend to reduce a Portfolio's expense ratio. Goldman Sachs reserves the right to
redeem at any time some or all of the shares of a Portfolio acquired for its own
account. A large redemption of shares of a Portfolio by Goldman Sachs could
significantly reduce the asset size of the Portfolio, which might have an
adverse effect on a Portfolio's investment flexibility, portfolio
diversification and expense ratio. Goldman Sachs will consider the effect of
redemptions on a Portfolio and other unitholders in deciding whether to redeem
its units.
PORTFOLIO TRANSACTIONS
GSAM places the portfolio transactions of the Portfolios and of all other
accounts managed by GSAM for execution with many firms. GSAM uses its best
efforts to obtain execution of portfolio transactions at prices which are
advantageous to each Portfolio and at reasonable competitive spreads or (when a
disclosed commission is being charged) at reasonably competitive commission
rates. In seeking such execution, GSAM will use its best judgment in evaluating
the terms of a transaction, and will give consideration to various relevant
factors, including without limitation the size and type of the transaction, the
nature and character of the market for the security, the confidentiality, speed
and certainty of effective execution required for the transaction, the general
execution and operational capabilities of the broker-dealer, the general
execution and operational capabilities of the firm, the reputation, reliability,
experience and financial condition of the firm, the value and quality of the
services rendered by the firm in this and other transactions, and the
reasonableness of the spread
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or commission, if any. Securities purchased and sold by the Portfolios are
generally traded in the over-the-counter market on a net basis (i.e., without
commission) through broker-dealers and banks acting for their own account rather
than as brokers, or otherwise involve transactions directly with the issuer of
such securities.
Goldman Sachs is active as an investor, dealer and/or underwriter in many
types of municipal and money market instruments. Its activities in this regard
could have some effect on the markets for those instruments which the Portfolios
buy, hold or sell. An order has been granted by the SEC under the Investment
Company Act which permits the Portfolios to deal with Goldman Sachs in
transactions in certain taxable securities in which Goldman Sachs acts as
principal. As a result, the Portfolios may trade with Goldman Sachs as
principal subject to the terms and conditions of such exemption.
Under the Investment Company Act, the Portfolios are prohibited from
purchasing any instrument of which Goldman Sachs is a principal underwriter
during the existence of an underwriting or selling syndicate relating to such
instrument, absent an exemptive order (the order referred to in the preceding
paragraph will not apply to such purchases) or the adoption of and compliance
with certain procedures under such Act. The Trust has adopted procedures which
establish, among other things, certain limitations on the amount of debt
securities that may be purchased in any single offering and on the amount of the
Trust's assets that may be invested in any single offering. Accordingly, in
view of Goldman Sachs' active role in the underwriting of debt securities, a
Portfolio's ability to purchase debt securities in the primary market may from
time to time be limited.
In certain instances there may be securities which are suitable for more
than one Portfolio as well as for one or more of the other clients of GSAM.
Investment decisions for each Portfolio and for GSAM's other clients are made
with a view to achieving their respective investment objectives. It may develop
that a particular security is bought or sold for only one client even though it
might be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more other clients
are selling that same security. Some simultaneous transactions are inevitable
when several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When two or more clients are simultaneously engaged in
the purchase or sale of the same security, the securities are allocated among
clients in a man ner believed to be equitable to each. It is recognized that in
some cases this system could have a detrimental effect on the price or volume of
the security in a particular transaction as far as a Portfolio is concerned.
Each Portfolio believes that over time its ability to participate in volume
transactions will produce better executions for the Portfolios.
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<PAGE>
During the fiscal year ended December 31, 1996, the Trust acquired and sold
securities of its regular broker/dealers: Bear Stearns, Chase Manhattan, Daiwa
Securities, Lehman, Morgan Stanley, Smith Barney Inc., Swiss Bank Corp. and
Union Bank of Switzerland.
As of December 31, 1996, the Prime Obligations Portfolio held the following
amounts of securities of its regular broker/dealers; as defined in Rule 10b-1
under the Investment Company Act, or their parents ($ in thousands): Chase
Manhattan ($57,038), Smith Barney ($30,000), Morgan Stanley ($58,323), and Swiss
Bank Corp. ($3,806).
As of December 31, 1996, the Money Market Portfolio held the following
amounts of securities of its regular broker/dealers; as defined in Rule 10b-1
under the Investment Company Act, or their parents ($ in thousands): Bear
Stearns ($34,778), Morgan Stanley ($70,359), Chase Manhattan ($30,388), and
Swiss Bank Corp. ($13,730).
As of December 31, 1996, the Treasury Obligations Portfolio held the
following amounts of securities of its regular broker/dealers; as defined in
Rule 10b-1, or their parents ($ in thousands): Bear Stearns Companies ($35,000),
Daiwa Securities ($35,000), Lehman ($35,000), Smith Barney Inc. ($30,000), Union
Bank of Switzerland ($30,000), Chase Manhattan ($107,833), Morgan Stanley
($129,400), and Swiss Bank Corp. ($58,316).
As of December 31, 1996, the Government Portfolio held the following
amounts of securities of its regular broker/dealers; as defined in Rule 10b-1,
or their parents ($ in thousands): Bear Stearns Companies ($30,000), Daiwa
Securities ($30,000), Lehman ($30,000), Morgan Stanley ($120,363), Chase
Manhattan ($100,303), and Swiss Bank Corp. ($54,244).
NET ASSET VALUE
The net asset value per unit of each Portfolio is determined by the
Portfolios' custodian as of the close of regular trading on the New York Stock
Exchange (normally 4:00 p.m. New York time) on each Business Day. A Business
Day means any day on which the New York Stock Exchange is open, except for days
on which Chicago, Boston or New York banks are closed for local holidays. Such
holidays include: New Year's Day, Martin Luther King Day, Presi dent's Day, Good
Friday, Memorial Day, the Fourth of July, Labor Day, Columbus Day, Veteran's
Day, Thanksgiving Day and Christmas Day.
Each Portfolio's securities are valued using the amortized cost method of
valuation in an effort to maintain a constant net asset value of $ 1.00 per
unit, which the Board of Trustees has determined to be in the best interest of
the Portfolios and their unitholders. This method involves valuing a security
at cost on the date of acquisition and thereafter assuming a constant accretion
of a discount or amortization of a premium to maturity, regardless of the impact
of fluctuating interest rates on the market value of the instrument. While this
method provides
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certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price a Portfolio
would receive if it sold the instrument. During such periods, the yield to an
investor in a Portfolio may differ somewhat from that obtained in a similar
investment company which uses available market quotations to value all of its
portfolio securities. During periods of declining interest rates, the quoted
yield on units of a Portfolio may tend to be higher than a like computation made
by a fund with identical investments utilizing a method of valuation based upon
market prices and estimates of market prices for all of its portfolio
instruments. Thus, if the use of amortized cost by a Portfolio resulted in a
lower aggregate portfolio value on a particular day, a prospective investor in
the Portfolio would be able to obtain a somewhat higher yield if he or she
purchased units of the Portfolio on that day, than would result from investment
in a fund utilizing solely market values, and existing investors in the
Portfolio would receive less investment income. The converse would apply in a
period of rising interest rates.
The Trustees have established procedures designed to stabilize, to the
extent reasonably possible, each Portfolio's price per unit as computed for the
purpose of sales and redemptions at $1.00. Such procedures include review of
each Portfolio by the Trustees, at such intervals as they deem appropriate, to
determine whether the Portfolio's net asset value calculated by using available
market quotations (or an appropriate substitute which reflects market
conditions) deviates from $1.00 per unit based on amortized cost, as well as
review of methods used to calculate the deviation. If such deviation exceeds
1/2 of 1%, the Trustees will promptly consider what action, if any, will be
initiated. In the event the Trustees determine that a deviation exists which
may result in material dilution or other unfair results to investors or existing
unitholders, they will take such corrective action as they regard to be
necessary and appropriate, including the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity; withholding part or all of dividends or payment of distributions from
capital or capital gains; redemptions of units in kind; or establishing a net
asset value per unit by using available market quotations or equivalents. In
addition, in order to stabilize the net asset value per unit at $1.00 the
Trustees have the authority (1) to reduce or increase the number of units
outstanding on a pro rata basis, and (2) to offset each unitholder's pro rata
portion of the deviation between the net asset value per unit and $1.00 from the
unitholder's accrued dividend account or from future dividends. Each Portfolio
may hold cash for the purpose of stabilizing its net asset value per unit.
Holdings of cash, on which no return is earned, would tend to lower the yield on
such Portfolio's units.
In order to continue to use the amortized cost method of valuation for each
Portfolio's investments, the Portfolios must comply with Rule 2a-7. See
"Investment Restrictions."
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The proceeds received by each Portfolio for each issue or sale of its
units, and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to such Portfolio and constitute the underlying assets of that Portfolio. The
underlying assets of each Portfolio will be segregated on the books of account,
and will be charged with the liabilities in respect to such Portfolio and with a
share of the general liabilities of the Trust. Expenses with respect to the
Portfolios are to be allocated in proportion to the net asset values of the
respective Portfolios except where allocations of direct expenses can otherwise
be fairly made. In addition, within each Portfolio, ILA Units, ILA
Administration Units, ILA Service Units and ILA Class B and Class C Units (Prime
Obligations Portfolio only) will be subject to different expense structures (see
"Organization and Capitalization").
REDEMPTIONS
The Trust may suspend the right of redemption of units of a Portfolio and
may postpone payment for any period: (i) during which the New York Stock
Exchange is closed other than customary weekend and holiday closings or during
which trading on the New York Stock Exchange is restricted, (ii) when the SEC
determines that a state of emergency exists which may make payment or transfer
not rea sonably practicable, (iii) as the SEC may by order permit for the
protection of the unitholders of the Trust or (iv) at any other time when the
Trust may, under applicable laws and regulations, suspend payment on the
redemption of the Portfolio's units.
The Trust agrees to redeem units of each Portfolio solely in cash up to the
lesser of $250,000 or 1% of the net asset value of the Portfolio during any 90-
day period for any one unitholder. The Trust reserves the right to pay other
redemptions, either total or partial, by a distribution in kind of securities
(instead of cash) from the applicable Portfolio's portfolio. The securities
distributed in such a distribution would be valued at the same value as that
assigned to them in calculating the net asset value of the units being redeemed.
If a unitholder receives a distribution in kind, he or she should expect to
incur transaction costs when he or she converts the securities to cash.
CALCULATION OF YIELD QUOTATIONS
Each Portfolio's yield quotations are calculated by a standard method
prescribed by the rules of the SEC. Under this method, the yield quotation is
based on a hypothetical account having a balance of exactly one unit at the
beginning of a seven-day period.
Yield, effective yield and tax-equivalent yield are calculated separately
for each class of units of a Portfolio. Each type of unit is subject to
different fees and expenses and may have differing yields for the same period.
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The yield quotation is computed as follows: the net change, exclusive of
capital changes (i.e., realized gains and losses from the sale of securities and
unrealized appreciation and depreciation), in the value of a hypothetical pre-
existing account having a balance of one unit at the beginning of the base
period is determined by dividing the net change in account value by the value of
the account at the beginning of the base period. This base period return is
then multiplied by 365/7 with the resulting yield figure carried to the nearest
100th of 1%. Such yield quotation shall take into account all fees that are
charged to a Portfolio.
Each Portfolio also may advertise a quotation of effective yield for a 7-
calendar day period. Effective yield is computed by compounding the
unannualized base period return determined as in the preceding paragraph by
adding 1 to that return, raising the sum to the 365/7 power and subtracting one
from the result, according to the following formula:
Effective Yield = [(base period return + 1)/365/7/] - 1
The Tax-Exempt Diversified, Tax-Exempt California, Tax-Exempt New York,
Federal and Treasury Instruments Portfolios may also advertise a tax-equivalent
yield which is computed by dividing that portion of a Portfolio's yield (as
computed above) which is tax-exempt by one minus a stated income tax rate and
adding the quotient to that portion, if any, of the yield of the Portfolio that
is not tax-exempt.
Unlike bank deposits or other investments which pay a fixed yield or return
for a stated period of time, the return for a Portfolio will fluctuate from time
to time and does not provide a basis for determining future returns. Return is
a function of portfolio quality, composition, maturity and market conditions as
well as of the expenses allocated to each Portfolio. The return of a Portfolio
may not be comparable to other investment alternatives because of differences in
the foregoing variables and differences in the methods used to value portfolio
securities, compute expenses and calculate return.
The yield, effective yield and tax-equivalent yield of each Portfolio with
respect to ILA Units, ILA Administration Units, ILA Service Units and ILA Class
B Units for the seven-day period ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Tax-
Effective Equivalent
Yield Yield Yield
----- --------- ----------
<S> <C> <C> <C>
Prime Obligations Portfolio:
ILA Units 5.12 5.25 N/A
ILA Administration Units 4.97 5.10 N/A
ILA Service Units 4.72 4.85 N/A
ILA Class B Units 4.12 4.25 N/A
Money Market Portfolio:
ILA Units 5.20 5.33 N/A
ILA Administration Units 5.05 5.18 N/A
</TABLE>
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<TABLE>
<S> <C> <C> <C>
ILA Service Units 4.80 4.93 N/A
Treasury Obligations Portfolio:
ILA Units 5.19 5.32 N/A
ILA Administration Units 5.04 5.17 N/A
ILA Service Units 4.79 4.92 N/A
Treasury Instruments Portfolio:
ILA Units 4.84 4.95 N/A
ILA Administration Units 4.69 4.80 N/A
ILA Service Units 4.44 4.55 N/A
Government Portfolio:
ILA Units 5.19 5.32 N/A
ILA Administration Units 5.04 5.17 N/A
ILA Service Units 4.79 4.92 N/A
Federal Portfolio:
ILA Units 5.15 5.28 N/A
ILA Administration Units 5.00 5.13 N/A
ILA Service Units 4.75 4.88 N/A
Tax-Exempt Diversified Portfolio:
ILA Units 3.58 3.64 5.93
ILA Administration Units 3.43 3.49 5.68
ILA Service Units 3.18 3.24 5.26
Tax-Exempt California Portfolio***:
ILA Units 3.47 3.53 5.75
ILA Administration Units 3.32 3.38 5.50
ILA Service Units** 3.07 3.13 5.08
Tax-Exempt New York Portfolio*
ILA Units 3.52 3.58 5.83
ILA Administration Units 3.37 3.43 5.58
ILA Service Units** 3.12 3.18 5.17
- -------------------------
</TABLE>
* 6.39%, 6.12% and 5.67% for the ILA Units, ILA Administration Units and ILA
Service Units, respectively, when taking New York State taxes into account,
and 6.72%, 6.43% and 5.96%, respectively, when taking New York City taxes
into account.
** Assuming such Units had been outstanding and were subject to maximum
administration or service fees.
*** 6.48%, 6.20% and 5.73% for the ILA Units, ILA Administration Units and ILA
Service Units, respectively, when taking California State taxes into account.
The information set forth in the foregoing table reflects certain fee
reductions and expense limitations voluntarily agreed to by the Adviser. See
"The Adviser, Distributor and Transfer Agent." In the absence of such fee
reductions and expense limitations, the yield of each Portfolio for the same
period would have been as follows:
<TABLE>
<CAPTION>
Tax-
Effective Equivalent
Yield Yield Yield
----- --------- ----------
<S> <C> <C> <C>
Prime Obligations Portfolio
ILA Units 5.10 5.23 N/A
ILA Administration Units 4.95 5.08 N/A
ILA Service Units 4.70 4.83 N/A
</TABLE>
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<TABLE>
<S> <C> <C> <C>
ILA Class B Units 4.10 4.23 N/A
Money Market Portfolio
ILA Units 5.15 5.28 N/A
ILA Administration Units 5.00 5.13 N/A
ILA Service Units 4.75 4.88 N/A
Treasury Obligations Portfolio
ILA Units 5.16 5.30 N/A
ILA Administration Units 5.01 5.15 N/A
ILA Service Units 4.76 4.90 N/A
Treasury Instruments Portfolio
ILA Units 4.62 4.73 N/A
ILA Administration Units 4.47 4.58 N/A
ILA Service Units 4.22 4.33 N/A
Government Portfolio
ILA Units 5.16 5.30 N/A
ILA Administration Units 5.01 5.15 N/A
ILA Service Units 4.76 4.90 N/A
Federal Portfolio
ILA Units 4.99 5.11 N/A
ILA Administration Units 4.84 4.96 N/A
ILA Service Units 4.59 4.71 N/A
Tax-Exempt Diversified Portfolio
ILA Units 3.48 3.54 5.76
ILA Administration Units 3.33 3.39 5.51
ILA Service Units 3.08 3.14 5.10
Tax-Exempt California Portfolio***
ILA Units 3.47 3.53 5.75
ILA Administration Units 3.32 3.38 5.50
ILA Service Units** 3.07 3.13 5.08
Tax-Exempt New York Portfolio*
ILA Units 3.42 3.48 5.66
ILA Administration Units 3.27 3.33 5.41
ILA Service Units** 3.02 3.08 5.00
- ------------------------------------------------------------------
</TABLE>
* 6.21%, 5.94% and 5.48% for the ILA Units, ILA Administration Units and ILA
Service Units, respectively, when taking New York State taxes into account,
and 6.53%, 6.24% and 5.77%, respectively, when taking New York City taxes
into account.
** Assuming such Units had been outstanding and were subject to maximum
administration or service fees.
*** 6.48%, 6.20% and 5.73% for the ILA Units, ILA Administration Units and ILA
Service Units, respectively, when taking the California State Taxes into
account.
The quotations of tax-equivalent yield set forth above for the seven-day
period ended December 31, 1996 are based on a federal marginal tax rate of
39.6%.
With respect to the Tax-Exempt California Portfolio, the California top
marginal State personal income tax rate of 9.30% is being assumed in addition to
the 39.6% federal tax rate, for a combined tax rate of 46.42%. With respect to
the Tax-Exempt New
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York Portfolio, the tax equivalent yields are being shown under three scenarios.
The first scenario assumes a federal marginal tax rate of 39.6%, the second
scenario assumes a New York top marginal State personal income tax rate of
6.85%, for a combined effective tax rate of 44.94%. The third scenario assumes
a New York City top marginal personal income tax rate of 4.46% in addition to
the above federal and New York State tax rates, for a combined effective tax
rate of 47.63%. The combined tax rates assume full deductibility of state and,
if applicable, city taxes in computing federal tax liability.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed or recommended 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 form a part of
such an asset allocation strategy. Such advertisements and information may also
include a discussion of GSAM's current economic outlook and domestic and
international market views and recommend periodic tactical modifications to
current asset allocation strategies. Such advertisements and information may
include other material which highlight or summarize the services provided in
support of an asset allocation program.
From time to time any Portfolio may publish an indication of its past
performance as measured by independent sources such as (but not limited to)
Lipper Analytical Services, Incorporated, Weisenberger Investment Companies
Service, Donoghue's Money Fund Report, Barron's, Business Week, Changing Times,
Financial World, Forbes, Money, Morningstar Mutual Funds, Micropal, Personal
Investor, Sylvia Porter's Personal Finance, and The Wall Street Journal.
The Trust may also advertise information which has been provided to the
NASD for publication in regional and local newspapers. In addition, the Trust
may from time to time advertise a Portfolio's performance relative to certain
indices and benchmark investments, including (without limitation): inflation and
interest rates, certificates of deposit (CDs), money market deposit accounts
(MMDAs), checking accounts, savings accounts and repurchase agreements. The
Trust may also compare a Portfolio's performance with that of other mutual funds
with similar investment objectives.
The composition of the investments in such mutual funds, comparative
indices and the characteristics of such benchmark investments are not identical
to, and in some cases are very different from, those of a Portfolio. Indices
and averages are generally unmanaged and the items included in the calculations
of such indices and averages may not be identical to the formulas used by a Fund
to calculate its performance data.
A Portfolio's performance data will be based on historical results and is
not intended to indicate future performance. A Portfolio's performance will
vary based on market conditions, portfolio expenses, portfolio investments and
other factors.
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Return for a Portfolio will fluctuate unlike certain bank deposits or other
investments which pay a fixed yield or return.
The Trust may also, at its discretion, from time to time make a list of a
Portfolio's holdings available to investors upon request. The Trust may from
time to time summarize the substance of discussions contained in shareholder
reports in advertisements and publish the Adviser's views as to markets, the
rationale for a Fund's investments and discussions of a Fund's current holdings.
In addition, from time to time, quotations from articles from financial and
other publications, such as those listed above, may be used in advertisements,
sales literature and in reports to unitholders.
TAX INFORMATION
Each Portfolio has qualified and has elected or intends to qualify and
elect to be treated and to qualify as a separate regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended, (the
"Code"). Such qualification does not involve supervision of management or
investment practices or policies by any governmental agency or bureau.
In order to qualify as a regulated investment company, each Portfolio must,
among other things, (a) derive at least 90% of its gross income for the taxable
year from dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of stock or securities or certain other
investments (the "90% Test"); (b) derive less than 30% of its gross income for
the taxable year from the sale or other disposition of stock or securities or
certain other investments held less than three months; and (c) diversify its
holdings so that, at the close of each quarter of its taxable year, (i) at least
50% of the market value of the Portfolio's total gross assets is represented by
cash and cash items (including receivables), U.S. Government securities,
securities of other regulated investment companies and other securities limited,
in respect of any one issuer, to an amount not greater in value than 5% of the
value of the Portfolio's total assets and not more than 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of the
Portfolio's total (gross) assets is invested in the securities (other than U.S.
Government securities and securities of other regulated investment companies) of
any one issuer or two or more issuers controlled by the Portfolio and engaged in
the same, similar or related trades or businesses. For purposes of these
requirements, participation interests will be treated as securities, and the
issuer will be identified on the basis of market risk and credit risk associated
with any particular interest. Certain payments received with respect to such
interests, such as commitment fees and certain facility fees, may not be treated
as income qualifying under the 90% test.
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Each Portfolio, as a regulated investment company, will not be subject to
federal income tax on any of its net investment income and net realized capital
gains that are distributed to unitholders with respect to any taxable year in
accordance with the Code's timing and other requirements, provided that the
Portfolio distributes at least 90% of its investment company taxable income
(generally, all of its net taxable income other than "net capital gain," which
is the excess of net long-term capital gain over net short-term capital loss)
for such year and, in the case of any Portfolio that earns tax-exempt interest,
at least 90% of the excess of the tax-exempt interest it earns over certain
disallowed deductions. A Portfolio will be subject to federal income tax at
regular corporate rates on any investment company taxable income or net capital
gain that it does not distribute for a taxable year. In order to avoid a non-
deductible 4% federal excise tax, each Portfolio must distribute (or be deemed
to have distributed) by December 31 of each calendar year at least 98% of its
taxable ordinary income for such year, at least 98% of the excess of its capital
gains over its capital losses (generally computed on the basis of the one-year
period ending on October 31 of such year), and all taxable ordinary income and
the excess of capital gains over capital losses for the previous year that were
not distributed in such year and on which the Portfolio paid no federal income
tax.
Dividends paid by a Portfolio from taxable net investment income (including
income attributable to accrued market discount and a portion of the discount on
certain stripped tax-exempt obligations and their coupons) and the excess of net
short-term capital gain over net long-term capital loss will be treated as
ordinary income in the hands of unitholders. Such distributions will not
qualify for the corporate dividends-received deduction. Dividends paid by a
Portfolio from the excess of net long-term capital gain (if any) over net short-
term capital loss are taxable to unitholders as long-term capital gain,
regardless of the length of time the units of a Portfolio have been held by such
unitholders, and also will not qualify for the corporate dividends-received
deduction. A Portfolio's net realized capital gains for a taxable year are
computed by taking into account realized capital losses, including any capital
loss carryforward of that Portfolio.
Distributions paid by the Tax-Exempt Diversified, Tax-Exempt California and
Tax-Exempt New York Portfolios from tax-exempt interest received by them and
properly designated as "exempt-interest dividends" will generally be exempt from
regular federal income tax, provided that at least 50% of the value of the
applicable Portfolio's total assets at the close of each quarter of its taxable
year consists of tax-exempt obligations, i.e., obligations described in Section
- -
103(a) of the Code (not including units of other regulated investment companies
that may pay exempt-interest dividends, because such units are not treated as
tax-exempt obligations for this purpose). Dividends paid by the other
Portfolios from any tax-exempt interest they may receive will not be tax-exempt,
because they will not satisfy the 50% requirement described in the preceding
sentence. A portion of any
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<PAGE>
tax-exempt distributions attributable to interest on certain "private activity
bonds," if any, received by a Portfolio may constitute a tax preference items
and may give rise to, or increase liability under, the alternative minimum tax
for particular unitholders. In addition, tax-exempt distributions of the
Portfolios may be considered in computing the "adjusted current earnings"
preference item of their corporate unitholders in determining the corporate
alternative minimum tax. To the extent that the Tax-Exempt Diversified, Tax-
Exempt California and Tax-Exempt New York Portfolios invest in certain short-
term instru ments, including repurchase agreements, the interest on which is not
exempt from Federal income tax, or earn other taxable income any distributions
of income from such investments or other taxable income will be taxable to
unitholders as ordinary income. All or substantially all of any interest on
indebtedness incurred directly or indirectly to purchase or carry units of the
Portfolio will generally not be deductible. The availability of tax-exempt
obligations and the value of the Portfolios may be affected by restrictive tax
legislation enacted in recent years.
In purchasing municipal obligations, the Tax-Exempt Diversified, Tax-Exempt
California and Tax-Exempt New York Portfolios rely on opinions of nationally-
recognized bond counsel for each issue as to the excludability of interest on
such obligations from gross income for federal income tax purposes and, where
applicable, the tax-exempt nature of such interest under the personal income tax
laws of a particular state. These Portfolios do not undertake independent
investigations concerning the tax-exempt status of such obligations, nor do they
guarantee or represent that bond counsels' opinions are correct.
Distributions of net investment income and net realized capital gains will
be taxable as described above, whether received in units or in cash.
Unitholders electing to receive distributions in the form of additional units
will have a cost basis in each unit so received equal to the amount of cash they
would have received had they elected to receive cash.
Certain Portfolios may be subject to foreign withholding taxes or other
foreign taxes with respect to their investments in certain securities of foreign
entities. These taxes may be reduced or eliminated under the terms of
applicable U.S. income tax treaties in some cases, and each Portfolio intends to
satisfy any procedural requirements to qualify for benefits under these
treaties. Although no Portfolio anticipates that more than 50% of the value of
its total assets at the close of a taxable year will be composed of securities
of foreign corporations, if the 50% requirement were satisfied by a portfolio,
that a Portfolio could make an election under Code Section 853 to permit its
unitholders to claim a credit or deduction on their federal income tax returns
for their pro rata portion of qualified taxes paid by that Portfolio in foreign
countries. In the event such an election is made, unitholders will be required
to include their pro rata share of such taxes in gross income and may be
entitled to claim a foreign tax credit or deduction with respect to such taxes,
subject to certain
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limitations under the Code. Unitholders who are precluded from taking such
credits or deductions will nevertheless be taxed on their pro rata share of the
foreign taxes included in their gross income, unless they are otherwise exempt
from federal income tax.
Each Portfolio will be required to report to the Internal Revenue Service
all taxable distributions, except in the case of certain exempt unitholders.
Under the backup withholding provisions of Code Section 3406, all such
distributions may be subject to withholding of federal income tax at the rate of
31% in the case of nonexempt unitholders who fail to furnish the Portfolio with
their taxpayer identification number and with certain certifications required by
the Internal Revenue Service or if the Internal Revenue Service or a broker
notifies a Portfolio that the number furnished by the unitholder is incorrect or
that the unitholder is subject to backup withholding as a result of failure to
report interest or dividend income. However, any taxable distributions from the
Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt New York Portfolios
will not be subject to backup withholding if the applicable Portfolio reasonably
estimates that at least 95% of its distributions will be exempt-interest
dividends. The Portfolios may refuse to accept an application that does not
contain any required taxpayer identification number or certification that the
number provided is correct, if applicable, or that the investor is an exempt
recipient. If the withholding provisions are applicable, any such
distributions, whether taken in cash or reinvested in units, will be reduced by
the amounts required to be withheld. Investors may wish to consult their tax
advisers about the applicability of the backup withholding provisions.
Redemptions (including exchanges) and other dispositions of units in
transactions that are treated as sales for tax purposes will generally not
result in taxable gain or loss, provided that the Portfolios successfully
maintain a constant net asset value per share, but a loss may be recognized to
the extent a CDSC is imposed on the redemption or exchange of ILA Class B or
Class C Units. All or a portion of such a loss may be disallowed under
applicable code provisions in certain circumstances. Unitholders should consult
their own tax advisors with reference to their circumstances to determine
whether a redemption, exchange, or other disposition of Portfolio Units is
properly treated as a sale for tax purposes.
All distributions (including exempt-interest dividends) whether received in
units or cash, must be reported by each unitholder who is required to file a
federal income tax return. The Portfolios will inform unitholders of the
federal income tax status of their distributions after the end of each calendar
year, including, in the case of the Tax-Exempt Diversified, Tax-Exempt
California and Tax-Exempt New York Portfolios, the amounts that qualify as
exempt-interest dividends and any portions of such amounts that constitute tax
preference items under the federal alternative minimum tax. Unitholders who
receive exempt-interest dividends and have not held their units of the
applicable Portfolio for its entire taxable year may have designated as tax-
exempt or as
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a tax preference item a percentage of their distributions which is not exactly
equal to a proportionate share of the amount of tax-exempt interest or tax
preference income earned during the period of their investment in such
Portfolio. Each unitholder should consult his or her own tax advisor to
determine the tax consequences of an investment in a Portfolio in the
unitholder's own state and locality.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Unitholders should consult their tax
advisers for more information.
The foregoing discussion relates solely to U.S. federal income tax law as
it applies to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies and financial
institutions. Each unitholder who is not a U.S. person should consult his or
her tax adviser regarding the U.S. and non-U.S. tax consequences of ownership of
units of a Portfolio, including the possibility that such a unitholder may be
subject to a U.S. nonresident alien withholding tax at a rate of 30% (or at a
lower rate under an applicable U.S. income tax treaty) on certain distributions
from a Portfolio and, if a current IRS Form W-8 or acceptable substitute is not
on file with the Portfolio, may be subject to backup withholding on certain
payments.
STATE AND LOCAL
The Portfolios may be subject to state or local taxes in jurisdictions in
which the Portfolios may be deemed to be doing business. In addition, in those
states or localities which have income tax laws, the treatment of a Portfolio
and its unitholders under such laws may differ from their treatment under
Federal income tax laws, and an investment in the Portfolios may have tax
consequences for unitholders that are different from those of a direct
investment in the Portfolios' securities. Unitholders should consult their own
tax advisers concerning these matters. For example, in such states or
localities it may be appropriate for unitholders to review with their tax
advisers the state income and, if applicable, intangible property tax
consequences of investments by the Portfolios in securities issued by the
particular state or the U.S. Government or its various agencies or
instrumentalities, because many states (i) exempt from personal income tax
distributions made by regulated investment companies from interest on
obligations of the particular state or on direct U.S. Government obligations
and/or (ii) exempt from intangible property tax the value of the units of such
companies attributable to such obligations, subject to certain state-specific
requirements and/or limitations. See also the discussion below of these
applicable provisions in California and New York.
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Provided that the Portfolios qualify as regulated investment companies and
incur no federal income tax liability, the Portfolios may still be subject to
New York State and City minimum taxes, which are small in amount.
California State Taxation. The following discussion of California tax law
assumes that the Tax-Exempt California Portfolio will be qualified as a
regulated investment company under Subchapter M of the Code and will be
qualified thereunder to pay exempt-interest dividends. The Tax-Exempt
California Portfolio intends to qualify for each taxable year under California
law to pay "exempt interest dividends" which will be exempt from the California
personal income tax.
Individual unitholders of the Tax-Exempt California Portfolio who reside in
California will not be subject to California personal income tax on
distributions received from the Portfolio to the extent such distributions are
exempt-interest dividends at tributable to interest on obligations the interest
on which is exempt from California personal income tax provided that the
Portfolio satisfies the requirement of California law that at least 50% of its
assets at the close of each quarter of its taxable year be invested in such
obligations and properly designates such exempt-interest dividends under
California Law. Distributions from the Tax-Exempt California Portfolio which are
attributable to sources other than those described in the second preceding
sentence will generally be taxable to such unitholders as ordinary income.
Moreover, California legislation which incorporates Subchapter M of the Code
provides that capital gain dividends may be treated as long-term capital gains.
Such gains are currently subject to personal income tax at ordinary income tax
rates. Capital gains that are retained by the Portfolio will be taxed to that
Portfolio, and California residents will receive no California personal income
tax credit for such tax. Distributions other than exempt-interest dividends are
includable in income subject to the California alternative minimum tax.
Distributions from investment income and long-term and short-term capital
gains will generally not be excluded from taxable income in determining
California corporate franchise taxes for corporate unitholders and will be
treated as ordinary dividend income for such purposes. In addition, such
distributions may be includable in income subject to the alternative minimum
tax.
Interest on indebtedness incurred or continued by unitholders to purchase
or carry units of the Tax-Exempt California Portfolio will not be deductible for
California personal income tax purposes.
In addition, any loss realized by a unitholder of the Tax-Exempt California
Portfolio upon the sale of units held for six months or less may be disallowed
to the extent of any exempt-interest dividends received with respect to such
units. Moreover, any loss realized upon the redemption of units within six
months from the date of purchase of such units and following receipt of a long-
term capital gains distribution will be treated
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as long-term capital loss to the extent of such long-term capital gains
distribution. Finally, any loss realized upon the redemption of units within
thirty days before or after the acquisition of other units of the same Portfolio
may be disallowed under the "wash sale" rules.
New York City and State Taxation. Individual unitholders who are residents
of New York State will be able to exclude for New York State income tax purposes
that portion of the exempt-interest dividends properly designated as such from
the Tax-Exempt New York Portfolio which is derived from interest on obligations
of New York State and its political subdivisions and obligations of Puerto Rico,
the U.S. Virgin Islands and Guam. Exempt- interest dividends may be properly
designated as such only if, as anticipated, at least 50% of the value of the
assets of the Portfolio are invested at the close of each quarter of its taxable
year in obligations of issuers the interest on which is excluded from gross
income for federal income tax purposes. Individual unitholders who are
residents of New York City will also be able to exclude such income for New York
City income tax purposes. Interest on indebtedness incurred or continued by a
shareholder to purchase or carry shares of the Tax-Exempt New York Portfolio is
not deductible for New York State or New York City personal income tax purposes.
Long-term capital gains, if any, that are distributed by the Tax-Exempt New
York Portfolio and are properly designated as capital gain dividends will be
treated as capital gains for New York State and City income tax purposes in the
hands of New York State and New York City residents
Unitholders should consult their tax advisers about the application of the
provisions of tax law described in this Statement of Additional Information in
light of their particular tax situations.
This discussion of the tax treatment of the Portfolio and its unitholders
is based on the tax laws in effect as of the date of this Statement of
Additional Information.
ORGANIZATION AND CAPITALIZATION
The Portfolios were reorganized from series of a Massachusetts business
Trust as part of Goldman Sachs Trust, a Delaware business trust, by a
Declaration of Trust dated January 28, 1997 on April 30, 1997.
The Act requires that where more than one class or series of units exists,
each class or series must be preferred over all other classes or series in
respect of assets specifically allocated to such class or series. The Trustees
also have authority to classify and reclassify any series of units into one or
more classes of units. As of the date of this Statement of Additional
Information, the Trustees have authorized the issuance of up to three classes of
units of each of the Portfolios: ILA Units, ILA Administration Units and ILA
Service Units. In addition, the Trustees have
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authorized a fourth and fifth class of units, ILA Class B Units and ILA Class C
Units, with respect to the Prime Obligations Portfolio.
Each ILA Unit, ILA Administration Unit, ILA Service Unit, ILA Class B Unit
and ILA Class C Unit of a Portfolio represents an equal proportionate interest
in the assets belonging to that Portfolio. It is contemplated that most units
(other than ILA Class B or Class C Units) 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 units
or another organization designated by such bank or institution. ILA Class B and
Class C Units generally are only issued upon exchange from Class B or Class C
Shares, respectively, of other Funds of the Goldman Sachs mutual funds. ILA
Units may be purchased for accounts held in the name of an investor or
institution that is not compensated by the Trust for services provided to the
institution's investors. ILA Administration Units may be purchased for accounts
held in the name of an investor or an institution that provides certain account
administration services to its customers, including maintenance of account
records and processing orders to purchase, redeem and exchange ILA
Administration Units. ILA Administration Units of each Portfolio bear the cost
of administration fees at the annual rate of up to .15 of 1% of the average
daily net assets of such Units. ILA Service Units may be purchased for accounts
held in the name of an institution that provides certain account administration
and unitholder liaison services to its customers, including maintenance of
account records, processing orders to purchase, redeem and exchange ILA Service
Units, responding to customer inquiries and assisting customers with investment
procedures. ILA Service Units bear the cost of service fees at the annual rate
of up to .40 of 1% of the average daily net assets of such Units. ILA Class B
Units of the Prime Obligations Portfolio are sold subject to a contingent
deferred sales charge of up to 5.0% and ILA Class C Units are sold subject to a
contingent deferred sales charge of 1.0% if redeemed within 12 months of
purchase. ILA Class B and Class C Units are sold through brokers and dealers
who are members of the National Association of Securities Dealers Inc. and
certain other financial services firms that have sales arrangements with Goldman
Sachs. ILA Class B and Class C Units bear the cost of distribution (Rule 12b-1)
fees at the aggregate rate of up to 0.75% of the average daily net assets
attributable to ILA Class B and Class C Units, respectively. ILA Class B and
Class C Units also bear the cost of an Authorized Dealer Service Plan at an
annual rate of up to 0.25% of the average daily net assets of the Prime
Obligations Portfolio attributable to ILA Class B and Class C Units.
It is possible that an institution or its affiliates may offer different
classes of units to its customers and thus receive different compensation with
respect to different classes of units of the same Portfolio. In the event a
Portfolio is distributed by salespersons or any other persons, they may receive
different compensation with respect to different classes of units of the
Portfolio. ILA Administration Units, ILA Service Units, ILA
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Class B Units and ILA Class C Units each have certain exclusive voting rights on
matters relating to their respective plans. Units of each class may be
exchanged only for Units of the same class in another Portfolio or, in the case
of the Prime Obligations Portfolio, shares of the corresponding class of certain
other mutual funds sponsored by Goldman Sachs. Except as described above, the
five classes of units are identical. Certain aspects of the Units may be
altered, after advance notice to unitholders, if it is deemed necessary in order
to satisfy certain tax regulatory requirements.
Rule 18f-2 under the Act provides that any matter required to be submitted
by the provisions of the Act or 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 units of each class or
series affected by such matter. Rule 18f-2 further provides that a class or
series shall be deemed to be affected by a matter unless the interests of each
class or series in the matter are substantially identical or the matter does not
affect any interest of such class or series. However, Rule 18f-2 exempts the
selection of independent public accountants, the approval of principal
distribution contracts and the election of directors from the separate voting
requirements of Rule 18f-2.
When issued units are fully paid and non-assessable. In the event of
liquidation, unitholders are entitled to share pro rata in the net assets of the
applicable class of the relevant Portfolio available for distribution to such
unitholders. All units entitle their holders to one vote per unit, are freely
transferable and have no preemptive subscription or conversion rights.
The Trust is not required to hold annual meetings of unitholders and does
not intend to hold such meetings. In the event that a meeting of unitholders is
held, each unit of the Trust will be entitled, as determined by the Trustees,
either to one voter for each unit or to one vote for each dollar of net asset
value represented by such units on all matters presented to unitholders
including the election of Trustees (this method of voting being referred to as
"dollar based voting"). However, to the extent required by the Act or otherwise
determined by the Trustees, series and classes of the Trust will vote separately
from each other. Unitholders of the Trust do not have cumulative voting rights
in the election of Trustees. Meetings of unitholders of the Trust, or any
series or class thereof, may be called by the Trustees, certain officers or upon
the written request of holders of 10% or more of the units entitled to vote at
such meetings. The unitholders of the Trust will have voting rights only with
respect to the limited number of matters specified in the Declaration of Trust
and such other matters as the Trustees may determine or may be required by law.
The Declaration of Trust provides for indemnification of Trustees, officers
and agents of the Trust unless the recipient is
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adjudicated (i) to be liable by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of such
person's office or (ii) not to have acted in good faith in the reasonable belief
that such person's actions were in the best interest of the Trust. The
Declaration of Trust provides that, if any shareholder or former shareholder of
any series is held personally liable solely by reason of being or having been a
shareholder and not because of the shareholder's acts or omissions or for some
other reason, the shareholder or former shareholder (or heirs, executors,
administrators, legal representatives or general successors) shall be held
harmless from and indemnified against all loss and expense arising from such
liability. The Trust acting on behalf of any affected series, must, upon
request by such shareholder, assume the defense of any claim made against such
shareholder for any act or obligation of the series and satisfy any judgment
thereon from the assets of the series.
The Declaration of Trust permits the termination of the Trust or of any
series or class of the Trust (i) by a majority of the affected shareholders at a
meeting of shareholders of the Trust, series or class; or (ii) by a majority of
the Trustees without shareholder approval if the Trustees determine that such
action is in the best interest of the Trust or its shareholders. The factors
and events that the Trustees may take into account in making such determination
include (i) the inability of the Trust or any successor series or class to
maintain its assets at an appropriate size; (ii) changes in laws or regulations
governing the Trust, series or class or affecting assets of the type in which it
invests; or (iii) economic developments or trends having a significant adverse
impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder
approval to cause the Trust, or any series thereof, to merge or consolidate with
any corporation, association, trust or other organization or sell or exchange
all or substantially all of the property belonging to the Trust or any series
thereof. In addition, the Trustees, without shareholder approval, may adopt a
master-feeder structure by investing all or a portion of the assets of a series
of the Trust in the securities of another open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration of
Trust without a shareholder vote. However, shareholders of the Trust have the
right to vote on any amendment (i) that would affect the voting rights of
shareholders, (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trust ees"). Series
Trustees may, but are not required to, serve as Trustees of the Trust or any
other series or class of the Trust. The Series Trustees have, to the exclusion
of any other Trustees of
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the Delaware Trust, all the powers and authorities of Trustees under the Trust
Instrument with respect to any other series or class.
As of July 15, 1997, the only holders of record of 5% or more of the
outstanding units of the Prime Obligations Portfolio were Duquesne Capital
Management, Inc., 2579 Washington Rd. Ste. 322, Pittsburgh, PA 15241-2563
(__%); Harris Trust & Savings Bank, 200 W. Monroe Street, 12th Floor, Chicago,
IL 60606-5509 (__%); United Missouri Bank of Kansas City, PO Box 419692, Kansas
City 64141-6692 (__%); and VF Corporation, 1047 North Park Road, Wyomissing, PA
19610 (__%).
As of July 15, 1997, the only holders of record of 5% or more of the
outstanding units of the Money Market Portfolio were Bank of New York, 48 Wall
Street, New York, NY 10286 (___%) and Stone Street & Bridge Street Funds, 85
Broad Street, 4th Floor, New York, NY 10004-2434 (___%).
As of July 15, 1997, the only holders of record of 5% or more of the
outstanding units of the Treasury Obligations Portfolio were Bank of New York
(NCD), 1 Wall Street, 5th Floor, New York, NY 10286-0001 (___%); Bankers Trust
Company, PO Box 897, Des Moines, IA 50304-0897 (___%); First National Bank of
Omaha, PO Box 3128, Omaha, NE 68103-0128 (___%; Firstar Bank Madison, N.A., PO
Box 7900, Madison, WI 53707-7900 (___%) and National City Bank Kentucky, 4100
W. 150th Street, 3rd Floor N. Annex, Cleveland, OH 44135 (___%).
As of July 15, 1997, the only holders of record of 5% or more of the
outstanding units of the Treasury Instruments Portfolio were Bank of New York
(NCD), 1 Wall Street, 5th Floor, New York, NY 10286-0001 (___%); Emerald
Partners, 237 Park Avenue Ste. 801, New York, NY 10017-3142 (___%); and Morgan
Stanley, 2 No. LaSalle Street, Ste. 500, Chicago, IL 60602 (___%).
As of July 15, 1997, the only holders of record of 5% or more of the
outstanding units of the Government Portfolio were American Exploration Co.,
1331 Lamar Street, Ste. 900, Houston, TX 77010-3027 (___%); Comerica Bank, PO
Box 55-519, Detroit, MI 48255-0499 (___%); Morgan Stanley, 2 No. LaSalle
Street, Ste. 500, Chicago, IL 60602 (___%); Northern Trust, 50 South LaSalle
Street, Chicago, IL 60675 (___%); State Street Bank & Trust Co., PO Box 1992,
Boston, MA 02105-1992 (___%); United Missouri Bank of Kansas City, PO Box
419692, Kansas City, MO 64141-6692 (___%); and Wells Fargo Bank, 26610 Agoura
Rd., Calabasas, CA 91302-1954 (___%).
As of July 15, 1997, the only holders of record of 5% or more of the
outstanding units of the Tax-Exempt New York Portfolio were Bank of New York, 48
Wall Street, New York, NY 10286 (___%); Marine Midland Bank, PO Box 4203,
Buffalo, NY 14240 (___%); Shames Trust Accounts, 57 Holly Place, Briarcliff, NY
10510-2107 (___%) and Stephen Apkon & Lisa Hertz Apkon, 33 Ashland Ave.,
Pleasantville, NY 10570-2301 (___%).
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As of July 15, 1997, the only holders of record of 5% or more of the
outstanding units of the Tax-Exempt California Portfolio were Bodri Capital
Management, Inc., 525 University Ave., Ste. 1322, Palo Alto, CA 94301 (___%);
and Chong-Moon Lee & Reiko-Takahashi Joint Tenants, 26541 Taaffe Road, Los
Altos, CA 94022-4313.
As of July 15, 1997, the only holders of record of 5% or more of the
outstanding units of the Federal Portfolio was Bank of New York, 48 Wall Street,
New York, NY 10286 (___%); and The Baupost Group, Inc., PO Box 389125,
Cambridge, MA 02238-9998 (___%).
As of July 15, 1997, the only holders of record of 5% of more of the
outstanding units of the Tax-Exempt Diversified Portfolio was Bodri Capital
Management, Inc., 525 University Ave., Ste. 1322, Palo Alto, CA 94301 (___%);
and Chong-Moon Lee, Los Altos, CA 94022-4313 (___%).
UNITHOLDER AND TRUSTEE LIABILITY
Under Delaware law, the unitholders of the Portfolios are not generally
subject to liability for the debts or obligations of the Trust. Similarly,
Delaware law provides that a series of the Trust will not be liable for the
debts or obligations of any other series of the Trust. However, no similar
statutory or other authority limiting business trust unitholder liability exists
in many other states. As a result, to the extent that a Delaware business trust
or a unitholder is subject to the jurisdiction of courts of such other states,
the courts may not apply Delaware law and may thereby subject the Delaware
business trust unitholders to liability. To guard against this risk, the
Declaration of Trust contains express disclaimer of unitholder liability for
acts or obligations of a Portfolio. Notice of such disclaimer will normally be
given in each agreement, obligation or instrument entered into or executed by a
Portfolio or the Trustees. The Declaration of Trust provides for indemnification
by the relevant Portfolio for all loss suffered by a unitholder as a result of
an obligation of the Portfolio. The Declaration of Trust also provides that a
Portfolio shall, upon request, assume the defense of any claim made against any
unitholder for any act or obligation of the Portfolio and satisfy any judgment
thereon. In view of the above, the risk of personal liability of unitholders is
remote.
In addition to the requirements set forth under the Declaration of Trust,
the Trust provides that unitholders may bring a derivative action on behalf of
the Trust only if the following conditions are met: (a) unitholders eligible to
bring such derivative action under Delaware law who hold at least 10% of the
outstanding units of the Portfolio, or 10% of the outstanding units of the class
to which such action relates, shall join in the request for the Trustees to
commence such action; and (b) the Trustees must be afforded a reasonable amount
of time to consider such unitholder request and to investigate the basis of such
claim. The Trustees shall be entitled to retain counsel or other advisers
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in considering the merits of the request and shall require an undertaking by the
Unitholders making such request to reimburse the Portfolio for the expense of
any such advisers in the event that the Trustees determine not to bring such
action.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
CUSTODIAN AND SUBCUSTODIAN
State Street Bank and Trust Company ("State Street") has been retained to act as
custodian of the Portfolios' assets. In that capacity, State Street maintains
the accounting records and calculates the daily net asset value per unit of the
Portfolios. Its mailing address is P.O. Box 1713, Boston, MA 02105. State
Street has appointed The Northern Trust Company, 50 South LaSalle Street,
Chicago, Illinois 60675 as subcustodian to hold cash and certain securities
purchased by the Trust.
INDEPENDENT ACCOUNTANTS
Arthur Andersen LLP, independent public accountants, One International Place,
Boston, MA 022210, have been selected as auditors of the Trust. In addition to
audit services, Arthur Andersen LLP prepares the Trust's federal and state tax
returns, and provides consultation and assistance on accounting, internal
control and related matters.
FINANCIAL STATEMENTS
The Financial Statements of the Portfolios, including the Statements of
Investments as of December 31, 1996, the Statements of Assets and Liabilities as
of December 31, 1996, the related Statements of Operations for the period then
ended, the Statements of Changes in Net Assets and the Financial Highlights for
the periods presented, the Notes to the Financial Statements, and the Report of
Independent Public Accountants, all of which are included in the 1996 Annual
Report to the unitholders, are attached hereto and incorporated by reference
into this Statement of Additional Information.
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SERVICE PLAN
(ILA Service Units Only)
The Trust, on behalf of each Portfolio, has adopted a service plan (the
"Plan") with respect to the ILA Service Units which authorizes the Portfolios to
compensate Service Organizations for providing certain account administration
and personal account maintenance services to their customers who are or may
become beneficial owners of such units. Pursuant to the Plan, the Trust, on
behalf of each Portfolio, enters into agreements with Service Organizations
which purchase ILA Service Units on behalf of their customers ("Service
Agreements"). Under such Service Agreements the Service Organizations may: (a)
act, directly or through an agent, as the sole unitholder of record and nominee
for all customers, (b) maintain account records for each customer who
beneficially owns ILA Service Units, (c) answer questions and handle
correspondence from customers regarding their accounts, (d) process customer
orders to purchase, redeem and exchange ILA Service Units, and handle the
transmission of funds representing the customers' purchase price or redemption
proceeds, (e) issue confirmations for transactions in units by customers, (f)
provide facilities to answer questions from prospective and existing investors
about ILA Service Units, (g) receive and answer investor correspondence,
including requests for prospectuses and statements of additional information,
(h) display and make prospectuses available on the Service Organization's
premises, (i) assist customers in completing application forms, selecting
dividend and other account options and opening custody accounts with the Service
Organization, and (j) act as liaison between customers and the Trust, including
obtaining information from the Trust, working with the Trust to correct errors
and resolve problems and providing statistical and other information to the
Trust. As compensation for such services, the Trust on behalf of each Portfolio
pays each Service Organization a service fee in an amount up to .40% (on an
annualized basis) of the average daily net assets of the ILA Service Units of
each Portfolio attributable to or held in the name of such Service Organization
for its customers; provided, however, that the fee paid for personal and account
maintenance services shall not exceed .25% of such average daily net assets.
For the fiscal years ended December 31, 1996, December 31, 1995 and
December 31, 1994, the amount of the service fees paid by each Portfolio then in
existence to Service Organizations was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
Prime Obligations
Portfolio $ 494,274 $937,733 $630,669
Money Market Portfolio 128,313 102,642 82,267
</TABLE>
80
<PAGE>
<TABLE>
<S> <C> <C> <C>
Treasury Obligations
Portfolio $ 579,790 478,419 435,536
Treasury Instruments
Portfolio 1,266,586 316,188 187,470
Government Portfolio 352,931 430,114 603,447
Federal Portfolio 562,023 254,508 34,415
Tax-Exempt Diversified
Portfolio 130,158 220,790 187,137
Tax-Exempt California
Portfolio/(1)/ -- -- --
Tax-Exempt New York
Portfolio/(1)/ -- -- --
</TABLE>
- ----------
/(1)/ ILA Service Unit activity has not commenced operations.
The Trust has adopted each Plan pursuant to Rule 12b-l under the Investment
Company Act in order to avoid any possibility that payments to the Service
Organizations pursuant to the Service Agreements might violate the Investment
Company Act. Rule 12b-l, which was adopted by the Securities and Exchange
Commission under the Investment Company Act, regulates the circumstances under
which an investment company such as the Trust may bear expenses associated with
the distribution of its securities. In particular, such an investment company
cannot engage directly or indirectly in financing any activity which is
primarily intended to result in the sale of securities issued by the company
unless it has adopted a plan pursuant to, and complies with the other
requirements of, such Rule. The Trust believes that fees paid for the services
provided in the Plan and described above are not expenses incurred primarily for
effecting the distribution of ILA Service Units. However, should such payments
be deemed by a court or the Securities and Exchange Commission to be
distribution expenses, such payments would be duly authorized by the Plan.
The Glass-Steagall Act prohibits all entities which receive deposits from
engaging to any extent in the business of issuing, underwriting, selling or
distributing securities, although institutions such as national banks are
permitted to purchase and sell securities upon the order and for the account of
their customers. Should future legislative or administrative action or judicial
or administrative decisions or interpretations prohibit or restrict the
activities of one or more of the Service Organizations in connection with the
Trust, such Service Organi zations 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
81
<PAGE>
purchases or sales of ILA Service Units automatically pursuant to pre-authorized
instructions, for example, effecting such transactions on a manual basis might
affect the size and/or growth of the Portfolios. In addition, state securities
laws on this issue may differ from the interpretations of federal law expressed
herein and banks and other financial institutions purchasing ILA Service Units
on behalf of their customers may be required to register as dealers pursuant to
state law. Any such alteration or discontinuance of services could require the
Trustees of the Trust to consider changing the Trust's method of operations or
providing alternative means of offering ILA Service Units to customers of such
Service Organizations, in which case the operation of the Trust, its size and/or
its growth might be significantly altered. It is not anticipated, however, that
any alteration of the Trust's operations would have any effect on the net asset
value per unit or result in financial losses to any unitholder.
Conflict of interest restrictions (including the Employee Retirement Income
Security Act of 1974) may apply to a Service Organization's receipt of
compensation paid by the Trust in connection with the investment of fiduciary
funds in ILA Service Units. Service Organizations, including banks regulated by
the Comptroller of the Currency, the Federal Reserve Board or the Federal
Deposit Insurance Corporation, and investment advisers and other money managers
subject to the jurisdiction of the Securities and Exchange Commission, the
Department of Labor or State Securities Commissions, are urged to consult legal
advisers before investing fiduciary assets in ILA Service Units.
The Plans were approved by the respective holders of ILA Service Units of
each Portfolio (other than the Tax-Exempt California and Tax-Exempt New York
Portfolios) on June 3, 1991. The Trustees of the Trust, including a majority of
the Trustees who are not interested persons of the Trust and who have no direct
or indirect financial interest in the operation of such Plans or the related
Service Agreements, most recently voted to approve the Plans and Service
Agreements at a meeting called for the purpose of voting on such Plan and
Service Agreements on April 23, 1997. They will remain in effect until April
30, 1998 and will continue in effect thereafter only if such continuance is
specifically approved annually by a vote of the Trustees in the manner described
above. A Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval of the ILA Service
unitholders of the affected Portfolio, and all material amendments of a Plan
must also be approved by the Trustees in the manner described above. A Plan may
be terminated at any time by a majority of the Trustees as described above or by
vote of a majority of the outstanding ILA Service Units of the affected
Portfolio. The Service Agreements may be terminated at any time, without
payment of any penalty, by vote of a majority of the Trustees as
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<PAGE>
described above or by a vote of a majority of the outstanding ILA Service Units
of the affected Portfolio on not more than 60 days' written notice to any other
party to the Service Agreements. The Service Agreements shall terminate
automatically if assigned. So long as the Plans are in effect, the selection
and nomination of those Trustees who are not interested persons shall be
determined by the discretion of the Trust's Nominating Committee, which consists
of all of the non-interested members of the Board of Trustees. The Trustees
have determined that, in their judgment, there is a reasonable likelihood that
the Plans will benefit the Portfolios and holders of ILA Service Units of such
Portfolios. In the Trustees' quarterly review of the Plans and Service
Agreements, they will consider their continued appropriateness and the level of
compensation provided therein.
DISTRIBUTION AND AUTHORIZED DEALER SERVICE PLANS (ILA CLASS B AND CLASS C UNITS
ONLY)
AUTHORIZED DEALER SERVICE PLAN
As described in the Prospectus, the Prime Obligations Portfolio with
respect to each of its ILA Class B and Class C Units has adopted a non-Rule 12b-
1 Authorized Dealer Service Plan (an "Authorized Dealer Service Plan") pursuant
to which Goldman Sachs and Authorized Dealers are compensated for the provision
of personal and account maintenance services. The Authorized Dealer Service Plan
has been most recently approved with respect to ILA Class B Units and initially
approved with respect to ILA Class C Units by the Board of Trustees, including a
majority of the non-interested Trustees who have no direct or indirect financial
interest in the Authorized Dealer Service Plan, at a meeting held on April 23,
1997. With respect to its ILA Class B and Class C Units, the Prime Obligations
Portfolio's Authorized Dealer Service Plan provides for the compensation for
personal and account maintenance services at an annual rate of up to 0.25% of
the Portfolio's average daily net assets attributable to ILA Class B Units and
Class C Units, respectively. For the fiscal year ended December 31, 1996, the
Prime Obligations Portfolio paid Goldman Sachs $128 under the Service Plan with
respect to its Class B units.
The Authorized Dealer Service Plan will remain in effect until May 1, 1998
and from year to year thereafter, provided that the continuance of such service
plan is approved annually by a majority vote of the Trustees of the Trust,
including a majority of the non-interested Trustees who have no direct or
indirect financial interest in the Authorized Dealer Service Plan. All material
amendments of the Authorized Dealer Service Plan must also be approved by the
Trustees of the Trust in the manner described above. The Authorized Dealer
Service Plan may be terminated at any time as to the ILA Class B or Class C
Units of the Prime Obligations Portfolio without payment of any penalty by
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<PAGE>
a vote of a majority of the non-interested Trustees of the Trust or by vote of a
majority of the outstanding ILA Class B Units or Class C Units, respectively, of
the Prime Obligations Portfolio. The Trustees of the Trust have determined that
in their judgment there is a reasonable likelihood that the Authorized Dealer
Service Plan will benefit the Prime Obligations Portfolio and its ILA Class B
and Class C Unitholders.
CLASS B DISTRIBUTION PLAN (ILA CLASS B UNITS). As described in the
Prospectus, the Trust has adopted, on behalf of the Prime Obligations Portfolio,
a distribution plan (the "Class B Plan") pursuant to Rule 12b-1 under the
Investment Company Act with respect to ILA Class B Units. See "Distribution and
Authorized Dealer Service Plans" in the Prospectus.
The Class B Plan was most recently approved on April 23, 1997 on behalf of
the Trust by a majority vote of the Trust's Board of Trustees, including a
majority of the Trustees who are not interested persons of the Trust and have no
direct or indirect financial interest in the Class B Plan, cast in person at a
meeting called for the purpose of approving the Class B Plan.
With respect to the Prime Obligations Portfolio, the compensation payable
under the Class B Plan is equal to 0.75% per annum of the average daily net
assets attributable to ILA Class B Units of that Portfolio. The fees received
by Goldman Sachs under the Class B Plan and contingent deferred sales charges on
ILA Class B Units may be sold by Goldman Sachs as distributor to entities which
provide financing for payments to Authorized Dealers in respect of sales of ILA
Class B Units. To the extent such fee is not paid to such dealers, Goldman
Sachs may retain such fee as compensation for its services and expenses of
distributing the Prime Obligations Portfolio's ILA Class B Units. If such fee
exceeds its expenses, Goldman Sachs may realize a profit from these
arrangements. For the fiscal year ended December 31, 1996, the Prime
Obligations Portfolio paid Goldman Sachs $382 under the Class B Plan.
The Class B Plan is a compensation plan which provides for the payment of a
specified distribution fee without regard to the distribution expenses actually
incurred by Goldman Sachs. If the Class B Plan were terminated by the Trust's
Board of Trustees and no successor plan were adopted, the Prime Obligations
Portfolio would cease to make distribution payments to Goldman Sachs and Goldman
Sachs would be unable to recover the amount of any of its unreimbursed
distribution expenditures.
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<PAGE>
Under the Class B Plan, Goldman Sachs, as distributor of the Portfolio's
ILA Class B Units, will provide to the Board of Trustees for its review, and the
Board will review at least quarterly, a written report of the services provided
and amounts expended by Goldman Sachs under the Class B Plan and the purposes
for which such services were performed and expenditures were made.
The Class B Plan will remain in effect with respect to the Prime
Obligations Portfolio from year to year, provided such continuance is approved
annually by a majority vote of the Board of Trustees, including a majority of
the non-interested Trustees. The Class B Plan may not be amended to increase
materially the amount to be spent for the services described therein as to the
Prime Obligations Portfolio without approval of a majority of the outstanding
ILA Class B Unitholders of that Portfolio. All material amendments of the Class
B Plan must also be approved by the Board of Trustees of the Trust in the manner
described above. The 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 ILA Class B Units of that Portfolio. So long as the
Class B Plan is in effect, the selection and nomination of non-interested
Trustees shall be committed to the discretion of the non-interested Trustees.
The Trustees have determined that in their judgment there is a reasonable
likelihood that the Class B Plan will benefit the Prime Obligations Portfolio
and its respective ILA Class B Unitholders.
CLASS C DISTRIBUTION PLAN (ILA CLASS C UNITS). As described in the
Prospectus, the Trust has adopted on behalf of the Prime Obligations Portfolio,
a distribution plan (the "Class C Plan") pursuant to Rule 12b-1 under the Act
with respect to the ILA Class C Units of the Prime Obligations Portfolio. See
85
<PAGE>
"Distribution and Authorized Dealer Service Plans (ILA Class B and Class C Units
only)" in the Prospectus.
The Class C Plan was approved for the Prime Obligations Portfolio on April
23, 1997, on behalf of the Trust 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 Class C Plan, cast in person at a meeting called for the purpose
of approving the Class C Plan. The Class C Plan for the Portfolio was approved
by the sole initial shareholders of the ILA Class C Units of the Portfolio on
___, 1997.
With respect to the Prime Obligations Portfolio, the compensation payable
under the Class C Plan is equal to 0.75% per annum of the average daily net
assets attributable to ILA Class C Units of that Portfolio. To the extent such
fee is not paid to such dealers, Goldman Sachs may retain such fee as
compensation for its services and expenses of distributing the Prime Obligations
Portfolio's Class C Units.
The Class C Plan is a compensation plan which provides for the payment of a
specified distribution fee without regard to the distribution expenses actually
incurred by Goldman Sachs. If the Class C Plan were terminated by the Trustees
and no successor plan were adopted, the Prime Obligations Portfolio would cease
to make distribution payments to Goldman Sachs and Goldman Sachs would be unable
to recover the amount of any of its unreimbursed distribution expenditures.
Under the Class C Plan, Goldman Sachs, as distributor of the Portfolio's
ILA Class C Units, will provide to the Board of Trustees for its review, and the
Board will review at least quarterly, a written report of the services provided
and amounts expended by Goldman Sachs under the Class C Plan and the purposes
for which such services were performed and expenditures were made.
The Class C Plan will remain in effect until May 1, 1998 and from year to
year, provided such continuance is approved annually by a majority vote of the
Trustees, including a majority of the non-interested Trustees. The Class C Plan
may not be amended to increase materially the amount to be spent for the
services described therein as to the Prime Obligations Portfolio without
approval of a majority of the outstanding Class C Units of the Prime Obligations
Portfolio. All material amendments of the Class C Plan must also be approved by
the Trustees in the manner described above. The Class C 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 C Units of the Prime Obligations Portfolio. So long as
a Class C Plan is in effect, the selection and nomination of non-interested
Trustees shall be
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<PAGE>
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 C Plan will benefit the Prime Obligations Portfolio and its respective
Class C Unitholders.
87
<PAGE>
================================================================================
- --------------------------------------------------------------------------------
ILA Unitholder Letter/Annual Report
- --------------------------------------------------------------------------------
Dear Unitholders:
We welcome this opportunity to provide you with a summary of the trends and
key events that affected the economy and the Goldman Sachs Institutional Liquid
Assets (ILA) Portfolios in 1996. It has been another positive year for ILA in
which the Portfolios did well compared with their respective IBC Financial Data,
Inc. averages while adhering to their conservative investment guidelines.
1996 in Review: After Easing Early in the Year, the Fed Remained Neutral Amid
Moderate Growth and Benign Inflation
Last year began on a weak note, with the economy still in the doldrums as
harsh winter storms and a strike at General Motors continued to restrain growth.
Against that backdrop, the Federal Reserve Board (the "Fed") cut the Federal
funds rate by 25 basis points to 5.25% in January 1996, following an easing of
the same magnitude in December 1995. It soon became evident that the economy had
responded and was somewhat healthier than expected, with first-quarter real
Gross Domestic Product (GDP) reported at 2.0% annualized. Growth was more
dramatic during the second quarter, as industrial activity and automobile and
home sales all showed significant improvement, pushing real GDP to 4.7%, its
highest rate in two years. That growth rate caused some to expect the Fed to
change direction and tighten before year-end. However, the economy subsequently
moderated significantly, with third-quarter annualized real GDP retreating to
2.1%, reflecting lackluster consumer spending and a widening U.S. trade deficit.
As 1996 drew to a close, moderate economic growth and contained inflation kept
the Fed in a neutral mode, despite a very robust stock market.
Historical Yield Curve (LIBOR)
[BAR GRAPH APPEARS HERE]
[PLOT POINTS TO COME]
Source: Goldman Sachs Fixed Income Database, reflecting the London Interbank
Offered Rate (LIBOR).
The Federal funds rate began the year at 5.50% and ended at 5.25%. The slope of
the LIBOR yield curve steepened significantly over the course of the year. By
the end of 1996, the spread between one- and 12-month LIBOR moved to plus 28
basis points.
A Nimble Strategy Contributed to Strong Performance
Taxable Sector. Structuring money market portfolios successfully during
1996 as the Fed shifted policy from easing to neutral to a bias to tighten
required strict attention to risk management, as well as to a detailed analysis
of market fundamentals and technicals. Analyzing the implied forward rates and
determining the extent to which the market had priced in too much easing at the
beginning of 1996 or too much tightening by midyear 1996 and then adjusting the
portfolios' weighted average maturities and structures were equally important to
our strategy.
During the second and third quarters of 1996, we extended the ILA
Portfolios' weighted average maturities as the yield curve steepened in
anticipation of a Fed tightening that did not materialize. During the early part
of the fourth quarter, market data suggested that growth slowed in the third
quarter. Consequently, the market was priced to a more neutral Fed policy.
However, year-end financing pressures resulted in investment opportunities
maturing in the first quarter of 1997, and the Portfolios closed the year with
neutral weighted average maturities.
- --------------------------------------------------------------------------------
1
<PAGE>
- --------------------------------------------------------------------------------
ILA Unitholder Letter/Annual Report (continued)
- --------------------------------------------------------------------------------
Tax-Exempt Sector. With tax reform basically a nonissue in 1996, investor
interest in the sector revived, causing total assets in the tax-exempt money
market fund category to increase by 13%. In contrast, supply was little changed
from 1995 levels, making tax-exempts slightly more expensive in 1996. These
supply/demand technicals coupled with our fundamental view that short-term rates
were likely to rise explains our neutral to short-to-neutral weighted average
maturities during the latter part of the year.
Summary for ILA Portfolios Institutional Units* as of December 31, 1996
<TABLE>
<CAPTION>
---------------------------------------------------------
Weighted
Institutional SEC 7-Day SEC 7-Day 30-Day Average
Liquid Assets Current Effective Average Maturity
Portfolios Yield Yield Yield (days)
=========================================================
<S> <C> <C> <C> <C>
Prime
Obligations 5.12% 5.25% 5.10% 40
---------------------------------------------------------
Money Market 5.20% 5.33% 5.18% 43
---------------------------------------------------------
Government 5.19% 5.32% 5.07% 31
---------------------------------------------------------
Treasury
Obligations 5.19% 5.32% 5.06% 34
---------------------------------------------------------
Treasury
Instruments 4.84% 4.95% 4.98% 54
---------------------------------------------------------
Federal 5.15% 5.28% 5.12% 41
---------------------------------------------------------
Tax-Exempt
Diversified 3.58% 3.64% 3.30% 39
---------------------------------------------------------
Tax-Exempt
California 3.47% 3.53% 3.11% 34
---------------------------------------------------------
Tax-Exempt
New York 3.52% 3.58% 3.19% 34
---------------------------------------------------------
</TABLE>
* ILA offers three separate classes of units (Institutional, Administration and
Service), each of which is subject to different fees and expenses that affect
performance and entitle unitholders to different services. The Administration
units and the Service units offer financial institutions the opportunity to
receive a fee for providing administrative support services. The Administration
units pay 0.15% plus 0.10% from the adviser for a total of 0.25%. The Service
units pay 0.40% plus 0.10% from the adviser for a total of 0.50%. More complete
information, including management fees and expenses, is included in the ILA
Portfolios' prospectus or may be obtained by calling the Goldman Sachs Funds at
1-800-621-2550.
Domestic Credit Trends Were Positive, Reflecting a Healthy
Economy and a Strong Market
Credit trends in 1996 were positive on the whole in the U.S., with steady
growth, low inflation, a booming stock market, and technological advances and
globalization transforming many industries. The major story of 1996 was the Dow
Jones Industrial Average climb of 26%, which, following the 33.5% increase in
1995, added up to a 68% growth rate since 1994.
The rising stock market supported record levels of mergers and
acquisitions. Over $650 billion in mergers, acquisitions and spin-offs were
announced in the U.S. in 1996 (up 27% from 1995), with $1.4 trillion announced
globally. This trend was spurred on not only by the stock market, but also by
deregulation in telecommunications, utilities and broadcasting. Unlike the
1980s, mergers this past year were generally equity-financed and aimed at
expanding core businesses, rather than diversifying. Merger and acquisition
activity was also utilized to boost earnings growth, since cost-cutting
opportunities had been largely exhausted during 1995.
Banks, which dominated merger activity in 1995, were busy consolidating
those mergers in 1996. It is likely that large regional domestic banks will
continue making acquisitions in 1997, although this is not expected to affect
their credit quality. At the end of the third quarter 1996, 80% of the banking
sector had a stable rating outlook.
Although consumer confidence was buoyed by low unemployment and mild
inflation, growing household debt levels led to an all-time high in credit card
loan delinquencies and personal bankruptcies. Consequently, financial results in
the consumer products, retail, restaurant and entertainment businesses were
mediocre at best. Almost all other industries, however, had improved credit
quality, with upgrades surpassing downgrades in utilities, energy, healthcare
and financial institutions. Many companies used the strength of the stock market
to substitute debt capital with equity capital, thereby improving their credit
quality.
Credit quality in the tax-exempt market was steady-to-improving during
1996. Market concerns arising from
- --------------------------------------------------------------------------------
2
<PAGE>
the Orange County bankruptcy abated somewhat, although various forms of credit
enhancement remained popular, even among high-quality issuers. Reflecting the
strong national economy, many states and localities experienced positive
financial results, reducing their regular cash flow borrowings.
The Credit Picture Abroad: Europe Improved,
While Asia Was Generally Stable
In Europe, developments were driven by the push towards European Monetary
Union (EMU), while the key factors in Asia were the fragile Japanese recovery
and a sharp downturn in Asian exports. In general, sovereign creditworthiness
improved during 1996. This was particularly the case in Europe, where the
political will to qualify for EMU produced significant improvements in fiscal
policy and debt dynamics, as it sparked more rapid corporate restructuring.
French and Italian banks did require close monitoring this year as their problem
loans continued, but French bank credit quality stabilized after having suffered
broad rating downgrades in 1995. The credit quality of most other European banks
was stable, with a few minor downgrades of German and Swiss banks. In Asia,
creditworthiness was fairly stable. The notable negative exception was the
Japanese financial sector, which remained under pressure from the ongoing
weakness of the real estate markets, sluggish economic growth and ongoing
deregulation. However, Japan's largest banks have strong fundamentals and will
continue to be important and dominant players in the global financial market.
Australian credit quality strengthened through improved macroeconomic balances,
which provided evidence that Australia's recent boom-and-bust cycles may be
over. The weakness of Asian exports did not affect creditworthiness directly;
exports should recover this year, and the scare could prompt salutary policy
adjustments going forward.
In 1996, we continued to apply conservative credit standards to our money
market portfolios. The Goldman Sachs Credit Department, which has analysts based
in London, Tokyo, Frankfurt and New York, as well as extensive technological
assets and credit expertise, will continue to vigilantly monitor global
developments in 1997.
Outlook and Strategies for 1997
Fourth-quarter 1996 GDP was reported at 4.7%, reflecting a stronger
economic picture from several sources: a sharp narrowing of the U.S. trade
deficit, as well as increases in consumer spending and industrial production.
Goldman Sachs' economists expect economic growth to continue at just under 2.0%
for the first quarter of 1997 and at approximately 3.0% for the full year. As a
result, Goldman Sachs currently believes the Fed is likely to raise short-term
interest rates by midyear.
Consequently, ILA Portfolios will continue to be managed with
short-to-neutral average life targets and short, ddered structures to prepare
for higher rates ahead.
Extended Trading Hours Improve Service Further
On November 4, 1996, we extended the trading hours for the Institutional
Liquid Assets Federal and Treasury Instruments Portfolios to 3:00 p.m. EST. Many
clients have already taken advantage of this additional flexibility.
In closing, we thank you for your support and for making 1996 a successful
year for the ILA Portfolios. We are pleased that many of you have joined our
conference calls following each Federal Open Market Committee meeting throughout
the year. Our goal is to continue to provide you with competitive performance,
as well as a range of value-added services that reflect the breadth and depth of
Goldman Sachs' outstanding resources.
Sincerely,
/s/ Kaysie P. Uniacke
Kaysie P. Uniacke
Portfolio Manager
February 7, 1997
3
<PAGE>
Statement of Investments
- -----------------------------------------------------------
ILA Prime Obligations Portfolio
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
Commercial Paper and Corporate Obligations--60.5%
Bank Holding Companies
BankAmerica Corp.
$50,000,000 5.27% 03/21/97 $ 49,421,764
Business Credit Institutions
General Electric Capital Corp.
20,000,000 5.30 03/26/97 19,752,667
30,000,000 5.44 04/03/97 29,582,933
JC Penney Funding Corp.
44,300,000 5.31 01/31/97 44,103,973
Chemicals
Bayer Corp.
25,000,000 5.33 03/13/97 24,737,201
Commercial Banks
CP Trust Certificates Series 1996
35,000,000 5.94/(a)/ 03/28/97 35,000,000
Life Insurance
Commonwealth Life Insurance Co.
55,000,000 6.11/(b)/ 05/08/97 55,000,000
Pacific Mutual Life Insurance Co.
25,000,000 5.52/(b)/ 02/28/97 25,000,000
Prudential Funding Corp.
40,000,000 5.42 01/29/97 39,831,378
Motor Vehicles and Equipment
Ford Motor Credit Corp.
20,000,000 5.50 01/28/97 19,917,500
Hertz Corporation
25,000,000 5.32 02/04/97 24,874,389
Personal Credit Institutions
Associates Corp.
50,000,000 5.32 01/29/97 49,793,111
Household Finance Corp.
50,000,000 5.32 03/12/97 49,482,778
Transamerica Finance Corp.
20,000,000 5.43 01/29/97 19,915,533
Receivable/Asset Financings
Beta Finance Inc.
7,000,000 6.11 06/17/97 7,000,000
Delaware Funding Corp.
30,000,000 5.29 02/20/97 29,779,583
Enterprise Funding Corp.
10,062,000 5.33 01/21/97 10,032,205
9,103,000 5.33 01/23/97 9,073,350
International Lease Finance Corp.
9,000,000 5.29% 03/24/97 $ 8,891,555
30,000,000 5.32 04/04/97 29,587,700
New Center Asset Trust
10,000,000 5.52 01/28/97 9,958,600
10,000,000 5.37 04/04/97 9,861,275
Security and Commodity Brokers, Dealers and Services
Bear Stearns Companies, Inc.
40,000,000 5.30 02/13/97 39,746,778
10,000,000 5.34 03/12/97 9,896,167
C.S. First Boston, Inc.
15,000,000 5.33 01/22/97 14,953,363
Merrill Lynch & Co., Inc.
10,000,000 5.45 02/19/97 9,925,819
40,000,000 5.33 02/26/97 39,668,356
Morgan Stanley Group, Inc.
10,000,000 5.59 01/28/97 9,958,075
15,000,000 5.32 02/06/97 14,920,200
25,000,000 5.79/(a)/ 06/27/97 25,000,000
- -----------------------------------------------------------
Total Commercial Paper and Corporate
Obligations $764,666,253
- -----------------------------------------------------------
Bank Notes--10.7%
Colorado National Bank
$25,000,000 5.59%/(b)/ 01/15/97 $ 24,999,810
FCC National Bank
15,000,000 5.70 05/22/97 14,982,722
20,000,000 6.00 06/02/97 20,000,808
Huntington National Bank
25,000,000 6.05 06/13/97 25,014,637
PNC Bank, N.A.
40,000,000 5.58/(b)/ 04/01/97 39,992,313
SMM Trust 1996
10,000,000 5.69/(b)/ 06/20/97 10,000,000
- -----------------------------------------------------------
Total Bank Notes $134,990,290
- -----------------------------------------------------------
U.S. Government Agency Obligations--1.6%
Federal National Mortgage Association
$20,400,000 5.36% 03/12/97 $ 20,187,386
- -----------------------------------------------------------
Total U.S. Government Agency Obligations $ 20,187,386
- -----------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
4
<PAGE>
Statement of Investments
- -----------------------------------------------------------
ILA Prime Obligations Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
Certificates of Deposit--9.5%
Chase Manhattan Corp.
$ 10,000,000 5.75% 02/03/97 $ 10,000,000
40,000,000 5.42 03/12/97 40,000,000
First Alabama Bank
20,000,000 5.55 02/28/97 19,999,973
Mellon Bank, N.A.
40,000,000 5.35 02/19/97 40,000,000
Union Bank of California
10,000,000 5.58 02/28/97 10,000,000
- -----------------------------------------------------------
Total Certificates of Deposit $ 119,999,973
- -----------------------------------------------------------
Repurchase Agreements--17.9%
C.S. First Boston Corp., dated 12/31/96, repurchase
price $50,465,000 (FNMA: $51,588,373, 6.12%-6.23%,
02/01/32-10/01/32)
$ 50,000,000 5.40% 03/03/97 $ 50,000,000
JP Morgan Securities, Inc., dated 12/31/96, repurchase
price $100,036,111 (U.S. Treasury Bond: $53,861,960,
11.25%, 02/15/15; FHLB Stripped Security:
$48,746,508, 06/23/97)
100,000,000 6.50 01/02/97 100,000,000
JP Morgan Securities, Inc., dated 12/31/96, repurchase
price $25,213,750 (FNMA: $9,152,917, 7.50%,
04/01/26; FHLMC: $17,073,692, 7.50%, 11/01/26)
25,000,000 5.40 02/26/97 25,000,000
Smith Barney, Inc., dated 12/31/96, repurchase price
$30,257,450 (FHLMC: $31,328,053, 7.00%,
06/01/26-11/01/26)
30,000,000 5.42 02/26/97 30,000,000
Joint Repurchase Agreement Account
21,400,000 6.58 01/02/97 21,400,000
- -----------------------------------------------------------
Total Repurchase Agreements $ 226,400,000
- -----------------------------------------------------------
Total Investments $1,266,243,902/(c)/
===========================================================
/(a)/Variable rate security-base index is one of the following:
U.S. Treasury Bill
One or three month LIBOR
One month commercial paper
Federal Funds
Prime lending rate
/(b)/Variable rate master note-base index is LIBOR.
/(c)/The amount stated also represents aggregate cost for federal
income tax purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Money Market Portfolio
December 31, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
<S> <C> <C> <C>
Commercial Paper and Corporate Obligations--48.5%
Business Credit Institutions
General Electric Capital Corp.
$15,000,000 5.44% 04/03/97 $ 14,791,467
Commercial Banks
CP Trust Certificates Series 1996
20,000,000 5.68/(a)/ 03/28/97 20,000,000
Computer Software and Services
Siemens Capital Corp.
25,000,000 5.32 02/13/97 24,841,139
Foreign Banks
Banca Crt Financial Corp.
10,000,000 5.35 01/22/97 9,968,792
5,000,000 5.35 01/31/97 4,977,708
17,430,000 5.45 03/03/97 17,269,039
5,400,000 5.42 04/03/97 5,325,204
Generale Bank
15,000,000 5.35 04/10/97 14,779,313
San Paolo U.S. Finance Co.
25,000,000 5.36 01/31/97 24,888,333
15,000,000 5.33 02/13/97 14,904,504
Unifunding, Inc.
40,000,000 5.45 01/29/97 39,830,444
Home Builders
International Lease Finance Corp.
40,000,000 5.43 03/07/97 39,607,833
Life Insurance
Commonwealth Life Insurance Co.
25,000,000 5.64/(b)/ 05/08/97 25,000,000
Prudential Funding Corp.
10,000,000 5.42 01/29/97 9,957,844
Motor Vehicles and Equipment
Daimler Benz Corp., N.A.
25,000,000 5.35 03/25/97 24,691,631
Ford Motor Credit Co.
40,000,000 5.32 02/04/97 39,799,022
Security and Commodity Brokers, Dealers and Services
Bear Stearns Companies, Inc.
35,000,000 5.30 02/13/97 34,778,431
Merrill Lynch & Co., Inc.
40,000,000 5.35 02/11/97 39,756,278
Morgan Stanley Group, Inc.
20,000,000 5.32 02/06/97 19,893,600
20,000,000 5.53/(a)/ 06/27/97 20,000,000
Nomura Holdings
35,000,000 5.39 01/29/97 34,853,272
- -----------------------------------------------------------
Total Commercial Paper and Corporate
Obligations $479,913,854
- -----------------------------------------------------------
Bank Notes--15.1%
Colorado National Bank
$15,000,000 5.59%/(b)/ 01/15/97 $ 14,999,886
Dakota Certificates of Standard Credit Card Master Trust
20,000,000 5.33/(b)/ 02/07/97 19,890,439
FCC National Bank, Wilmington
10,000,000 5.70 05/22/97 9,988,481
First Bank FSB
5,000,000 5.61/(b)/ 04/11/97 4,999,734
First National Bank of Maryland
5,000,000 5.60/(b)/ 09/30/97 4,998,547
Huntington National Bank
5,000,000 6.05 06/13/97 4,998,229
PNC Bank, N.A.
10,000,000 5.58/(b)/ 04/01/97 9,998,078
20,000,000 5.40/(b)/ 10/01/97 19,988,244
Society National Bank of Cleveland
25,000,000 5.58/(b)/ 05/14/97 24,990,309
SMM Trust 1996
10,000,000 5.69/(b)/ 06/20/97 10,000,000
Southtrust Bank of Alabama, N.A.
25,000,000 5.54/(b)/ 05/15/97 24,995,313
- -----------------------------------------------------------
Total Bank Notes $149,847,260
- -----------------------------------------------------------
Certificates of Deposit--0.5%
Chase Manhattan Corp.
$ 5,000,000 5.75% 02/03/97 $ 5,000,000
- -----------------------------------------------------------
Total Certificates of Deposit $ 5,000,000
- -----------------------------------------------------------
Certificates of Deposit - Foreign Eurodollar--7.6%
Norinchukin Bank, London
$40,000,000 5.49% 03/18/97 $ 40,000,830
Sanwa Bank Ltd., London
35,000,000 5.46 03/21/97 35,000,377
- -----------------------------------------------------------
Total Certificates of Deposit - Foreign
Eurodollar $ 75,001,207
- -----------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Statement of Investments
- ----------------------------------------------------------
ILA Money Market Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
Certificates of Deposit - Yankeedollar--9.1%
Industrial Bank of Japan, New York
$35,000,000 5.46% 03/19/97 $ 35,000,368
Landesbank Hessen Thuer Gir, New York
30,000,000 6.03 06/13/97 30,036,531
Sumitomo Bank, Los Angeles
25,000,000 5.52 02/28/97 24,998,171
- -----------------------------------------------------------
Total Certificates of Deposit - Yankeedollar $ 90,035,070
- -----------------------------------------------------------
Taxable Municipal Notes--2.9%
Florida Housing Finance Authority
$28,800,000 5.92%/(b)/ 01/01/34 $ 28,800,000
- -----------------------------------------------------------
Total Taxable Municipal Notes $ 28,800,000
- -----------------------------------------------------------
Time Deposit--3.6%
Bank of Tokyo, Mitsubishi Bank Ltd.
$35,000,000 5.50% 05/16/97 $ 35,000,000
- -----------------------------------------------------------
Total Time Deposit $ 35,000,000
- -----------------------------------------------------------
Repurchase Agreements--12.9%
JP Morgan Securities, Inc., dated 12/31/96, repurchase
price $50,018,056 (FHLMC: $52,044,149, 7.26%,
09/17/01)
$50,000,000 6.50% 01/02/97 $ 50,000,000
Joint Repurchase Agreement Account
77,200,000 6.58 01/02/97 77,200,000
- -----------------------------------------------------------
Total Repurchase Agreements $127,200,000
- -----------------------------------------------------------
Total Investments $990,797,391/(c)/
===========================================================
/(a)/Variable rate security-base index is one of the following:
U.S. Treasury Bill
One or three month LIBOR
One month commercial paper
Federal Funds
Prime lending rate
/(b)/Variable rate master note-base index is LIBOR.
/(c)/The amount stated also represents aggregate cost for federal
income tax purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- -----------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Government Portfolio
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
U.S. Government Agency Obligations--31.2%
Federal Home Loan Bank
$ 25,000,000 5.35% 01/30/97 $ 24,892,257
50,000,000 5.40/(a)/ 04/04/97 49,988,154
25,000,000 5.45 11/12/97 24,977,221
10,000,000 5.42 12/02/97 9,986,619
25,000,000 5.50/(a)/ 12/26/97 24,979,592
Federal National Mortgage Association
30,000,000 6.50 01/02/97 29,994,583
15,000,000 4.72/(a)/ 01/27/97 14,999,007
20,000,000 5.41/(a)/ 09/29/97 19,992,616
7,500,000 5.53 10/29/97 7,497,075
50,000,000 5.40/(a)/ 12/03/97 49,968,600
- -----------------------------------------------------------
Total U.S. Government Agency Obligations $257,275,724
- -----------------------------------------------------------
U.S. Treasury Obligations--3.0%
United States Treasury Notes
$ 20,000,000 5.63% 06/30/97 $ 19,965,941
5,000,000 6.00 09/02/97 4,999,214
- -----------------------------------------------------------
Total U.S. Treasury Obligations $ 24,965,155
- -----------------------------------------------------------
Repurchase Agreements--66.1%
Bear Stearns Companies, Inc. dated 12/31/96, repurchase
price $30,011,333 (FNMA: $30,894,721, 8.50%, 09/01/25)
$ 30,000,000 6.80% 01/02/97 $30,000,000
C.S. First Boston Corp., dated 12/11/96, repurchase
price $30,403,125 (FHLM: $31,559,521, 7.00%, 11/01/26)
30,000,000 5.38 03/11/97 30,000,000
Daiwa Securities, dated 12/31/96, repurchase price
$30,011,500 (U.S. Treasury Bill: $30,600,013, 11/13/97)
30,000,000 6.90 01/02/97 30,000,000
Goldman, Sachs & Co., dated 12/11/96, repurchase price
$30,403,125 (FNMA: $30,964,228, 6.12%, 10/01/32)
30,000,000 5.38 03/11/97 30,000,000
JP Morgan Securities, Inc., dated 12/12/96, repurchase
price $30,403,125 (FNMA: $31,531,603, 8.00%, 06/01/26)
30,000,000 5.38 03/12/97 30,000,000
Lehman Government Securities, Inc., dated 12/31/96,
repurchase price $30,011,833 (U.S. Treasury Stripped
Security: $22,193,561, 11/15/99; U.S. Treasury
Notes: $8,408,442, 7.75%-8.88%, 2/15/00-2/15/01)
30,000,000 7.10 01/02/97 30,000,000
Merrill Lynch Government Securities, Inc., dated 12/31/96,
repurchase price $30,011,833 (FNMA: $30,385,501, 5.28%,
06/01/24)
30,000,000 7.10 01/02/97 30,000,000
Repurchase Agreements (continued)
Nomura Securities International, Inc., dated 12/31/96,
repurchase price $30,012,500 (FHLM: $30,924,339,
6.50%-8.00%, 01/01/00-09/01/11)
$ 30,000,000 7.50% 01/02/97 $ 30,000,000
Joint Repurchase Agreement Account
305,000,000 6.58 01/02/97 305,000,000
- -----------------------------------------------------------
Total Repurchase Agreements $545,000,000
- -----------------------------------------------------------
Total Investments $827,240,870/(b)/
===========================================================
/(a)/Variable rate security-base index is one of the following:
Federal Funds
Prime lending rate
One month LIBOR
/(b)/The amount stated also represents aggregate cost for federal income tax
purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentages shown for each investment category reflect the value of the
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Statement of Investments
- -----------------------------------------------------------
ILA Treasury Obligations Portfolio
December 31, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
<S> <C> <C> <C>
U.S. Treasury Obligations--9.6%
United States Treasury Notes
$40,000,000 5.63% 06/30/97 $39,932,792
27,500,000 5.38 12/01/97 27,459,792
10,000,000 5.25 12/31/97 9,975,384
- -----------------------------------------------------------
Total U.S. Treasury Obligations $77,367,968
- -----------------------------------------------------------
Repurchase Agreements--90.8%
Bear Stearns Companies Inc., dated 12/31/96, repurchase
price $35,013,125 (U.S. Treasury Note: $35,659,606,
8.75%, 8/15/00)
$35,000,000 6.75% 01/02/97 $35,000,000
C.S. First Boston Corp., dated 12/13/96, repurchase price
$30,399,750 (U.S. Treasury Note: $30,748,620, 7.50%,
11/15/01)
30,000,000 5.33 03/13/97 30,000,000
CIBC Wood Gundy Securities, dated 12/31/96, repurchase
price $35,013,028 (U.S. Treasury Bond: $35,702,267,
8.50%, 02/15/20)
35,000,000 6.70 01/02/97 35,000,000
Daiwa Securities, dated 12/31/96, repurchase price
$35,013,417 (U.S. Treasury Bill: $35,700,492, 11/13/97)
35,000,000 6.90 01/02/97 35,000,000
Goldman, Sachs & Co., dated 12/31/96, repurchase price
$35,012,833 (U.S. Treasury Note: $35,700,497, 7.25%,
02/15/98)
35,000,000 6.60 01/02/97 35,000,000
JP Morgan Securities, Inc., dated 12/31/96, repurchase
price $35,012,833 (U.S. Treasury Note: $35,838,260,
7.38%, 11/15/97)
35,000,000 6.60 01/02/97 35,000,000
Lehman Government Securities, Inc., dated 12/31/96,
repurchase price $35,013,806 (U.S. Treasury Stripped
Securities: $35,703,063, 02/15/00-11/15/00)
35,000,000 7.10 01/02/97 35,000,000
Merrill Lynch Government Securities, Inc., dated
12/31/96, repurchase price $35,012,542 (U.S. Treasury
Stripped Securities: $35,702,128, 02/15/02-02/15/26)
35,000,000 6.45 01/02/97 35,000,000
Nomura Securities International, Inc., dated 12/12/96,
repurchase price $30,400,500 (U.S. Treasury Notes:
$30,600,339, 5.13%-8.50%, 04/15/97-08/15/01)
30,000,000 5.34 03/12/97 30,000,000
Sanwa Securities, dated 12/31/96, repurchase price
$35,013,125 (U.S. Treasury Note: $36,039,356, 8.50%,
2/15/00)
35,000,000 6.75 01/02/97 35,000,000
Smith Barney Inc., dated 12/11/96, repurchase price
$30,400,500 (U.S. Treasury Notes: $28,942,094,
5.38%-6.88%, 05/15/97-07/31/99; U.S. Treasury Stripped
Security: $1,658,209, 02/15/00)
30,000,000 5.34 03/11/97 30,000,000
UBS Securities Inc., dated 12/31/96, repurchase price
$35,013,368 (U.S. Treasury Note: $35,676,249, 6.00%,
09/30/98)
35,000,000 6.88 01/02/97 35,000,000
Joint Repurchase Agreement Account
327,900,000 6.58 01/02/97 327,900,000
- -----------------------------------------------------------
Total Repurchase Agreements $732,900,000
- -----------------------------------------------------------
Total Investments $810,267,968/(a)/
===========================================================
</TABLE>
/(a)/The amount stated also represents aggregate cost for
federal income tax purposes.
Interest rates represent either the stated coupon rate,
annualized yield on date of purchase for discounted notes,
or, for floating rate securities, the current reset rate,
which is based upon current interest rate indices.
The percentages shown for each investment category reflect
the value of investments in that category as a percentage
of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Statement of Investments
- ------------------------------------------------------------
ILA Treasury Instruments Portfolio
December 31, 1996
- ------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
============================================================
U.S. Treasury Obligations--99.3%
United States Treasury Bills
$25,000,000 4.72% 01/30/97 $ 24,904,944
5,500,000 4.95 01/30/97 5,478,069
75,000,000 4.80 02/06/97 74,640,000
48,600,000 4.83 02/06/97 48,365,262
14,500,000 4.86 02/06/97 14,429,530
32,100,000 5.41 02/06/97 31,942,389
90,000,000 4.95 02/06/97 89,554,500
75,000,000 4.82 02/13/97 74,568,208
150,000,000 5.03 02/13/97 149,098,792
10,500,000 4.86 02/27/97 10,419,203
21,500,000 4.90 02/27/97 21,333,196
28,400,000 4.94 02/27/97 28,177,865
United States Treasury Notes
30,000,000 6.25 01/31/97 30,025,345
50,000,000 7.50 01/31/97 50,097,656
50,000,000 4.75 02/18/97 49,961,310
312,000,000 6.88 02/28/97 312,866,648
205,000,000 6.63 03/31/97 205,703,323
- ------------------------------------------------------------
Total U.S. Treasury Obligations $1,221,566,240
- ------------------------------------------------------------
Total Investments $1,221,566,240/(a)/
============================================================
/(a)/The amount stated also represents aggregate cost for federal income tax
purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentages shown for each investment category reflect the value of the
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Federal Portfolio
December 31, 1996
- ------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
============================================================
U.S. Government Agency Obligations--100.3%
Federal Farm Credit Bank
$ 20,515,000 5.36% 01/02/97 $ 20,511,946
37,635,000 5.58 01/06/97 37,605,833
2,400,000 5.58 01/07/97 2,397,767
27,300,000 5.26-5.27 01/13/97 27,252,072
36,345,000 5.35 01/15/97 36,269,382
56,000,000 5.37 01/21/97 55,832,933
42,000,000 5.37 01/23/97 41,862,170
9,750,000 5.50 01/27/97 9,711,271
11,490,000 5.48 01/31/97 11,437,529
212,210,000 5.23-5.41/(a)/ 02/03/97 212,075,061
44,895,000 5.21 02/04/97 44,674,092
24,000,000 5.33 02/06/97 23,872,080
20,545,000 5.21-5.33 02/10/97 20,424,201
10,000,000 5.20 02/14/97 9,936,444
79,055,000 5.21-5.39 02/18/97 78,494,540
14,830,000 5.22 02/21/97 14,720,332
50,635,000 5.21-5.33 02/26/97 50,216,604
17,000,000 5.21 02/27/97 16,859,764
16,000,000 5.21 02/28/97 15,865,698
51,610,000 5.22-5.32 03/03/97 51,423,313
8,000,000 5.32 03/10/97 7,919,609
7,180,000 5.21 03/11/97 7,108,302
50,000,000 5.48/(b)/ 03/11/97 49,992,224
6,200,000 5.21 03/12/97 6,137,191
20,000,000 5.36 03/25/97 19,752,844
19,000,000 5.32-5.36 03/26/97 18,762,747
9,000,000 5.32 03/27/97 8,886,950
11,000,000 5.32 03/31/97 10,855,325
17,000,000 5.30 04/01/97 16,774,750
50,000,000 5.52/(b)/ 05/21/97 49,981,445
50,000,000 5.84 06/18/97 49,958,175
10,000,000 5.37/(b)/ 06/26/97 9,996,868
50,000,000 5.49/(b)/ 08/26/97 49,972,764
50,000,000 5.36/(b)/ 10/02/97 49,959,775
Federal Home Loan Bank
5,100,000 5.22 01/02/97 5,099,261
50,000,000 5.38/(b)/ 01/03/97 49,999,747
17,895,000 5.24 01/16/97 17,855,929
34,900,000 5.23 01/23/97 34,788,562
25,000,000 5.28 01/28/97 24,901,000
133,300,000 5.22-5.35 01/30/97 132,733,719
25,130,000 5.28 01/31/97 25,019,533
181,845,000 5.21-5.32 02/13/97 180,701,332
28,750,000 5.21-5.26 02/14/97 28,566,649
145,815,000 5.20% 02/20/97 144,761,891
34,300,000 5.31 02/21/97 34,041,978
125,320,000 5.20-5.21 02/27/97 124,287,275
27,680,000 5.21 03/06/97 27,423,622
101,750,000 5.23 03/13/97 100,700,477
35,000,000 5.35 03/27/97 34,557,882
50,000,000 5.51/(b)/ 03/27/97 49,989,790
80,000,000 5.35 03/31/97 78,941,889
100,000,000 5.22/(b)/ 04/01/97 99,981,167
25,000,000 5.84 06/27/97 24,976,809
50,000,000 5.51/(b)/ 08/28/97 49,977,691
65,000,000 5.50/(b)/ 09/26/97 64,962,440
50,000,000 5.50/(b)/ 12/26/97 49,959,182
Student Loan Marketing Association
75,000,000 5.41 10/02/97 74,972,733
74,000,000 5.46 11/10/97 73,963,185
Tennessee Valley Authority
40,000,000 5.21 01/24/97 39,866,856
47,975,000 5.21 02/05/97 47,731,993
47,300,000 5.21 02/06/97 47,053,567
87,385,000 5.20-5.22 02/19/97 86,765,491
75,000,000 5.17 02/20/97 74,461,458
75,000,000 5.17 02/21/97 74,450,688
60,840,000 5.26-5.31 02/25/97 60,347,412
20,000,000 5.23 03/21/97 19,770,461
106,885,000 5.28 03/26/97 105,568,177
75,000,000 5.25 04/09/97 73,928,125
- ------------------------------------------------------------
Total Investments $3,300,609,972/(c)/
============================================================
/(a)/Variable rate security-base index is one of the following:
U.S. Treasury Bill
One or three month LIBOR
Federal Funds
Prime lending rate
/(b)/Variable rate master note-base index is LIBOR.
/(c)/The amount stated also represents aggregate cost for federal
income tax purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
Statement of Investments
- -------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio
December 31, 1996
- --------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
==============================================================
Alabama--6.4%
Columbia IDB PCRB Series 1996 A for Alabama Power Co.
(VMIG1)
$21,000,000 5.00% 01/01/97 $21,000,000
Columbia IDB PCRB VRDN for Alabama Power Co. Series
1995 B
(A-1/VMIG1)/(c)/
23,500,000 5.00 01/01/97 23,500,000
Columbia IDB PCRB VRDN for Alabama Power Co. Series
1995 C
(A-1/VMIG1)
4,600,000 4.65 01/01/97 4,600,000
Columbia IDB PCRB VRDN for Alabama Power Co. Series
1995 E
(A-1/VMIG1)
4,900,000 5.10 01/01/97 4,900,000
Homewood RB for Samford University (Bank of Nova Scotia
LOC) (A-1+/VMIG1)
16,000,000 5.00 01/01/97 16,000,000
Jefferson County Sewer Revenue Warrants Series 1995 A
(Bayerische Landesbank Girozentrale LOC)(A-1+/P-1)
19,300,000 4.25 01/07/97 19,300,000
Mobile County IDA PCRB for M&T Chemicals (Bankers Trust
LOC) (A1)
3,000,000 4.13 01/01/97 3,000,000
Mobile IDA PCRB for Alabama Power Co. Series
1993A(A-1/VMIG1)
8,600,000 4.15 01/01/97 8,600,000
Mobile IDA PCRB for Alabama Power Co. Series
1994(A-1/VMIG1)
2,100,000 5.00 01/01/97 2,100,000
- -----------------------------------------------------------
$103,000,000
- -----------------------------------------------------------
Alaska--0.2%
Valdez Marine Terminal RB for Arco, Inc. Series 1994
C(A-1/P-1)
$ 2,600,000 3.60% 04/10/97 $ 2,600,000
- -----------------------------------------------------------
Arkansas--1.2%
Crossett PCRB for Georgia Pacific Corp. Series 1991
VRDN
(Suntrust Bank LOC)(A-1+/AA3)
$ 9,500,000 4.15% 01/07/97 $ 9,500,000
Union County PCRB Series 1988 for Great :Lakes Chemical
(A-1)
9,000,000 4.21/(b)/ 01/07/97 9,000,000
- -----------------------------------------------------------
$18,500,000
- -----------------------------------------------------------
California--5.8%
California RANS VRDN Series 1996-97 B(SP-1+/VMIG1)
$ 6,000,000 3.47% 01/31/97 $ 6,000,000
California RANS VRDN Series 1996-97 C1(SP-1+/VMIG1)
12,000,000 4.00 01/07/97 12,000,000
California Statewide Communities Development Authority
Refunding RB Series 1995(A-1+)/(c)/
$ 9,300,000 3.90% 01/07/97 $ 9,300,000
California Statewide Communities Development Authority
Refunding RB Series 1995A-2(A-1+)
2,500,000 3.90 01/07/97 2,500,000
Los Angeles County MF Hsg. RB(A-1+)
3,500,000 2.80 01/07/97 3,500,000
Los Angeles County TRANS (Credit Suisse/Morgan Guaranty
Trust Co./Westdeutsche Landesbank Girozentrale/Bank
of America/Union Bank of Switzerland
LOC)(SP-1/VMIG1)
12,450,000 4.50 06/30/97 12,492,536
Newport Beach VRDN RB Series 1996 A(A-1+)
600,000 5.15 01/01/97 600,000
State of California RANS Series 1996-97(SP-1+/VMIG1)
45,800,000 4.05 01/07/97 45,800,000
- -----------------------------------------------------------
$92,192,536
- -----------------------------------------------------------
Colorado--0.6%
State of Colorado General Fund TRANS Series 1996
A(SP-1+)
$10,000,000 4.50% 06/27/97 $10,033,630
- -----------------------------------------------------------
Connecticut--1.4%
State of Connecticut Development Authority
PCRB(Deutsche Bank LOC)(A-1+/VMIG1)
$17,400,000 4.15%/(b)/ 01/07/97 $17,400,000
State of Connecticut State 2nd Lien VRDN (Commerzbank
Bank LOC)(A-1+/VMIG1)
4,800,000 4.00 01/07/97 4,800,000
- -----------------------------------------------------------
$22,200,000
- -----------------------------------------------------------
District of Columbia--1.1%
District of Columbia VRDN ACES for Georgetown
University Series 1988 B, C and E (Bayerishe
Landesbank Girozentrale LOC)
(A-1+/VMIG1)
$10,900,000 4.10% 01/07/97 $10,900,000
HFA MF Hsg. for Mclean Gardens South Apartments VRDN
(Sumitomo Bank LOC)(VMIG1)
7,000,000 4.30 01/07/97 7,000,000
- -----------------------------------------------------------
$17,900,000
- -----------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
Florida--2.8%
Dade County Water & Sewer VRDN Series 1994(A-1+/VMIG1)
$7,475,000 4.00%/(b)/ 01/07/97 $ 7,475,000
Florida Local Government Pooled CP Notes (First Union
National Bank of Florida LOC)(A-1+/P-1)
29,162,000 3.70 01/24/97 29,162,000
7,225,800 3.60 02/18/97 7,225,800
1,800,000 3.50 03/14/97 1,800,000
- -----------------------------------------------------------
$45,662,800
- -----------------------------------------------------------
Georgia--12.0%
Albany Dougherty PCRB for Philip Morris Co. (A-1/P-1)
$17,000,000 4.15% 01/07/97 $17,000,000
Albany Dougherty PCRB Series 1991 for Georgia Power
Co.(A-1+)
2,120,000 4.15 01/07/97 2,120,000
Burke County Development Authority RB(A-1+/VMIG1)
6,000,000 4.65 01/01/97 6,000,000
29,055,000 5.00 01/01/97 29,055,000
3,000,000 4.15 01/07/97 3,000,000
Burke County PCRB for Georgia Power Co.(A-1+/VMIG1)/(c)/
2,900,000 5.00 01/07/97 2,900,000
29,850,000 4.00/(b)/ 01/07/97 29,850,000
3,425,000 4.15 01/07/97 3,425,000
6,000,000 4.15 01/07/97 6,000,000
Burke County PCRB for Georgia Power Co. Series
1994(VMIG1)
3,400,000 5.00 01/07/97 3,400,000
Cobb County Institute of Nuclear Operations Inc. VRDN
for Georgia Power Co. (Suntrust Bank LOC)(Aa3)
4,295,000 4.15 01/07/97 4,295,000
Cobb County Power Operations Inc. VRDN (Trust Company
Bank LOC)(AA-)
2,330,000 4.15 01/07/97 2,330,000
Columbus Hospital Authority RB for St. Francis
Hospital(VMIG1)
7,750,000 4.15/(b)/ 01/01/97 7,750,000
DeKalb County IDA VRDN for Siemens Energy and
Automation, Inc.(P-1)
3,750,000 4.05 01/07/97 3,750,000
Dekalb Private Hospital Authority VRDN for Egleston
Children's Hospital Series 1994 A (Suntrust Bank
LOC)(VMIG1)
1,800,000 4.05 01/07/97 1,800,000
Floyd County PCRB for Georgia Power Co. Series
1996(A-1/VMIG1)
5,080,000 5.00 01/07/97 5,080,000
Fulco Hospital Authority Revenue Anticipation
Certificates Series 1992 (Suntrust Bank LOC)(A-1+)
4,815,000 4.15% 01/07/97 4,815,000
Georgia Municipal Gas Authority RB(A-1/VMIG1)
22,200,000 4.00/(b)/ 01/07/97 22,200,000
Heard County PCRB for Georgia Power Co. Series
1996(A-1/VMIG1)
1,800,000 5.00 01/01/97 1,800,000
Henry County IDA PCRB for Georgia Pacific Corp.
(Suntrust Bank LOC)(Aa3)
4,000,000 4.15 01/07/97 4,000,000
Municipal Electric Authority of Georgia Subordinate
General Resolution Series 1985 B and C (Credit
Suisse/Morgan Guaranty/Bayerische Landesbank
Girozentrale LOC)(A-1+/P-1)
12,650,000 3.55 03/06/97 12,650,000
8,145,000 3.55 03/11/97 8,145,000
Municipal Electric Authority of Georgia Subordinate
General Resolution Series 1994 C (Credit
Suisse/Morgan Guaranty/
Bayerische Landesbank Girozentrale LOC)(A-1+/VMIG1)
7,000,000 3.50 03/13/97 7,000,000
Savannah Economic Development Authority PCRB VRDN for
Savannah Electric & Power Co. (A-1/VMIG1)
4,085,000 4.15 01/07/97 4,085,000
- -----------------------------------------------------------
$192,450,000
- -----------------------------------------------------------
Hawaii--0.1%
Hawaii Housing Finance and Development Authority VRDN
(FHLB LOC)(A-1+)
$ 2,200,000 2.80% 01/07/97 $ 2,200,000
- -----------------------------------------------------------
Idaho--0.6%
Idaho Health Facilities for Holy Cross Health
Systems(A-1/VMIG1)
$10,000,000 4.10% 01/07/97 $10,000,000
- -----------------------------------------------------------
Illinois--3.2%
Belleville IDA for Weyerhaeuser Company Series
1993(A-1)
$ 1,800,000 4.21% 01/07/97 $ 1,800,000
Illinois Health Facilities Authority VRDN for Central
Dupage Hospital (Rabobank Nederland LOC)(VMIG1)
5,000,000 5.25 01/01/97 5,000,000
Illinois Health Facilities Authority VRDN for
Resurrection Healthcare(VMIG1)
15,000,000 5.00 01/01/97 15,000,000
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
Statement of Investments
- ------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
============================================================
Illinois (continued)
Illinois Health Facilities Authority VRDN Series 1985 D Revolving
Fund Pooled Finance Program (First National Bank of Chicago
LOC)(A-1/VMIG1)
$16,600,000 4.15% 01/07/97 $ 16,600,000
Illinois Health Facility Authority VRDN for Elmhurst Memorial
Hospital(VMIG1)
100,000 5.30 01/01/97 100,000
Sauget PCRB VRDN Series 1992(P-1)
3,300,000 4.20 01/07/97 3,300,000
Sauget PCRB VRDN Series 1993(P-1)
9,335,000 4.20 01/07/97 9,335,000
- -----------------------------------------------------------
$ 51,135,000
- -----------------------------------------------------------
Indiana--5.1%
Fort Wayne Hospital Authority VRDN Series 1985 C and D (Bank of
America LOC)(VMIG1)
$ 1,180,000 4.15% 01/07/97 $ 1,180,000
Fort Wayne Parkview Memorial Hospital VRDN Series 1985
B, C & D (Fuji Bank LOC)(VMIG1)/(c)/
16,855,000 4.15 01/07/97 16,855,000
Gary CP Notes for U.S. Steel Corp. (Bank of New York LOC)
(A-1+/P-1)
20,000,000 3.55 03/11/97 20,000,000
Indiana Hospital Equipment Financing Authority VRDN
Series 1985 A (MBIA)(A-1/VMIG1)
29,490,000 4.20 01/07/97 29,490,000
Jasper County PCRB for Nipsco Series 1994 A(A-1+/VMIG1)
5,200,000 5.10 01/01/97 5,200,000
Schererville Economic Development VRDN Series 1983 for Avery
International Corp. Project (Bankers Trust LOC)(Aa2)
4,000,000 4.13 01/07/97 4,000,000
Warrick County PCRB for Aluminum Company of America Series
1992(A-1)
5,000,000 4.15 01/07/97 5,000,000
- -----------------------------------------------------------
$ 81,725,000
- -----------------------------------------------------------
Iowa--1.4%
Muscatine County VRDN for Monsanto Corp.(P-1)
$ 1,000,000 4.20% 01/07/97 $ 1,000,000
Salix PCRB VRDN for Midwest Power Systems Inc.(A-1/VMIG1)/(c)/
21,795,000 4.15 01/07/97 21,795,000
- -----------------------------------------------------------
$ 22,795,000
- -----------------------------------------------------------
Kentucky--1.7%
Calvert VRDN for Air Products and Chemicals Inc. Project(A-1)
$ 1,000,000 4.20% 01/07/97 $ 1,000,000
Mason County Variable/Fixed Rate PCRB Pooled for East Kentucky
Power (CFC)(A-1+/Aa3)
13,450,000 4.15 01/07/97 13,450,000
Trimble County PCRB for Louisville Gas & Electric Series 1996 A(A-
1+/VMIG1)
12,500,000 3.50 03/14/97 12,500,000
- -----------------------------------------------------------
$ 26,950,000
- -----------------------------------------------------------
Louisiana--2.5%
Ascension Parish PCRB for BASF Wyandotte Corp. Series
1985 (Bank of Tokyo LOC)(P-1)
$ 2,600,000 5.10% 01/01/97 $ 2,600,000
Ascension Parish PCRB for Vulcan Materials Co. Series 1996(A-
1+/VMIG1)
8,200,000 4.20 01/07/97 8,200,000
Louisiana Public Facilities Authority School Health Care System
UPDATE Series 1993(A-1+/VMIG1)
7,700,000 3.60 01/08/97 7,700,000
Parish of Desoto PCRB Series 1991 A (Swiss Bank LOC)(A-1+/VMIG1)
4,600,000 4.05 01/07/97 4,600,000
Parish of Iberville VRDN for Air Products and Chemicals, Inc.
Project(A-1)
6,200,000 4.20 01/07/97 6,200,000
Plaquemines Port RB for Teco Energy, Inc. Series 1985 B(A-1+/P-1)
2,000,000 3.60 02/13/97 2,000,000
South Louisiana Port Commission RB for Occidental Petroleum Corp.
Series 1996 (Wachovia Bank LOC)(P-1)
4,400,000 4.15 01/07/97 4,400,000
West Baton Rouge Parish VRDN for Dow Chemical Co. Series 1991
(P-1)
4,000,000 3.55 02/10/97 4,000,000
- -----------------------------------------------------------
$ 39,700,000
- -----------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1996
- --------------------------------------------------------------------
- --------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
====================================================================
Maryland--0.9%
Baltimore County Consolidated Public Improvement BANS Series
1995(A-1+/P-1)
$10,000,000 3.55% 02/06/97 $ 10,000,000
Frederick GO VRDN (Fuji Bank LOC)(A-1/VMIG1)
4,800,000 4.25 01/07/97 4,800,000
- --------------------------------------------------------------------
$ 14,800,000
- --------------------------------------------------------------------
Massachusetts--1.6%
Massachusetts Bay Transportation Authority Series 1996 A Notes
(SP-1/MIG2)
$11,000,000 3.75% 02/28/97 $ 11,008,115
Massachusetts Health & Education Authority RB for Harvard
University Series I(A-1+/VMIG1)/(c)/
13,866,000 3.90 01/07/97 13,866,000
- --------------------------------------------------------------------
$ 24,874,115
- --------------------------------------------------------------------
Michigan--0.7%
Michigan Job Development Authority for Mazda Motor Manufacturing
VRDN (Sumitomo Bank LOC)(VMIG1)
$11,100,000 4.25% 01/07/97 $ 11,100,000
- --------------------------------------------------------------------
Minnesota--1.5%
Becker PCRB for Northern States Power Co. Series 1992 A(A-1+)
$ 8,000,000 3.65% 01/16/97 $ 8,000,000
6,000,000 3.55 03/12/97 6,000,000
Becker PCRB for Northern States Power Co. Series 1993 A(A-1/VMIG1)
4,000,000 3.55 03/12/97 4,000,000
White Bear Lake IDA for Weyerhauser Co. Series 1993(A-1)
6,800,000 4.21 01/07/97 6,800,000
- --------------------------------------------------------------------
$ 24,800,000
- --------------------------------------------------------------------
Mississippi--0.6%
Canton IDR for Levi Strauss Co. (Bank of America LOC)(P-1)
$10,000,000 4.15%/(b)/ 01/07/97 $ 10,000,000
- --------------------------------------------------------------------
Missouri--1.8%
Belton RB (Texas Commerce Bank LOC)(P-1)
$ 4,025,000 4.25% 01/07/97 $ 4,025,000
Kansas City Cloversett IDA MF Hsg. RB Series 1988 VRDN (Boatmen's
Bank of Kansas City LOC)(A-1+)
8,720,000 4.30 01/07/97 8,720,000
Missouri Health & Education Facility Authority VRDN (MBIA)(AAA)
10,500,000 4.10 01/07/97 10,500,000
State Environmental Improvement and Energy Resources
Authority RB for Monsanto Corporation (P-1)
$ 5,520,000 4.20% 01/07/97 $ 5,520,000
- --------------------------------------------------------------------
$ 28,765,000
- --------------------------------------------------------------------
Montana--0.3%
Forsyth PCRB for Pacificorp. Series 1988 (Industrial Bank of Japan
LOC)(A-1/P-1)
$ 3,400,000 4.70% 01/01/97 $ 3,400,000
Montana State Board of Investments VRDN Payroll Tax Bonds(VMIG1)
1,000,000 4.00 01/07/97 1,000,000
- --------------------------------------------------------------------
$ 4,400,000
- --------------------------------------------------------------------
Nevada--0.2%
Clark County VRDN for Nevada Airport System (MBIA)
(A-1+/VMIG1)
$ 3,200,000 4.00% 01/07/97 $ 3,200,000
- --------------------------------------------------------------------
New Jersey--3.3%
New Jersey TRANS Series 1997 A(A-1+/P-1)
$48,000,000 3.50% 03/12/97 $ 48,000,000
New Jersey Turnpike Authority RB Series 1991 D (FGIC)(P-1)
5,600,000 3.75 01/07/97 5,600,000
- --------------------------------------------------------------------
$ 53,600,000
- --------------------------------------------------------------------
New Mexico--0.2%
Farmington PCRB for Arizona Public Service Series 1994 A (Union
Bank of Switzerland LOC)(A-1+/P-1)
$ 2,600,000 5.00% 01/01/97 $ 2,600,000
- --------------------------------------------------------------------
New York--12.1%
New York City GO VRDN Series 1993 B (FGIC)(A-1+/VMIG1)
$ 5,500,000 4.50% 01/01/97 $ 5,500,000
New York City GO (MBIA)(VMIG1)
19,800,000 4.15 01/07/97 19,800,000
New York City GO RANS Series 1997 A(SP-1+/VMIG1)
60,000,000 4.50 04/15/97 60,137,770
New York City GO Series 1992 D (FGIC)
20,000,000 3.95 01/07/97 20,000,000
New York City GO Series 1994 (Union Bank of Switzerland
LOC)(A-1+/VMIG1)
2,200,000 4.50 01/01/97 2,200,000
New York City GO VRDN (Dai-Ichi Kangyo Bank LOC)(A-1/VMIG1)
2,600,000 4.50 01/01/97 2,600,000
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1996
- --------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
====================================================================
New York (continued)
New York City GO VRDN (Norinchukin Bank LOC) (A-1+/VMIG1)
$ 7,000,000 4.50% 01/01/97 $ 7,000,000
New York City Municipal Water Finance Authority CP Notes Series 3
(Toronto Dominion Bank/Bank of Nova Scotia LOC)(A-1+/P-1)
8,900,000 3.50 03/12/97 8,900,000
New York City Municipal Water Finance Authority Series 3 (Toronto
Dominion Bank/Bank of Nova Scotia
LOC)(A-1+/P-1)
3,000,000 3.50 03/11/97 3,000,000
New York State Energy Research & Development Authority PCRB for
New York State Electric & Gas Series 1994 D (Union Bank of
Switzerland LOC)(A-1+/VMIG1)
8,700,000 4.40 01/01/97 8,700,000
New York State Housing Finance Agency for Normandie Court
Housing RB Series 1987 A (Fleet Bank LOC)(VMIG1)
900,000 4.00 01/07/97 900,000
New York State Local Government Assistance Series 1995 B VRDN
(Bank of Nova Scotia LOC)(A-1+/VMIG1)/(c)/
19,600,000 4.00 01/07/97 19,600,000
New York State Local Government Series G VRDN (National
Westminster Bank LOC)(A-1+/VMIG1)
1,150,000 3.85 01/07/97 1,150,000
New York State Local Government VRDN Series 1995 F (Toronto
Dominion Bank LOC)(A-1+/VMIG1)/(c)/
15,000,000 4.00 01/07/97 15,000,000
New York State Triborough Bridge & Tunnel Authority VRDN
(FGIC)(A-1+/VMIG1)
19,300,000 4.00 01/07/97 19,300,000
- --------------------------------------------------------------------
$193,787,770
- --------------------------------------------------------------------
North Carolina--6.0%
North Carolina Eastern Municipal Power Agency RB Series 1988 B
(Morgan Guaranty/Union Bank of Switzerland LOC)(A-1+)
$ 2,700,000 3.70% 01/16/97 $ 2,700,000
10,000,000 3.70 01/27/97 10,000,000
Person County PCRB for Carolina Power & Light Series 1992 A
(A-1/P-1)
7,000,000 4.25 01/07/97 7,000,000
Rockingham County IDA PCRB for Philip Morris Co.(A-1/P-1)
3,960,000 4.15 01/07/97 3,960,000
North Carolina (continued)
Wake County PCRB for Carolina Power & Light Series 1990 A & B (Fuji
Bank LOC)(A-2/P-1)
$ 7,000,000 3.75% 02/06/97 $ 7,000,000
11,000,000 3.55 02/07/97 11,000,000
12,100,000 3.55 02/10/97 12,100,000
12,900,000 3.75 02/14/97 12,900,000
29,000,000 3.75 02/18/97 29,000,000
- -------------------------------------------------------------
$95,660,000
- -------------------------------------------------------------
Ohio--2.4%
Cleveland-Cuyahoga County Port Authority VRDN for Rock & Roll
Hall of Fame (Credit Local de France LOC)(A-1+)
$ 9,000,000 4.05% 01/07/97 $ 9,000,000
Columbus Electric System Series 1994 RB (Union Bank of Switzerland
LOC)(VMIG1)
10,620,000 3.35 01/31/97 10,620,000
Franklin County Hospital RB for Holy Cross Health System Series
1995(A-1/VMIG1)/(c)/
18,900,000 4.10 01/07/97 18,900,000
- -------------------------------------------------------------
$38,520,000
- -------------------------------------------------------------
Oregon--1.7%
Lane County PCRB VRDN for Weyerhaeuser Company Series 1994
(A-1)
$ 6,500,000 4.21% 01/07/97 $ 6,500,000
Portland VRDN for Columbia Grain Inc. Project (Fuji Bank/Bank of
Tokyo LOC)(VMIG1)
17,650,000 4.25 01/07/97 17,650,000
State of Oregon Veteran's Welfare Series 73 H VRDN (Morgan
Guaranty LOC)(A-1+/VMIG1)
3,400,000 4.00 01/07/97 3,400,000
- -------------------------------------------------------------
$27,550,000
- -------------------------------------------------------------
Pennsylvania--2.7%
Allegheny County PCRB for U.S. Steel Series 1985 (Commerzbank
LOC)(A-1+/P-1)
$28,400,000 3.50% 03/13/97 $28,400,000
Allegheny County PCRB for U.S. Steel Series 1986 (Commerzbank
LOC)(A-1+/P-1)
700,000 3.50 02/06/97 700,000
Philadelphia TRANS Series 1996-97 A(SP-1/VMIG1)
14,000,000 4.50 06/30/97 14,036,476
- --------------------------------------------------------------
$43,136,476
- --------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Puerto Rico--2.0%
Commonwealth of Puerto Rico RANS Series 1997 A(SP-1+/VMIG1)
$32,000,000 4.00% 07/30/97 $ 32,103,040
- -------------------------------------------------------------------
South Carolina--0.7%
York County Floating/Fixed Rate PCRB Pooled Series 1984-North
Carolina Electric Membership Corp. VRDN (CFC)(A-1+/VMIG1)
$11,275,000 4.15% 01/07/97 $ 11,275,000
- -------------------------------------------------------------------
Texas--11.5%
Brazos Harbor IDA VRDN for Monsanto Co.(P-1)
$ 3,500,000 4.20% 01/07/97 $ 3,500,000
Brazos River Authority PCRB Series 1994 for Monsanto Co.(P-1)
5,100,000 4.20 01/07/97 5,100,000
Brazos River Authority VRDN for Monsanto Co.(P-1)
5,300,000 4.20 01/07/97 5,300,000
Brazos River Harbor Authority VRDN for Dow Chemical Corp. Series
1991(A-1/P-1)
13,500,000 3.60 01/24/97 13,500,000
Harris County Health Facilities Development Corp. UPDATE Series
1993(A-1+/VMIG1)
5,200,000 3.55 01/07/97 5,200,000
5,200,000 3.50 01/29/97 5,200,000
Harris County Hospital RB for Childrens Hospital Series 1989 B-2
(VMIG1)
7,900,000 4.10 01/07/97 7,900,000
Harris County Toll Road VRDN Series 1994 C(A-1+/VMIG1)
23,700,000 4.05 01/07/97 23,700,000
Nueces River IDA PCRB UPDATE for San Miguel Electric Series 1984
(CFC)(A-1+/VMIG1)
25,000,000 3.50 02/26/97 25,000,000
25,700,000 3.50 03/10/97 25,700,000
San Antonio Electric & Gas Systems CP Notes Series A(A-1+/P-1)
18,800,000 3.50 03/12/97 18,800,000
State of Texas TRANS Series 1996(SP-1+/VMIG1)/(c)/
25,000,000 4.75/(b)/ 08/29/97 25,193,274
20,000,000 4.75 08/29/97 20,154,620
- -------------------------------------------------------------------
$ 184,247,894
- -------------------------------------------------------------------
Utah--0.2%
Salt Lake County PCRB for Service Station/British Petroleum Series
1994 B(P-1)
$ 2,815,000 5.00% 01/01/97 $ 2,815,000
- -------------------------------------------------------------------
Virginia--6.7%
Chesapeake PCRB for Virginia Electric & Power Series
1985(A-1/P-1)
$22,000,000 3.60% 02/06/97 $22,000,000
Chesterfield County PCRB for Philip Morris Series 1987 A(A-1/P-1)
5,000,000 3.55 02/06/97 5,000,000
Chesterfield County PCRB for Philip Morris Series 1992(A-1/P-1)
14,700,000 4.15 01/07/97 14,700,000
Chesterfield County PCRB for Virginia Electric & Power Series 1985
(A-1/P-1)
8,000,000 3.60 02/07/97 8,000,000
5,200,000 3.60 02/12/97 5,200,000
Chesterfield County PCRB for Virginia Electric & Power
Series 1987 C(A-1/P-1)
1,000,000 3.60 02/12/97 1,000,000
Louisa PCRB For Virginia Electric & Power Series 1984(A-1/P-1)
4,000,000 3.60 02/07/97 4,000,000
4,000,000 3.60 02/13/97 4,000,000
3,000,000 3.60 02/14/97 3,000,000
Louisa PCRB for Virginia Electric & Power Series 1987(A-1/P-1)
1,300,000 3.55 02/06/97 1,300,000
Roanoke VRDN for Carilion Health Systems Hospital Series A(A-1)
20,400,000 4.10 01/07/97 20,400,000
Spotsylvania IDA for Carlisle Corporation (Suntrust Bank LOC)(AA3)
6,500,000 4.15/(b)/ 01/07/97 6,500,000
York County PCRB for Virginia Electric & Power Series 1985(A-1/P-1)
9,400,000 3.70 01/14/97 9,400,000
2,700,000 3.65 03/10/97 2,700,000
- -------------------------------------------------------------------
$ 107,200,000
- -------------------------------------------------------------------
Washington--4.6%
King County Sewer Revenue BANS Series A(A-1/P-1)
$10,000,000 3.55% 03/10/97 $10,000,000
Port of Grays Harbor IDA VRDN for Weyerhaeuser Project Series
1992(A-1+)
1,000,000 4.21 01/07/97 1,000,000
Port of Grays Harbor IDA VRDN for Weyerhaeuser Project Series
1993(A-1+)
5,850,000 4.21 01/07/97 5,850,000
Port of Kalama Floating/Fixed Rate for Conagra, Inc. Series 1983
(Morgan Guaranty Trust LOC)(AAA)
2,230,000 4.00 01/07/97 2,230,000
Union Gap City IDA VRDN for Weyerhaeuser Project Series 1992(A-1)
1,600,000 4.21 01/07/97 1,600,000
- ------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
Washington (continued)
Washington Health Care Facilities Authority VRDN Series 1996
(Morgan Guaranty Trust LOC)(VMIG1)
$4,300,000 5.25% 01/01/97 $ 4,300,000
Washington Public Power Supply Project Electric RB Series 1993-1A
(Bank of America LOC)(A-1+/VMIG1)
10,860,000 4.10 01/07/97 10,860,000
Washington Public Power Supply Project Electric RB Series 1993-2A
(Bank of America LOC)(A-1/VMIG1)
11,100,000 4.10 01/07/97 11,100,000
Washington Public Power Supply System RB Series 1993-3A
(Bank of America LOC)(A-1+/VMIG1)
15,000,000 4.10/(b)/ 01/07/97 15,000,000
3,115,000 3.95 01/07/97 3,115,000
8,200,000 4.10 01/07/97 8,200,000
- -----------------------------------------------------------
$73,255,000
- -----------------------------------------------------------
Wyoming--1.4%
Pacificorp PCRB VRDN for Sweetwater County Series 1990 A
(Credit Suisse LOC)(VMIG1)
$16,200,000 4.15% 01/07/97 $16,200,000
Sweetwater County PCRB for Idaho Power Co. Series 1996 C
(A-1+/VMIG1)
6,100,000 5.10 01/01/97 6,100,000
- -----------------------------------------------------------
$22,300,000
- -----------------------------------------------------------
Total Investments $1,749,033,261/(a)/
==========================================================
/(a)/The amount stated also represents aggregate cost for federal
income tax purposes.
/(b)/When-issued securities.
/(c)/Portions of these securities are being segregated for when-issued
securities.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
Maturity dates represent either the stated date on the security, the next
interest reset date for floating rate securities, or the prerefunded date for
those type of securities.
Security ratings are unaudited.
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.
18
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Tax-Exempt California Portfolio
December 31, 1996
- ------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
============================================================
California--96.4%
California Health Facilities Authority VRDN for Kaiser Permanente
Series 1993 A, B & C RB(A-1+/VMIG1)
$ 2,000,000 4.00% 01/07/97 $ 2,000,000
California Health Facility Finance Authority RB Series
1990 A VRDN (Rabobank Nederland LOC)(A-1+/VMIG1)
8,100,000 4.00 01/07/97 8,100,000
California PCRB for Pacific Gas & Electric (Banque Nationale de Paris
LOC)(A-1+)
4,100,000 4.80 01/01/97 4,100,000
California Pollution Control Financing Authority for Southern
California Edison Adjustable TRB Series 1986 D(A-1/VMIG1)
1,800,000 4.70 01/01/97 1,800,000
California RANS VRDN Series 1996-97 B(SP-1+/VMIG1)
10,000,000 3.47 01/31/97 10,000,000
California RANS VRDN Series 1996-97 C1(SP-1+/VMIG1)
25,500,000 4.01 01/07/97 25,500,000
California School Cash Reserves Program Authority Series 1996 A
(MBIA)(SP-1/VMIG1)
9,000,000 4.75 07/02/97 9,040,248
California School Cash Reserves Program Authority Series 1996 B
(MBIA)(VMIG1)
10,000,000 4.50 12/19/97 10,083,758
California Statewide Communities Development Authority
for Kaiser Foundation Hospital 1995 COPS(A-1+/VMIG1)
16,500,000 4.00 01/07/97 16,500,000
California Statewide Communities Development Authority RB Series
1995 A (A-1+)
13,900,000 3.90 01/07/97 13,900,000
California Statewide Communities Development Authority Series
1995A-1(A-1+)
14,200,000 3.90 01/07/97 14,200,000
California Statewide Communities Development Authority, Refunding
RB Series 1995A-2(A-1+)
5,500,000 3.90 01/07/97 5,500,000
Chula Vista RB Series 1996 A for San Diego Gas & Electric(A-
1/VMIG1)
11,200,000 5.10 01/01/97 11,200,000
City of Anaheim Electric RANS Tax Exempt CP
Notes(A-1+/P-1)
8,950,000 3.45 01/29/97 8,950,000
City of Fresno MF Hsg. Revenue Refunding Bonds Series 1996 A
(First Interstate Bank of California LOC)(VMIG1)
3,315,000 4.15 01/07/97 3,315,000
City of Irwindale IDRB Series 1984 for Toys-R-Us VRDN (Bankers
Trust LOC)(AA2)
2,000,000 4.13% 01/07/97 2,000,000
City of Los Angeles VRDN MF Hsg. Museum Terrace-84H (Bank of
America LOC)(VMIG1)
3,500,000 4.00 01/07/97 3,500,000
City of Newport Beach Floating/Fixed Rate Health Facilities Memorial
Hospital Facility VRDN(A-1/VMIG1)
10,750,000 5.15 01/01/97 10,750,000
City of Newport Beach VRDN RB Series 1996 A(A-1+)
3,800,000 5.15 01/01/97 3,800,000
City of Newport Beach VRDN RB Series 1996 B(A-1+)
23,000,000 5.15 01/01/97 23,000,000
City of San Diego VRDN MF Hsg. RB Series 1985 (Bank of
America LOC)(VMIG1)
15,700,000 4.05 01/07/97 15,700,000
City of San Diego MF Hsg. for Lacima Apartments VRDN (Citibank
LOC)(VMIG1)
13,125,000 4.05 01/07/97 13,125,000
City of San Diego MF Hsg. for Nobel Court Apartments VRDN
(Citibank LOC)(VMIG1)
11,555,000 4.05 01/07/97 11,555,000
Contra Costa MF Hsg. for Lakeshore Apartments VRDN(A-1+)
4,600,000 4.05 01/07/97 4,600,000
East Bay Municipal Utility District California Water & Waste
(A-1+/P-1)
4,300,000 3.45 02/27/97 4,300,000
Huntington Beach City Monthly MF Hsg. VRDN Series 1985 A (Bank
of America LOC)(VMIG1)
7,500,000 4.00 01/31/97 7,500,000
Kings County Housing Authority MF Hsg. Refunding RB Series 1996 A
(First Interstate Bank of California LOC)(VMIG1)
2,500,000 4.15 01/07/97 2,500,000
Los Angeles County Metro Transportation Authority VRDN
(MBIA)(SP-1+/VMIG1)
4,595,000 4.00 01/07/97 4,595,000
Los Angeles County Metro Transportation Authority RANS Series 1996
A(VMIG1)
10,000,000 4.00 02/27/97 10,013,586
Los Angeles County Metro Transportation CP Notes (National
Westminster/Union Bank of California/ABN Amro/Canadian
Imperial Bank of Commerce/Banque Nationale de Paris LOC)
(A-1+/P-1)
10,000,000 3.65 01/10/97 10,000,000
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Tax-Exempt California Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
California (continued)
Los Angeles County TRANS (Credit Suisse/Morgan Guaranty Trust
Co./Westdeutsche Landesbank Girozentrale/Bank of
America/Union Bank of Switzerland LOC)(SP-1+/VMIG1)
$16,400,000 4.50% 06/30/97 $16,456,497
Los Angeles County, VRDN MF Hsg. for Valencia Village Series 1984 C
(Industrial Bank of Japan Ltd. LOC)(A-1+)
16,400,000 2.80 01/07/97 16,400,000
Los Angeles Housing Authority MF Hsg. VRDN for Canyon Country
Villas Series 1985 H (Industrial Bank of Japan Ltd. LOC)(VMIG1)
19,000,000 2.80 01/07/97 19,000,000
Northern California Power Agency Geothermal Project Number 3
Adjustable Rate RB Series 1996 A (AMBAC)(A-1+/VMIG1)
8,500,000 3.85 01/07/97 8,500,000
Orange County Apartment Development RB Issue 1984 C Seaside
Meadow (Fuji Bank Ltd.)(A-1/VMIG1)
24,000,000 3.95 01/07/97 24,000,000
Pomona Public Financing Authority VRDN (Sumitomo Bank LOC)
(SP-1+)
2,075,000 4.25 01/07/97 2,075,000
Sacramento County 1990 COP Admin-Center Courthouse Project
VRDN (Union Bank of Switzerland LOC)(A-1+/VMIG1)
500,000 3.75 01/07/97 500,000
San Bernardino County VRDN-Woodview Apartments Series
1985 (Bank of America LOC)(VMIG1)
6,500,000 4.05 01/07/97 6,500,000
San Diego County MF Hsg. for Country Hills VRDN (FNMA)
(A-1+)
10,300,000 4.05 01/07/97 10,300,000
San Diego IDB Series 1995 B for San Diego Gas & Electric(A-1/VMIG1)
1,000,000 3.50 01/23/97 1,000,000
San Leandro MF Hsg. VRDN Series 1985 B- Haas Avenue
Apartments (Bank of America LOC)(VMIG1)
3,900,000 4.00 01/07/97 3,900,000
Southern California Metro Water District Series A CP Notes(A-1+/P-1)
5,400,000 3.50 02/20/97 5,400,000
Southern California Metropolitan Water District Revenue
Refunding Bonds Series 1996 A (AMBAC)(A-1+/VMIG1)
4,500,000 4.00 01/07/97 4,500,000
Southern California Public Power Authority 1991 Subordinated
Revenue Refunding Bonds (AMBAC)(A-1+/VMIG1)
9,100,000 3.90 01/07/97 9,100,000
Southern California Public Power Authority Power
Project RB Series 1996 B (AMBAC)(A-1+/VMIG1)
7,500,000 3.90 01/07/97 7,500,000
Southern California Public Power Authority Power
Project RB Series 1996 C (AMBAC)(A-1+/VMIG1)
10,000,000 3.90 01/07/97 10,000,000
Triunfo Sanitation District VRDN Refunding RB Series 1994 (Banque
Nationale de Paris LOC)(A-1+)
3,700,000 4.20 01/07/97 3,700,000
Tulare-Porterville Schools Finance Authority COPS (Union Bank of
California LOC)(VMIG1)
4,935,000 4.30 01/07/97 4,935,000
- -----------------------------------------------------------
$424,894,089
- -----------------------------------------------------------
Puerto Rico--3.2%
Commonwealth of Puerto Rico RANS Series 1997 A(SP-1+/VMIG1)
$14,000,000 4.00% 07/30/97 $14,045,081
- -----------------------------------------------------------
Total Investments $438,939,170/(a)/
===========================================================
/(a)/The amount stated also represents aggregate cost for federal income tax
purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
Maturity dates represent either the stated date on the security, the next
interest reset date for floating rate securities, or the prerefunded date for
those types of securities.
Security ratings are unaudited.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
Statement of Investments
- -----------------------------------------------------------
ILA Tax-Exempt New York Portfolio
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
New York--94.2%
City of Yonkers IDA RB for Consumers (Industrial Bank
of Japan LOC)(VMIG1)
$2,700,000 3.90% 01/07/97 $2,700,000
City of Yonkers IDA Series 1991 Civic Facility RB
(Industrial Bank of Japan LOC)(VMIG1)
2,900,000 3.90 01/07/97 2,900,000
Great Neck North Water Authority Water System RB Series
1993 A VRDN (FGIC)(A-1+/VMIG1)
3,800,000 4.00 01/07/97 3,800,000
IDA Civic Facility RB Cold Spring Harbor Labs Series
1989 VRDN (Morgan Guaranty Trust LOC)(A-1+)
2,200,000 4.90 01/01/97 2,200,000
Metropolitan Museum of Art Variable Rate Interest
Bonds(AA/AA)
1,500,000 4.00 01/07/97 1,500,000
Metropolitan Transportation Authority Commuter Facility
VRDN Series 1991 (National Westminster/Morgan
Guaranty/Industrial Bank of Japan/Sumitomo Bank/J.P.
Morgan/Bank of Tokyo LOC)(A-1+/VMIG1)
3,400,000 4.05 01/07/97 3,400,000
Nassau County TANS Series 1996 B(SP-1+)
3,500,000 4.25 08/29/97 3,515,754
New York City GO Bonds (Sumitomo Bank LOC)(A-1/VMIG1)
800,000 5.00 01/01/97 800,000
New York City GO Fiscal 1995 Series B-6
(MBIA)(A-1+/VMIG1)
3,900,000 5.10 01/01/97 3,900,000
1,250,000 5.10 01/01/97 1,250,000
New York City GO RANS Series 1997 A(SP-1+/VMIG1)
4,000,000 4.50 04/15/97 4,009,256
New York City IDA - Civic Facility RB 1989 National
Audubon Society, Inc. (Swiss Bank Corp. LOC)(A-1+)
4,000,000 4.80 01/01/97 4,000,000
New York City IDA for Columbia Grammar Prep School VRDN
(Chemical Bank LOC)(A-1+)
2,500,000 4.15 01/07/97 2,500,000
New York City Municipal Water Finance Authority CP
Series 1 (Canadian Imperial Bank of Commerce
LOC)(P-1)
6,900,000 3.55 01/16/97 6,900,000
New York City Municipal Water Finance Authority Series
3 (Toronto Dominion Bank/Bank of Nova Scotia
LOC)(P-1)
2,500,000 3.50 03/11/97 2,500,000
New York City Trust for Cultural Resources American
Museum of Natural History Adjustable Rate TRB VRDN
(MBIA)(VMIG1)
$3,200,000 3.80% 01/07/97 $3,200,000
New York State Dormitory Authority RB Series 1990 B for
Cornell University VRDN(VMIG1)
4,700,000 4.80 01/01/97 4,700,000
New York State Energy Research & Development Authority
For Long Island Lighting Co. VRDN (Toronto Dominion
Bank LOC) (A-1+/P-1)
3,000,000 4.05 01/07/97 3,000,000
New York State Energy Research & Development Authority
PCRB for New York State Electric & Gas Series 1994 B
(Union Bank of Switzerland LOC)(A-1+/VMIG1)
7,800,000 5.00 01/01/97 7,800,000
New York State Energy Research & Development Authority
PCRB for New York State Electric & Gas Series 1994 D
(Union Bank of Switzerland LOC)(A-1+/VMIG1)
3,600,000 4.40 01/01/97 3,600,000
New York State Energy Research & Development Authority
PCRB for Rochester Gas & Electric Series 1984
(Credit Suisse LOC)(P-1)
2,100,000 3.40 01/31/97 2,100,000
New York State Energy Research & Development Authority
PCRB Series A & B - Central Hudson Gas & Electric
VRDN (Deutsche Bank LOC)(AA2)
1,300,000 3.90 01/07/97 1,300,000
New York State Energy Research & Development Authority
for Orange and Rockland Utilities Series 1995 A VRDN
(AMBAC)(A-1+/VMIG1)
5,000,000 3.80 01/07/97 5,000,000
New York State GO BANS Series R(A-1/P-1)
4,500,000 3.55 02/25/97 4,500,000
New York State GO BANS Series T(A-1/P-1)
3,500,000 3.55 02/24/97 3,500,000
New York State Housing Finance Agency for Normandie
Court Housing RB Series 1987 A (Fleet Bank
LOC)(VMIG1)
5,100,000 4.00 01/07/97 5,100,000
New York State Local Government Assistance Series 1995
B VRDN (Bank of Nova Scotia LOC)(A-1+/VMIG1)
1,700,000 4.00 01/07/97 1,700,000
New York State Local Government Series C VRDN
(Landesbank Hessen-Thueringen Girozentrale
LOC)(A-1+/VMIG1)
7,000,000 4.00 01/07/97 7,000,000
- ----------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Statement of Investments
- -----------------------------------------------------------
ILA Tax-Exempt New York Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
New York (continued)
New York State Local Government Series G VRDN (National
Westminster Bank LOC)(A-1+/VMIG1)
$700,000 3.85% 01/07/97 $ 700,000
New York State Medical Care Facility Financing Agency
for Children's Hospital of Buffalo RB Series 1991 A
(Barclays Bank LOC)(VMIG1)
1,900,000 4.20 01/07/97 1,900,000
New York State Triborough Bridge & Tunnel Authority
VRDN (FGIC)(A-1+/VMIG1)
4,700,000 4.00 01/07/97 4,700,000
Oswego County IDA PCRB Series 1992 for Philip
Morris(A-1/P-1)
1,000,000 4.15 01/07/97 1,000,000
Syracuse University IDA VRDN (Morgan Guaranty
LOC)(AA+/A-1 /VMIG1)
1,200,000 4.80 01/01/97 1,200,000
- -----------------------------------------------------------
$107,875,010
- -----------------------------------------------------------
Puerto Rico--5.7%
Commonwealth of Puerto Rico RANS Series 1997
A(SP-1+/VMIG1)
$3,500,000 4.00% 07/30/97 $ 3,511,271
Puerto Rico Government Development Bank VRDN (Credit
Suisse LOC)(A-1/VMIG1)
1,000,000 3.75 01/07/97 1,000,000
Puerto Rico Medical and Environmental PCRB Series 1983
A for Key Pharmaceuticals Inc. (Morgan Guaranty LOC)
2,000,000 3.75 12/01/97 2,000,000
- -----------------------------------------------------------
$ 6,511,271
- -----------------------------------------------------------
Total Investments $114,386,281/(a)/
===========================================================
/(a)/ The amount stated also represents aggregate cost for federal income tax
purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
Maturity dates represent either the stated date on the security, the next
interest reset date for floating rate securities, or the prerefunded date for
those types of securities.
Security ratings are unaudited.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
Investment Abbreviations:
ACES --Adjustable Convertible Extendible
Securities
AMBAC --Insured by American Municipal Bond
Assurance Corp.
BANS --Bond Anticipation Notes
CFC --Unconditionally Guaranteed by
Cooperative Finance Corp.
COPS --Certificates of Particication
CP --Commercial Paper
FGIC --Insured by Financial Guaranty
Insurance Co.
FNMA --Federal National Mortgage
Association
GO --General Obligation
HFA --Health Facility Authority
IDA --Industrial Development Authority
IDB --Industrial Development Bond
IDR --Industrial Development Revenue Bond
LOC --Letter of Credit
MBIA --Insured by Municipal Bond Investors
Assurance
MF Hsg. --Multi-Family Housing
PCRB --Pollution Control Revenue Bond
RANS --Revenue Anticipation Notes
RB --Revenue Bond
TANS --Tax Anticipation Notes
TECP --Tax Exempt Commercial Paper
TRANS --Tax Revenue Anticipation Notes
TRB --Tender Revenue Bond
UPDATE --Unit Priced Daily Adjustable
Tax-Exempt Security
VRDN --Variable Rate Demand Note
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
- --------------------------------------------------------------------------------
- ------------------------------------- --------------------------------------
[This page intentionally left blank]
- -------------------------------------- -------------------------------------
23
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ILA ILA
Prime Money ILA
Obligations Market Government
Portfolio Portfolio Portfolio
==============================================
<S> <C> <C> <C>
Assets:
Investments in securities, at value based on amortized cost $1,266,243,902 $ 990,797,391 $ 827,240,879
Interest receivable 3,701,956 3,538,130 1,378,983
Cash 143,480 128,908 152,717
Other assets 18,680 33,706 48,509
- ------------------------------------------------------------------------------------------------------------------------
Total assets 1,270,108,018 994,498,135 828,821,088
- ------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payable for investment securities purchased -- -- --
Dividends payable 5,999,306 4,784,617 3,427,645
Accrued expenses and other liabilities 530,616 513,611 459,492
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 6,529,922 5,298,228 3,887,137
- ------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 1,263,578,517 989,199,498 824,862,428
Accumulated undistributed net investment income -- -- --
Accumulated undistributed net realized gain (loss) on investment
transactions (421) 409 71,523
- ------------------------------------------------------------------------------------------------------------------------
Net assets $1,263,578,096 $ 989,199,907 824,933,951
========================================================================================================================
Net asset value, offering and redemption price per unit
(net assets/units outstanding) $ 1.00 $ 1.00 $ 1.00
========================================================================================================================
Units Outstanding:
ILA units 1,154,745,689 703,096,586 694,604,345
ILA Administration units 23,775,858 257,258,398 36,044,854
ILA Service units 84,710,642 28,844,514 94,213,229
ILA B units 346,328 -- --
- ------------------------------------------------------------------------------------------------------------------------
Total units of beneficial interest outstanding, $.001 par value
(unlimited number of units authorized) 1,263,578,517 989,199,498 824,862,428
========================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
ILA ILA ILA ILA ILA
Treasury Treasury ILA Tax-Exempt Tax-Exempt Tax-Exempt
Obligations Instruments Federal Diversified California New York
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
================================================================================================
<S> <C> <C> <C> <C> <C>
$ 810,267,968 $1,221,566,240 $3,300,609,972 $1,749,033,261 $438,939,170 $114,386,281
532,015 14,004,604 4,477,173 7,404,080 2,433,885 404,538
99,319 148,266 365,400 1,862,438 599,385 41,299
775 10,026 125,725 8,601 8,650 --
- ------------------------------------------------------------------------------------------------
810,900,077 1,235,729,136 3,305,578,270 1,758,308,380 441,981,090 114,832,118
- ------------------------------------------------------------------------------------------------
-- -- -- 150,828,428 -- --
3,404,801 4,597,910 13,642,248 4,524,992 1,168,073 274,842
428,726 525,543 1,305,746 494,147 194,663 62,795
- ------------------------------------------------------------------------------------------------
3,833,527 5,123,453 14,947,994 155,847,567 1,362,736 337,637
- ------------------------------------------------------------------------------------------------
$ 807,035,766 1,230,590,333 3,290,699,109 1,602,342,561 440,637,879 114,499,366
-- -- -- 362,642 10,495 1,634
30,784 15,350 (68,833) (244,390) (30,020) (6,519)
- ------------------------------------------------------------------------------------------------
$ 807,066,550 $1,230,605,683 $3,290,630,276 $1,602,460,813 $440,618,354 $114,494,481
================================================================================================
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
================================================================================================
574,608,995 708,990,271 2,303,703,731 1,514,523,522 440,495,857 70,178,026
108,916,431 137,701,171 794,578,398 59,097,259 142,022 44,321,340
123,510,340 383,898,891 192,416,980 28,918,372 -- --
-- -- -- -- -- --
- ------------------------------------------------------------------------------------------------
807,035,766 1,230,590,333 3,290,699,109 1,602,539,153 440,637,879 114,499,366
================================================================================================
- ------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- ------------------------------------------------------------------------------
Statements of Operations
For the Year Ended December 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ILA ILA
Prime Money ILA
Obligations Market Government
Portfolio Portfolio Portfolio
=========================================
<S> <C> <C> <C>
Investment income:
Interest income $81,770,923 $54,320,799 $39,035,321
- ----------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 5,185,990 3,447,586 2,509,206
Transfer agent fees 592,685 394,010 286,766
Custodian fees 289,863 203,454 157,058
Professional fees 43,453 28,965 22,465
Trustees' fees 19,256 10,622 9,356
Other 178,787 197,862 186,415
- ----------------------------------------------------------------------------------------------------------------------
Total expenses 6,310,034 4,282,499 3,171,266
Less--Expenses reimbursable and fees waived by Goldman Sachs (234,432) (736,102) (231,536)
- ----------------------------------------------------------------------------------------------------------------------
Net expenses 6,075,602 3,546,397 2,939,730
Administration unit fees 65,534 316,155 63,048
Service unit fees 494,274 128,313 352,931
- ----------------------------------------------------------------------------------------------------------------------
Net expenses and unit fees 6,635,410 3,990,865 3,355,709
- ----------------------------------------------------------------------------------------------------------------------
Net investment income 75,135,513 50,329,934 35,679,612
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions 72,405 72,865 62,662
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $75,207,918 $50,402,799 $35,742,274
======================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ILA ILA ILA ILA ILA
Treasury Treasury ILA Tax-Exempt Tax-Exempt Tax-Exempt
Obligations Instruments Federal Diversified California New York
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
=========================================================================================
<S> <C> <C> <C> <C> <C>
$48,666,691 $53,608,537 $146,327,912 $54,107,112 $13,695,668 $3,421,539
----------------------------------------------------------------------------------------
3,157,511 3,629,131 9,496,253 5,391,039 1,410,751 359,201
360,858 414,758 1,085,286 616,119 161,229 41,051
197,650 167,744 459,900 135,944 45,236 21,336
27,555 34,247 77,027 42,553 13,995 6,322
11,552 12,842 34,394 17,650 4,574 1,215
157,226 213,340 423,802 136,197 38,866 7,681
- -----------------------------------------------------------------------------------------
3,912,352 4,472,062 11,576,662 6,339,502 1,674,651 436,806
(212,886) (2,294,583) (4,522,286) (1,564,664) (22,092) (108,395)
----------------------------------------------------------------------------------------
3,699,466 2,177,479 7,054,376 4,774,838 1,652,559 328,411
145,201 145,441 906,321 73,660 262 39,843
579,790 1,266,586 562,023 130,158 -- --
- -----------------------------------------------------------------------------------------
4,424,457 3,589,506 8,522,720 4,978,656 1,652,821 368,254
- -----------------------------------------------------------------------------------------
44,242,234 50,019,031 137,805,192 49,128,456 12,042,847 3,053,285
- -----------------------------------------------------------------------------------------
195,578 416,602 (4,477) (12,968) 15 (4,539)
- -----------------------------------------------------------------------------------------
$44,437,812 $50,435,633 $137,800,715 $49,115,488 $12,042,862 $3,048,746
=========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
27
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ILA ILA
Prime Money ILA
Obligations Market Government
Portfolio Portfolio Portfolio
================================================
<S> <C> <C> <C>
From Operations:
Net investment income $ 75,135,513 $ 50,329,934 $ 35,679,612
Net realized gain(loss) on investment transactions 72,405 72,865 62,662
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 75,207,918 50,402,799 35,742,274
- ----------------------------------------------------------------------------------------------------------------------
Distributions to Unitholders from:
Net investment income
ILA units (67,076,054) (38,261,044) (29,556,990)
ILA Administration units (2,206,827) (10,545,315) (2,048,010)
ILA Service units (5,850,540) (1,523,575) (4,074,612)
ILA B units (2,092) -- --
Net realized gain on investment transactions
ILA units (65,059) (54,983) (38,029)
ILA Administration units (2,127) (15,267) (2,635)
ILA Service units (5,640) (2,206) (5,242)
- ----------------------------------------------------------------------------------------------------------------------
Total distributions to unitholders (75,208,339) (50,402,390) (35,725,518)
- ----------------------------------------------------------------------------------------------------------------------
From unit transactions (at $1.00 per unit):
Proceeds from sales of units 9,633,671,566 8,281,604,075 5,115,245,365
Reinvestment of dividends and distributions 40,414,429 38,191,105 17,312,306
Cost of units repurchased (9,962,009,233) (8,092,253,028) (5,011,078,568)
- ----------------------------------------------------------------------------------------------------------------------
Increase(decrease) in net assets resulting from unit transactions (287,923,238) 227,542,152 121,479,103
- ----------------------------------------------------------------------------------------------------------------------
Total increase(decrease) (287,923,659) 227,542,561 121,495,859
Net Assets:
Beginning of year 1,551,501,755 761,657,346 703,438,092
- ----------------------------------------------------------------------------------------------------------------------
End of year $1,263,578,096 $ 989,199,907 $ 824,933,951
======================================================================================================================
Accumulated undistributed net investment income -- -- --
======================================================================================================================
Summary of unit transactions (at $1.00 per unit):
ILA Units:
Units sold 8,756,241,159 5,161,953,773 4,490,979,392
Reinvestment of dividends and distributions 36,833,028 30,348,683 13,978,786
Units repurchased (8,899,537,496) (5,063,361,34) (4,380,790,567)
- ----------------------------------------------------------------------------------------------------------------------
(106,463,309) 128,941,113 124,167,611
- ----------------------------------------------------------------------------------------------------------------------
ILA Administration Units:
Units sold 318,656,203 2,902,067,359 220,574,807
Reinvestment of dividends and distributions 1,520,549 7,510,848 283,223
Units repurchased (359,456,201) (2,816,742,074) (232,371,387)
- ----------------------------------------------------------------------------------------------------------------------
(39,279,449) 92,836,133 (11,513,357)
- ----------------------------------------------------------------------------------------------------------------------
ILA Service Units:
Units sold 558,266,701 217,582,943 403,691,166
Reinvestment of dividends and distributions 2,060,072 331,574 3,050,297
Units repurchased (702,853,581) (212,149,611) (397,916,614)
- ----------------------------------------------------------------------------------------------------------------------
(142,526,808) 5,764,906 8,824,849
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in units (288,269,566)* 227,542,152 121,479,103
======================================================================================================================
</TABLE>
* In addition, ILA B units had sales, reinvestments of dividends and
distributions and repurchases of 507,503, 780 and 161,955 units,
respectively, for a net increase of 346,328 units.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
ILA ILA ILA ILA ILA
Treasury Treasury ILA Tax-Exempt Tax-Exempt Tax-Exempt
Obligations Instruments Federal Diversified California New York
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
=========================================================================================================
<S> <C> <C> <C> <C> <C>
$ 44,242,234 $ 50,019,031 $ 137,805,192 $ 49,128,456 $ 12,042,847 $ 3,053,285
195,578 416,602 (4,477) (12,968) 15 (4,539)
- ------------------------------------------------------------------------------------------------------
44,437,812 50,435,633 137,800,715 49,115,488 12,042,862 3,048,746
- ------------------------------------------------------------------------------------------------------
(32,818,890) (30,911,761) (101,011,206) (46,819,418) (12,036,826) (2,289,010)
(4,742,767) (4,651,770) (30,041,532) (1,375,597) (6,021) (764,275)
(6,680,577) (14,455,500) (6,752,454) (933,441) -- --
-- -- -- -- -- --
(124,367) (251,459) -- -- -- --
(17,973) (37,841) -- -- -- --
(25,316) (117,591) -- -- -- --
- ------------------------------------------------------------------------------------------------------
(44,409,890) (50,425,922) (137,805,192) (49,128,456) (12,042,847) (3,053,285)
- ------------------------------------------------------------------------------------------------------
5,362,879,167 5,282,794,697 15,965,974,823 9,518,523,372 2,958,021,573 648,758,829
13,347,956 20,444,542 79,358,869 35,078,864 11,445,149 2,949,980
(5,492,732,128) (4,850,904,367) (15,106,127,095) (9,392,133,030) (2,875,637,134) (654,470,394)
- ------------------------------------------------------------------------------------------------------
(116,505,005) 452,334,872 939,206,597 161,469,206 93,829,588 (2,761,585)
- ------------------------------------------------------------------------------------------------------
(116,477,083) 452,344,583 939,202,120 161,456,238 93,829,603 (2,766,124)
923,543,633 778,261,100 2,351,428,156 1,441,004,575 346,788,751 117,260,605
- ------------------------------------------------------------------------------------------------------
$ 807,066,550 $1,230,605,683 $3,290,630,276 $1,602,460,813 $ 440,618,354 $114,494,481
=======================================================================================================
-- -- -- $ 362,642 $ 10,495 $ 1,634
=======================================================================================================
3,696,243,017 3,783,423,031 11,171,686,790 9,264,641,627 2,957,305,487 340,781,821
11,811,603 19,300,481 66,486,820 34,471,658 11,444,982 2,236,468
(3,844,547,762) (3,680,022,103) (10,666,427,699) (9,127,243,309) (2,875,001,835) (363,376,230)
- ------------------------------------------------------------------------------------------------------
(136,493,142) 122,701,409 571,745,911 171,869,976 93,748,634 (20,357,941)
- ------------------------------------------------------------------------------------------------------
659,581,577 470,006,128 3,606,492,816 142,908,870 716,086 307,977,008
855,243 1,082,829 11,506,068 298,114 167 713,512
(644,240,509) (402,096,387) (3,340,378,274) (132,882,806) (635,299) (291,094,164)
- ------------------------------------------------------------------------------------------------------
16,196,311 68,992,570 277,620,610 10,324,178 80,954 17,596,356
- ------------------------------------------------------------------------------------------------------
1,007,054,573 1,029,365,538 1,187,795,217 110,972,875 -- --
681,110 61,232 1,365,981 309,092 -- --
(1,003,943,857) (768,785,877) (1,099,321,122) (132,006,915) -- --
- ------------------------------------------------------------------------------------------------------
3,791,826 260,640,893 89,840,076 (20,724,948) -- --
- ------------------------------------------------------------------------------------------------------
(116,505,005) 452,334,872 939,206,597 161,469,206 93,829,588 (2,761,585)
=======================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
29
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ILA ILA
Prime Money ILA
Obligations Market Government
Portfolio Portfolio Portfolio
----------------------------------------------
<S> <C> <C> <C>
From Operations:
Net investment income $ 107,583,870 $ 49,478,386 $ 51,830,087
Net realized gain (loss) on investment transactions 14,828 23,170 168,758
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 107,598,698 49,501,556 51,998,845
- ----------------------------------------------------------------------------------------------------------------------
Distributions to Unitholders from:
Net investment income
ILA units (90,145,210) (39,853,826) (42,814,965)
ILA Administration units (5,198,674) (8,266,526) (3,434,653)
ILA Service units (12,239,986) (1,358,034) (5,580,469)
Net realized gain on investment transactions
ILA units (12,607) (18,166) (138,212)
ILA Administration units (741) (4,378) (12,197)
ILA Service units (1,480) (626) (17,502)
- ----------------------------------------------------------------------------------------------------------------------
Total distributions to unitholders (107,598,698) (49,501,556 ) (51,997,998)
- ----------------------------------------------------------------------------------------------------------------------
From unit transactions (at $1.00 per unit):
Proceeds from sales of units 12,338,624,975 6,865,371,082 6,147,457,376
Reinvestment of dividends and distributions 46,658,797 34,033,174 18,869,484
Cost of units repurchased (13,117,315,317) 6,864,945,994) (6,596,822,965)
- ----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets resulting from unit
transactions (732,031,545) 34,458,262 (430,496,105)
- ----------------------------------------------------------------------------------------------------------------------
Total increase (decrease) (732,031,545) 34,458,262 (430,495,258)
Net Assets:
Beginning of year 2,283,533,300 727,199,084 1,133,933,350
- ----------------------------------------------------------------------------------------------------------------------
End of year $1,551,501,755 $ 761,657,346 $ 703,438,092
- ----------------------------------------------------------------------------------------------------------------------
Accumulated undistributed net investment income -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Summary of unit transactions (at $1.00 per unit):
ILA Units:
Units sold 10,673,706,881 5,167,984,860 5,286,093,615
Reinvestment of dividends and distributions 43,663,215 30,173,260 14,307,877
Units repurchased (11,419,966,319) (5,183,472,607) (5,611,448,715)
- ----------------------------------------------------------------------------------------------------------------------
(702,596,223) 14,685,513 (311,047,223)
- ----------------------------------------------------------------------------------------------------------------------
ILA Administration Units:
Units sold 801,545,537 1,503,847,493 385,128,154
Reinvestment of dividends and distributions 1,574,573 3,545,805 410,476
Units repurchased (889,335,631) (1,488,837,741) (433,455,523)
- ----------------------------------------------------------------------------------------------------------------------
(86,215,521) 18,555,557 (47,916,893)
- ----------------------------------------------------------------------------------------------------------------------
ILA Service Units:
Units sold 863,372,557 193,538,729 476,235,607
Reinvestment of dividends and distributions 1,421,009 314,109 4,151,131
Units repurchased (808,013,367) (192,635,646) (551,918,727)
- ----------------------------------------------------------------------------------------------------------------------
56,780,199 1,217,192 (71,531,989)
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in units (732,031,545) 34,458,262 (430,496,105)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
ILA ILA ILA ILA ILA
Treasury Treasury ILA Tax-Exempt Tax-Exempt Tax-Exempt
Obligations Instruments Federal Diversified California New York
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
======================================================================================================
<S> <C> <C> <C> <C> <C>
$ 49,882,996 $ 39,027,924 $ 127,991,600 $ 55,137,781 $ 10,292,899 $ 3,354,557
634,764 426,028 (11,971) (38,116) (4,501) --
- ------------------------------------------------------------------------------------------------------
50,517,760 39,453,952 127,979,629 55,099,665 10,288,398 3,354,557
- ------------------------------------------------------------------------------------------------------
(37,834,730) (31,147,754) (98,487,540) (50,915,901) (10,279,510) (2,746,431)
(5,921,841) (3,930,340) (26,181,728) (2,430,414) (13,389) (608,126)
(6,116,634) (3,949,830) (3,322,332) (1,791,466) -- --
(474,791) (338,176) -- -- -- --
(76,052) (43,832) -- -- -- --
(81,059) (43,878) -- -- -- --
- ------------------------------------------------------------------------------------------------------
(50,505,107) (39,453,810) (127,991,600) (55,137,781) (10,292,899) (3,354,557)
- ------------------------------------------------------------------------------------------------------
5,295,765,985 4,545,981,787 12,879,366,733 9,669,281,502 2,111,844,558 637,393,901
14,985,214 18,329,605 59,359,416 35,116,542 9,384,940 3,009,869
(5,307,633,793) (4,472,240,590) (12,558,288,438) (9,832,589,904) (2,002,625,120) (646,630,502)
- ------------------------------------------------------------------------------------------------------
3,117,406 92,070,802 380,437,711 (128,191,860) 118,604,378 (6,226,732)
- ------------------------------------------------------------------------------------------------------
3,130,059 92,070,944 380,425,740 (128,229,976) 118,599,877 (6,226,732)
920,413,574 686,190,156 1,971,002,416 1,569,234,551 228,188,874 123,487,337
- ------------------------------------------------------------------------------------------------------
$ 923,543,633 $ 778,261,100 $2,351,428,156 $1,441,004,575 $ 346,788,751 $117,260,605
======================================================================================================
-- -- -- $ 362,642 $ 10,495 $ 1,634
======================================================================================================
4,098,618,029 3,716,958,431 9,845,256,084 9,311,743,687 2,111,311,145 412,445,304
12,443,257 17,215,281 53,443,869 34,419,501 9,375,255 2,397,973
(4,113,675,854) (3,695,227,116) (9,792,323,613) (9,438,508,967) (2,001,353,653) (408,825,174)
- ------------------------------------------------------------------------------------------------------
(2,614,568) 38,946,596 106,376,340 (92,345,779) 119,332,747 6,018,103
- ------------------------------------------------------------------------------------------------------
852,080,094 450,755,034 2,431,546,258 230,975,117 533,413 224,948,597
2,541,957 1,065,347 5,373,341 522,467 9,685 611,896
(859,607,724) (447,499,474) (2,249,895,904) (280,499,429) (1,271,467) (237,805,328)
- ------------------------------------------------------------------------------------------------------
(4,985,673) 4,320,907 187,023,695 (49,001,845) (728,369) (12,244,835)
- ------------------------------------------------------------------------------------------------------
345,067,862 378,268,322 602,564,391 126,562,698 -- --
-- 48,977 542,206 174,574 -- --
(334,350,215) (329,514,000) (516,068,921) (113,581,508) -- --
- ------------------------------------------------------------------------------------------------------
10,717,647 48,803,299 87,037,676 13,155,764 -- --
- ------------------------------------------------------------------------------------------------------
3,117,406 92,070,802 380,437,711 (128,191,860) 118,604,378 (6,226,732)
======================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
31
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1996
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Money Market Trust (the "Trust"), a business trust organized under
the laws of the Commonwealth of Massachusetts on December 6, 1978, includes the
Goldman Sachs--Institutional Liquid Assets Portfolios ("ILA"). The Trust is
registered under the Investment Company Act of 1940 (as amended) as an open-end
management investment company. ILA consists of nine portfolios: Prime
Obligations, Money Market, Government, Treasury Obligations, Treasury
Instruments, Federal, Tax-Exempt Diversified, Tax-Exempt California and Tax-
Exempt New York. All of the portfolios are diversified except for the Tax-Exempt
California and Tax-Exempt New York Portfolios. ILA offers three classes of units
for each of its portfolios: ILA units, ILA Administration units and ILA Service
units. In addition, Prime Obligations offers ILA B units. The investment
objective of the Funds is to maximize current income to the extent consistent
with the preservation of capital and maintenance of liquidity.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by ILA. The preparation of financial statements in conformity with
generally accepted accounting principles require management to make estimates
and assumptions that may affect the reported amounts.
A. Investment Valuation--
- --------------------------
ILA uses the amortized-cost method for valuing portfolio securities, which
approximates market value. Under this method, all investments purchased at a
discount or premium are valued by amortizing the difference between the original
purchase price and maturity value of the issue over the period to maturity.
B. Interest Income--
- ---------------------
Interest income is determined on the basis of interest accrued, premium
amortized and discount earned.
C. Federal Taxes--
---------------
It is each portfolio's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
each year substantially all investment company taxable and tax-exempt income to
its unitholders. Accordingly, no federal tax provisions are required.
The characterization of distributions to unitholders for financial reporting
purposes is determined in accordance with federal income tax rules. Therefore,
the source of the Portfolios' distributions may be shown in the accompanying
financial statements as either from or in excess of net investment income or net
realized gain on investment transactions, or from paid-in capital, depending on
the type of book/tax differences that may exist.
At December 31, 1996, ILA's tax year end, the following portfolios had capital
loss carryforwards for U.S. Federal tax purposes of approximately:
<TABLE>
<CAPTION>
Years of
Portfolio Amount Expiration
--------- ------ ----------
<S> <C> <C>
Federal $ 72,000 2000 to 2004
Tax-Exempt Diversified 244,000 1997 to 2004
Tax-Exempt California 30,000 1999 to 2003
Tax-Exempt New York 7,000 1999 to 2004
</TABLE>
These amounts are available to be carried forward to offset future capital gains
to the extent permitted by applicable laws or regulations.
D. Expenses--
- --------------
Expenses incurred by ILA which do not specifically relate to an individual
portfolio of ILA are allocated to the portfolios based on each portfolio's
relative average net assets for the period.
Unitholders of ILA Administration, ILA Service and ILA B units bear all
expenses and fees paid to service and distribution organizations for their
services with respect to such units as well as other expenses (subject to
expense limitations) which are directly attributable to such units.
- --------------------------------------------------------------------------------
32
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
December 31,1996
- --------------------------------------------------------------------------------
3. Agreements
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), acts as investment adviser pursuant to
an Advisory Agreement. Under the Advisory Agreement, GSAM, subject to general
supervision of the Trust's Board of Trustees, manages the portfolios and
provides for the administration of ILA's other affairs. As compensation for the
services rendered under the Advisory Agreement and the assumption of the
expenses related thereto, GSAM is entitled to a fee, computed daily and payable
monthly, at an annual rate equal to .35% of each portfolio's average daily net
assets. For the year ended December 31, 1996 and until further notice, GSAM has
agreed to waive advisory fees of .05%, .20%, .15%, .10% and .09% for the Money
Market, Treasury Instruments, Federal, Tax-Exempt Diversified and Tax-Exempt New
York Portfolios, respectively.
Goldman Sachs also serves as ILA's transfer agent under a Transfer Agency
Agreement for a fee. In addition, Goldman Sachs acts as ILA's distributor under
a Distribution Agreement for which it receives no compensation. Amounts due to
Goldman Sachs are included in "Accrued expenses and other liabilities" in the
accompanying Statements of Assets and Liabilities.
GSAM has voluntarily agreed that if the sum of a portfolio's expenses
(including the advisory fee, but excluding interest, taxes, brokerage
commissions, litigation and indemnification expenses, administration, authorized
dealer service, distribution and service plan fees and other extraordinary
expenses) exceeds on an annualized basis .41% of such portfolio's net assets,
the portfolio will be reimbursed in the amount of such excess monthly.
In addition, GSAM has voluntarily agreed to reimburse the Money Market,
Treasury Instruments, Federal, Tax-Exempt Diversified and Tax-Exempt New York
Portfolios to the extent that each portfolio's expenses, as defined above,
exceed .36%, .21%, .26%, .31% and .32%, respectively, of the average net assets
per annum. Amounts due from Goldman Sachs at December 31, 1996 are included in
"Other assets" in the accompanying Statements of Assets and Liabilities.
The ILA B units of Prime Obligations Portfolio have adopted a Distribution
Plan (the "Distribution Plan") pursuant to Rule 12b-1. Under the Distribution
Plan, Goldman Sachs is entitled to a quarterly fee for distribution services
equal, on an annual basis, up to .75% of ILA B units average daily net assets.
The ILA B units of Prime Obligations Portfolio have 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. ILA B units pay a fee under this Service Plan equal, on an
annual basis, up to .25% of ILA Class B's average daily net assets.
The chart below outlines the fee waivers and expense reimbursements for the
year ended December 31, 1996 and amounts owed to and due from Goldman Sachs at
December 31, 1996 (in thousands):
- -------------------------------------------------------------------------------
Due to
Goldman
Sachs Amounts
Adviser Expense for Adviser/ due from
Fee Reimburse- Transfer Goldman
Fund Waived ments Total Agent Fees Sachs
================================================================================
Prime
Obligations
Portfolio $-- $234 $234 $462 $18
- --------------------------------------------------------------------------------
Money
Market
Portfolio 493 243 736 318 34
- --------------------------------------------------------------------------------
Government
Portfolio -- 232 232 265 45
- --------------------------------------------------------------------------------
Treasury
Obligations
Portfolio -- 213 213 267 --
- --------------------------------------------------------------------------------
Treasury
Instruments
Portfolio 2,074 221 2,295 180 10
- --------------------------------------------------------------------------------
Federal
Portfolio 4,070 452 4,522 648 126
- --------------------------------------------------------------------------------
Tax-Exempt
Diversified
Portfolio 1,540 25 1,565 399 --
- --------------------------------------------------------------------------------
Tax-Exempt
California
Portfolio -- 22 22 147 --
- -------------------------------------------------------------------------------
Tax-Exempt
New York
Portfolio 92 16 108 26 --
- -------------------------------------------------------------------------------
33
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
December 31, 1996
- --------------------------------------------------------------------------------
4. Administration and Service Plans
ILA has adopted Administration and Service Plans. These plans allow for ILA
Administration units and ILA Service units, respectively, to compensate service
organizations for providing varying levels of account administration and
unitholder liaison services to their customers who are beneficial owners of such
units. The Administration and Service Plans provide for compensation to the
service organizations in an amount up to .15% and .40% (on an annualized basis),
respectively, of the average daily net asset value of the respective units.
5. Line of Credit Facility
ILA participates in a $250,000,000 uncommitted, unsecured revolving line of
credit facility to be used solely for temporary or emergency purposes. Under the
most restrictive arrangement, each Portfolio must own securities having a market
value in excess of 300% of the total bank borrowings. The interest rate on the
borrowings is based on the Federal Funds rate. During the year ended
December 31, 1996, ILA did not have any borrowings under this facility.
6. Repurchase Agreements
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping by the custodian.
7. Joint Repurchase Agreement Accounts
The ILA Portfolios, together with other registered investment companies having
advisory agreements with GSAM or its affiliates, may transfer uninvested cash
balances into joint accounts, the daily aggregate balances of which are invested
in one or more repurchase agreements. The underlying securities for the
repurchase agreements are U.S. Treasury obligations.
As of December 31, 1996, the Prime Obligations, Money Market, Government and
Treasury Obligations Portfolios had investments in the following joint account
of $21,400,000, $77,200,000, $305,000,000 and $327,900,000 in principal amount,
respectively. As of December 31, 1996, the repurchase agreements in this joint
account, along with the corresponding underlying securities (including the type
of security, market value, interest rate and maturity date), were as follows:
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
Repurchase Agreements
BT Securities Corp., dated 12/31/96, repurchase price $200,061,111 (U.S.
Treasury Notes: $154,133,720, 5.75%-6.38%, 08/31/97-04/30/01; U.S.
Treasury Bills: $48,126,398, 06/12/97)
$200,000,000 5.50% 01/02/97 $ 200,000,000
Chase Securities, Inc., dated 12/31/96, repurchase price $1,000,369,444
(U.S. Treasury Notes: $1,020,003,399, 5.00%-9.13%, 11/15/97-5/31/99)
1,000,000,000 6.65 01/02/97 1,000,000,000
Citicorp. Securities, Inc., dated 12/31/96, repurchase price $100,034,722
(U.S. Treasury Notes: $101,974,154, 5.88%-7.50%, 03/31/98-11/15/01)
100,000,000 6.25 01/02/97 100,000,000
Morgan Stanley & Co., dated 12/31/96, repurchase price $1,200,450,000
(U.S. Treasury Notes: $954,150,236, 6.00%-6.25%, 07/31/98-09/30/98;
U.S. Treasury Bills: $270,396,330, 01/23/97-10/16/97)
1,200,000,000 6.75 01/02/97 1,200,000,000
Swiss Bank Corp., dated 12/31/96, repurchase price $140,846,933
(U.S. Treasury Notes: $129,531,177, 4.75%-8.88%,01/15/97-08/15/03; U.S.
Treasury Bills: $14,639,156, 01/30/97-06/26/97)
140,800,000 6.00 01/02/97 140,800,000
Swiss Bank Corp., dated 12/31/96, repurchase price $400,150,000 (U.S.
Treasury Notes: $367,986,300, 4.75%-8.88%, 01/15/97-08/15/03; U.S.
Treasury Bills: $41,588,512, 01/30/97-06/26/97)
400,000,000 6.75 01/02/97 400,000,000
- -------------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $3,040,800,000
================================================================================
8. Other Matters
Pursuant to an SEC exemptive order, each taxable Portfolio may enter into
certain principal transactions, including repurchase agreements, with Goldman,
Sachs & Co. subject to certain limitations which include the following: 25% of
eligible security transactions, as defined, and 10% of repurchase agreement
transactions.
- --------------------------------------------------------------------------------
34
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Unit Outstanding Throughout Each Period
Prime Obligations Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
===================================
Net
Net asset realized Total Net asset
value at Net gain on income from value at
beginning investment investment investment Distributions end Total
of period income transactions operations to unitholders of period return/(a)/
==========================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended December 31,
================================
1996-ILA units ...................... $1.00 $0.0511 -- $0.0511 $(0.0511) $1.00 5.22%
1996-ILA Administration units ....... 1.00 0.0497 -- 0.0497 (0.0497) 1.00 5.06
1996-ILA Service units .............. 1.00 0.0474 -- 0.0474 (0.0474) 1.00 4.80
1996-ILA B units/(b)/................ 1.00 0.0262 -- 0.0262 (0.0262) 1.00 3.97/(d)/
1995-ILA units ...................... 1.00 0.0566 -- 0.0566 (0.0566) 1.00 5.79
1995-ILA Administration units ....... 1.00 0.0551 -- 0.0551 (0.0551) 1.00 5.63
1995-ILA Service units .............. 1.00 0.0522 -- 0.0522 (0.0522) 1.00 5.37
1994-ILA units ...................... 1.00 0.0394 -- 0.0394 (0.0394) 1.00 4.07
1994-ILA Administration units ....... 1.00 0.0379 -- 0.0379 (0.0379) 1.00 3.91
1994-ILA Service units .............. 1.00 0.0365 -- 0.0365 (0.0365) 1.00 3.66
1993-ILA units ...................... 1.00 0.0291 0.0002 0.0293 (0.0293) 1.00 2.97
1993-ILA Administration units ....... 1.00 0.0275 0.0003 0.0278 (0.0278) 1.00 2.82
1993-ILA Service units .............. 1.00 0.0250 0.0001 0.0251 (0.0252) 1.00 2.56
1992-ILA units ...................... 1.00 0.0364 0.0010 0.0374 (0.0374) 1.00 3.75
1992-ILA Administration units ....... 1.00 0.0339 0.0010 0.0349 (0.0349) 1.00 3.60
1992-ILA Service units .............. 1.00 0.0311 0.0010 0.0321 (0.0320) 1.00 3.34
1991-ILA units ...................... 1.00 0.0591 0.0003 0.0594 (0.0594) 1.00 6.10
1991-ILA Administration units ....... 1.00 0.0568 0.0003 0.0571 (0.0571) 1.00 5.94
1991-ILA Service units .............. 1.00 0.0558 0.0003 0.0561 (0.0561) 1.00 5.68
1990-ILA units ...................... 1.00 0.0793 -- 0.0793 (0.0793) 1.00 8.21
1990-ILA Administration units /(c)/.. 1.00 0.0438 -- 0.0438 (0.0438) 1.00 7.81/(d)/
1990-ILA Service units/(c)/.......... 1.00 0.0425 -- 0.0425 (0.0425) 1.00 7.56/(d)/
1989-ILA units ...................... 1.00 0.0890 -- 0.0890 (0.0890) 1.00 9.27
1988-ILA units ...................... 1.00 0.0714 -- 0.0714 (0.0714) 1.00 7.48
1987-ILA units ...................... 1.00 0.0634 -- 0.0634 (0.0634) 1.00 6.50
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
===========================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end of expenses to income to
average net average net period average net average net
assets assets (in 000's) assets assets
===============================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended December 31,
================================
1996-ILA units ...................... 0.41% 5.11% $1,154,787 0.43% 5.09%
1996-ILA Administration units ....... 0.56 4.97 23,738 0.58 4.95
1996-ILA Service units .............. 0.81 4.74 84,707 0.83 4.72
1996-ILA B units/(b)/................ 1.41/(d)/ 4.09/(d)/ 346 1.43/(d)/ 4.07/(d)/
1995-ILA units ...................... 0.41 5.66 1,261,251 0.43 5.64
1995-ILA Administration units ....... 0.56 5.51 63,018 0.58 5.49
1995-ILA Service units .............. 0.81 5.22 227,233 0.83 5.20
1994-ILA units ...................... 0.40 3.94 1,963,846 0.42 3.92
1994-ILA Administration units ....... 0.55 3.79 149,234 0.57 3.77
1994-ILA Service units .............. 0.80 3.65 170,453 0.82 3.63
1993-ILA units ...................... 0.40 2.91 2,332,771 0.42 2.89
1993-ILA Administration units ....... 0.55 2.75 189,431 0.57 2.73
1993-ILA Service units .............. 0.80 2.50 137,804 0.82 2.48
1992-ILA units ...................... 0.40 3.64 3,444,591 0.42 3.62
1992-ILA Administration units ....... 0.55 3.39 257,321 0.57 3.37
1992-ILA Service units .............. 0.80 3.11 22,044 0.82 3.09
1991-ILA units ...................... 0.40 5.91 3,531,736 0.42 5.89
1991-ILA Administration units ....... 0.55 5.68 198,417 0.57 5.66
1991-ILA Service units .............. 0.80 5.58 18,789 0.82 5.56
1990-ILA units ...................... 0.38 7.93 2,833,541 0.38 7.93
1990-ILA Administration units /(c)/.. 0.55/(d)/ 7.62/(d)/ 209,272 0.55/(d)/ 7.62/(d)/
1990-ILA Service units/(c)/.......... 0.80/(d)/ 7.25/(d)/ 19,039 0.80/(d)/ 7.25/(d)/
1989-ILA units ...................... 0.40 8.90 3,761,964 0.40 8.90
1988-ILA units ...................... 0.40 7.14 3,799,628 0.40 7.14
1987-ILA units ...................... 0.40 6.34 5,814,280 0.40 6.34
</TABLE>
- -------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/ILA Class B unit activity commenced during May of 1996.
/(c)/ILA Administration and Service unit activity commenced during June of 1990.
/(d)/Annualized.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Money Market Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
=====================================
Net Net Total
asset realized income Net asset
value at Net gain on from Distributions value at
beginning investment investment investment to end of Total
of period income transactions operations unitholders period return /(a)/
==========================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended December 31,
===============================
1996-ILA units ............. $1.00 $0.0515 $0.0001 $0.0516 $(0.0516) $1.00 5.27%
1996-ILA Administration
units ................... 1.00 0.0500 0.0001 0.0501 (0.0501) 1.00 5.12
1996-ILA Service units ..... 1.00 0.0475 0.0001 0.0476 (0.0476) 1.00 4.86
1995-ILA units ............. 1.00 0.0571 -- 0.0571 (0.0571) 1.00 5.85
1995-ILA Administration
units ................... 1.00 0.0555 -- 0.0555 (0.0555) 1.00 5.69
1995-ILA Service units ..... 1.00 0.0529 -- 0.0529 (0.0529) 1.00 5.43
1994-ILA units ............. 1.00 0.0401 -- 0.0401 (0.0401) 1.00 4.13
1994-ILA Administration
units ................... 1.00 0.0388 -- 0.0388 (0.0388) 1.00 3.98
1994-ILA Service units ..... 1.00 0.0364 -- 0.0364 (0.0364) 1.00 3.72
1993-ILA units ............. 1.00 0.0296 0.0003 0.0299 (0.0299) 1.00 3.03
1993-ILA Administration
units ................... 1.00 0.0281 0.0003 0.0284 (0.0284) 1.00 2.88
1993-ILA Service units ..... 1.00 0.0257 0.0002 0.0259 (0.0259) 1.00 2.62
1992-ILA units ............. 1.00 0.0368 0.0004 0.0372 (0.0372) 1.00 3.76
1992-ILA Administration
units ................... 1.00 0.0356 0.0004 0.0360 (0.0360) 1.00 3.61
1992-ILA Service units ..... 1.00 0.0358 0.0006 0.0364 (0.0364) 1.00 3.35
1991-ILA units ............. 1.00 0.0591 0.0004 0.0595 (0.0595) 1.00 6.12
1991-ILA Administration
units ................... 1.00 0.0574 0.0004 0.0578 (0.0578) 1.00 5.96
1991-ILA Service units ..... 1.00 0.0547 0.0004 0.0551 (0.0551) 1.00 5.70
1990-ILA units ............. 1.00 0.0793 0.0001 0.0794 (0.0794) 1.00 8.24
1990-ILA Administration
units/(c)/............... 1.00 0.0424 0.0001 0.0425 (0.0425) 1.00 7.86/(b)/
1990-ILA Service units/(c)/. 1.00 0.0438 -- 0.0438 (0.0438) 1.00 7.61/(b)/
1989-ILA units ............. 1.00 0.0885 0.0001 0.0886 (0.0886) 1.00 9.31
1988-ILA units ............. 1.00 0.0751 -- 0.0751 (0.0751) 1.00 7.66
For the Period December 2, 1987 (commencement of operations) through December 31,
================================================================================
1987-ILA units ............. 1.00 0.0063 -- 0.0063 (0.0063) 1.00 7.38/(b)/
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
============================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end of expenses to income to
average net average net period average net average net
assets assets (in 000's) assets assets
============================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended December 31,
===============================
1996-ILA units ............. 0.36% 5.15% $703,097 0.43% 5.08%
1996-ILA Administration
units ................... 0.51 5.00 257,258 0.58 4.93
1996-ILA Service units ..... 0.76 4.75 28,845 0.83 4.68
1995-ILA units ............. 0.36 5.71 574,155 0.42 5.65
1995-ILA Administration
units ................... 0.51 5.55 164,422 0.57 5.49
1995-ILA Service units ..... 0.76 5.29 23,080 0.82 5.23
1994-ILA units ............. 0.35 4.01 559,470 0.43 3.93
1994-ILA Administration
units ................... 0.50 3.88 145,867 0.58 3.80
1994-ILA Service units ..... 0.75 3.61 21,862 0.83 3.53
1993-ILA units ............. 0.35 2.96 699,604 0.43 2.88
1993-ILA Administration
units ................... 0.50 2.81 150,452 0.58 2.73
1993-ILA Service units ..... 0.75 2.57 11,166 0.83 2.49
1992-ILA units ............. 0.35 3.68 884,571 0.43 3.60
1992-ILA Administration
units ................... 0.50 3.56 187,445 0.58 3.48
1992-ILA Service units ..... 0.75 3.58 15,114 0.83 3.50
1991-ILA units ............. 0.35 5.91 1,153,191 0.42 5.84
1991-ILA Administration
units ................... 0.50 5.74 210,330 0.57 5.67
1991-ILA Service units ..... 0.75 5.47 56,586 0.82 5.40
1990-ILA units ............. 0.35 7.93 924,141 0.40 7.88
1990-ILA Administration
units/(c)/............... 0.50/(b)/ 7.63/(b)/ 204,477 0.55/(b)/ 7.58/(b)/
1990-ILA Service units/(c)/. 0.75/(b)/ 7.46/(b)/ 38,128 0.80/(b)/ 7.41/(b)/
1989-ILA units ............. 0.35 8.85 1,295,389 0.40 8.80
1988-ILA units ............. 0.27 7.51 701,105 0.40 7.38
For the Period December 2, 1987 (commencement of operations) through December 31,
================================================================================
1987-ILA units ............. 0.15/(b)/ 7.62/(b)/ 183,633 0.40/(b)/ 7.37/(b)/
- -------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration and Service unit activity commenced during June of 1990.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Government Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
=====================================
Net Net Total
asset realized income Net asset
value at Net (gain) on from Distributions value at
beginning investment investment investment to end of Total
of period income transactions operations unitholders period return /(a)/
==========================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended December 31,
================================
1996-ILA units ............. $1.00 $0.0504 $ 0.0001 $0.0505 $(0.0504) $1.00 5.15%
1996-ILA Administration
units ................... 1.00 0.0489 0.0001 0.0490 (0.0489) 1.00 4.99
1996-ILA Service units ..... 1.00 0.0463 0.0001 0.0464 (0.0463) 1.00 4.73
1995-ILA units ............. 1.00 0.0562 0.0002 0.0564 (0.0564) 1.00 5.77
1995-ILA Administration
units ................... 1.00 0.0549 0.0002 0.0551 (0.0551) 1.00 5.62
1995-ILA Service units ..... 1.00 0.0519 0.0002 0.0521 (0.0521) 1.00 5.35
1994-ILA units ............. 1.00 0.0378 0.0002 0.0380 (0.0380) 1.00 3.94
1994-ILA Administration
units ................... 1.00 0.0362 0.0002 0.0364 (0.0364) 1.00 3.79
1994-ILA Service units ..... 1.00 0.0350 0.0002 0.0352 (0.0352) 1.00 3.53
1993-ILA units ............. 1.00 0.0282 0.0008 0.0290 (0.0291) 1.00 2.94
1993-ILA Administration 1.00 0.0267 0.0008 0.0275 (0.0276) 1.00 2.79
units ...................
1993-ILA Service units ..... 1.00 0.0242 0.0006 0.0248 (0.0250) 1.00 2.53
1992-ILA units ............. 1.00 0.0338 0.0027 0.0365 (0.0364) 1.00 3.70
1992-ILA Administration
units ................... 1.00 0.0325 0.0027 0.0352 (0.0351) 1.00 3.55
1992-ILA Service units ..... 1.00 0.0309 0.0030 0.0339 (0.0336) 1.00 3.29
1991-ILA units ............. 1.00 0.0567 0.0011 0.0578 (0.0578) 1.00 5.91
1991-ILA Administration
units ................... 1.00 0.0545 0.0011 0.0556 (0.0556) 1.00 5.75
1991-ILA Service units ..... 1.00 0.0522 0.0011 0.0533 (0.0533) 1.00 5.49
1990-ILA units ............. 1.00 0.0779 0.0003 0.0782 (0.0782) 1.00 8.11
1990-ILA Administration
units (c)................ 1.00 0.0439 0.0004 0.0443 (0.0443) 1.00 7.74/(b)/
1990-ILA Service units (c).. 1.00 0.0359 0.0002 0.0361 (0.0363) 1.00 7.42/(b)/
1989-ILA units ............. 1.00 0.0877 0.0001 0.0878 (0.0878) 1.00 9.15
1988-ILA units ............. 1.00 0.0716 0.0002 0.0718 (0.0718) 1.00 7.42
1987-ILA units ............. 1.00 0.0622 0.0001 0.0623 (0.0624) 1.00 6.43
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
============================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end of expenses to income to
average net average net period average net average net
assets assets (in 000's) assets assets
===========================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended December 31,
================================
1996-ILA units ............. 0.41% 5.04% $694,651 0.44% 5.01%
1996-ILA Administration
units ................... 0.56 4.89 36,055 0.59 4.86
1996-ILA Service units ..... 0.81 4.63 94,228 0.84 4.60
1995-ILA units ............. 0.41 5.62 570,469 0.43 5.60
1995-ILA Administration
units ................... 0.56 5.49 47,558 0.58 5.47
1995-ILA Service units ..... 0.81 5.19 85,401 0.83 5.17
1994-ILA units ............. 0.40 3.78 881,520 0.44 3.74
1994-ILA Administration
units ................... 0.55 3.62 95,483 0.59 3.58
1994-ILA Service units ..... 0.80 3.50 156,930 0.84 3.46
1993-ILA units ............. 0.40 2.82 1,315,378 0.43 2.79
1993-ILA Administration
units ................... 0.55 2.67 161,845 0.58 2.64
1993-ILA Service units ..... 0.80 2.42 101,272 0.83 2.39
1992-ILA units ............. 0.40 3.38 1,785,472 0.42 3.36
1992-ILA Administration
units ................... 0.55 3.25 461,542 0.57 3.23
1992-ILA Service units ..... 0.80 3.09 56,389 0.82 3.07
1991-ILA units ............. 0.40 5.67 2,103,627 0.43 5.64
1991-ILA Administration
units ................... 0.55 5.45 464,060 0.58 5.42
1991-ILA Service units ..... 0.80 5.22 200,176 0.83 5.19
1990-ILA units ............. 0.39 7.79 2,203,756 0.39 7.79
1990-ILA Administration
units (c)................ 0.55/(b) 7.49/(b)/ 296,313 0.55/(b)/ 7.49/(b)/
1990-ILA Service units (c).. 0.80/(b)/ 7.15/(b)/ 132,888 0.80/(b)/ 7.15/(b)/
1989-ILA units ............. 0.40 8.77 2,268,330 0.40 8.77
1988-ILA units ............. 0.40 7.16 2,197,796 0.40 7.16
1987-ILA units ............. 0.40 6.22 2,243,870 0.40 6.22
- -------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration and Service unit activity commenced during June and July
of 1990, respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- -------------------------------------------------------------------------------
Financial Highlights (continued)
- -------------------------------------------------------------------------------
Selected Data for a Unit Outstanding Throughout Each Period
Treasury Obligations Portfolio
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
===================================
Net
Net asset realized Total Net asset
value at Net gain on income from value at
beginning investment investment investment Distributions end of Total
of period income transaction operation to unitholders period return/(a)/
====================================================================================
For the Years Ended December 31,
================================
<S> <C> <C> <C> <C> <C> <C> <C>
1996-ILA units ............................. $1.00 $0.0498 $0.0002 $0.0500 $(0.0500) $1.00 5.11%
1996-ILA Administration units .............. 1.00 0.0483 0.0003 0.0486 (0.0486) 1.00 4.95
1996-ILA Service units ..................... 1.00 0.0459 0.0001 0.0460 (0.0460) 1.00 4.69
1995-ILA units ............................. 1.00 0.0551 0.0007 0.0558 (0.0558) 1.00 5.73
1995-ILA Administration units .............. 1.00 0.0537 0.0007 0.0544 (0.0544) 1.00 5.57
1995-ILA Service units ..................... 1.00 0.0511 0.0007 0.0518 (0.0518) 1.00 5.31
1994-ILA units ............................. 1.00 0.0377 -- 0.0377 (0.0377) 1.00 3.91
1994-ILA Administration units .............. 1.00 0.0368 -- 0.0368 (0.0368) 1.00 3.75
1994-ILA Service units ..................... 1.00 0.0340 -- 0.0340 (0.0340) 1.00 3.49
1993-ILA units ............................. 1.00 0.0279 0.0006 0.0285 (0.0286) 1.00 2.89
1993-ILA Administration units .............. 1.00 0.0264 0.0006 0.0270 (0.0270) 1.00 2.74
1993-ILA Service units ..................... 1.00 0.0239 0.0006 0.0245 (0.0246) 1.00 2.48
1992-ILA units ............................. 1.00 0.0339 0.0025 0.0364 (0.0362) 1.00 3.65
1992-ILA Administration units .............. 1.00 0.0320 0.0023 0.0343 (0.0343) 1.00 3.49
1992-ILA Service units ..................... 1.00 0.0294 0.0024 0.0318 (0.0318) 1.00 3.23
1991-ILA units ............................. 1.00 0.0557 0.0018 0.0575 (0.0575) 1.00 5.90
1991-ILA Administration units .............. 1.00 0.0540 0.0018 0.0558 (0.0558) 1.00 5.74
1991-ILA Service units ..................... 1.00 0.0515 0.0018 0.0533 (0.0533) 1.00 5.48
1990-ILA units ............................. 1.00 0.0772 0.0002 0.0774 (0.0774) 1.00 8.05
1990-ILA Administration units /(c)/......... 1.00 0.0413 0.0002 0.0415 (0.0415) 1.00 7.67/(b)/
1990-ILA Service units /(c)/................ 1.00 0.0417 0.0003 0.0420 (0.0421) 1.00 7.42/(b)/
1989-ILA units ............................. 1.00 0.0864 0.0005 0.0869 (0.0869) 1.00 9.06
1988-ILA units ............................. 1.00 0.0704 0.0004 0.0708 (0.0708) 1.00 7.30
1987-ILA units ............................. 1.00 0.0617 0.0002 0.0619 (0.0619) 1.00 6.32
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
======================
Ratio Ratio of net Ratio of net
of net investment Net Ratio of net investment
expenses income to assets at expenses to income to
to average of average end of period average net average net
net assets net assets (in 000's) assets assets
=============================================================================
For the Years Ended December 31,
================================
1996-ILA units .................................. 0.41% 4.98% $574,734 0.43% 4.96%
1996-ILA Administration units ................... 0.56 4.83 108,850 0.58 4.81
1996-ILA Service units .......................... 0.81 4.59 123,483 0.83 4.57
1995-ILA units .................................. 0.41 5.51 711,209 0.43 5.49
1995-ILA Administration units ................... 0.56 5.37 92,643 0.58 5.35
1995-ILA Service units .......................... 0.81 5.11 119,692 0.83 5.09
1994-ILA units .................................. 0.40 3.77 713,816 0.44 3.73
1994-ILA Administration units ................... 0.55 3.68 97,626 0.59 3.64
1994-ILA Service units .......................... 0.80 3.40 108,972 0.84 3.35
1993-ILA units .................................. 0.40 2.79 969,565 0.43 2.76
1993-ILA Administration units ................... 0.55 2.64 121,327 0.58 2.61
1993-ILA Service units .......................... 0.80 2.39 185,506 0.83 2.36
1992-ILA units .................................. 0.40 3.39 1,328,036 0.43 3.36
1992-ILA Administration units ................... 0.55 3.20 152,804 0.58 3.17
1992-ILA Service units .......................... 0.80 2.94 183,208 0.83 2.91
1991-ILA units .................................. 0.40 5.57 1,709,321 0.43 5.54
1991-ILA Administration units ................... 0.55 5.40 146,795 0.58 5.37
1991-ILA Service units .......................... 0.80 5.15 154,419 0.83 5.12
1990-ILA units .................................. 0.39 7.72 1,816,991 0.39 7.72
1990-ILA Administration units /(c)/.............. 0.55/(b)/ 7.42/(b)/ 132,088 0.55/(b)/ 7.42/(b)/
1990-ILA Service units /(c)/..................... 0.80/(b)/ 7.11/(b)/ 148,323 0.80/(b)/ 7.11/(b)/
1989-ILA units .................................. 0.40 8.64 1,769,974 0.40 8.64
1988-ILA units .................................. 0.40 7.04 1,657,215 0.40 7.04
1987-ILA units .................................. 0.40 6.17 1,693,767 0.40 6.17
</TABLE>
- -------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration and Service unit activity commenced during June and July
of 1990, respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Treasury Instruments Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
========================================
Net asset Net realized Total Net asset
value at Net gain income from Distributions value at
beginning investment on investment investment to end Total /(a)/
of period income transcations operations unitholders of period return
===================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended December 31,
================================
1996-ILA units ............. $1.00 $0.0496 $0.0004 $0.0500 $(0.0500) $1.00 5.10%
1996-ILA Administration
units ................... 1.00 0.0482 0.0004 0.0486 (0.0486) 1.00 4.95
1996-ILA Service units ..... 1.00 0.0456 0.0004 0.0460 (0.0460) 1.00 4.68
1995-ILA units ............. 1.00 0.0550 0.0006 0.0556 (0.0556) 1.00 5.70
1995-ILA Administration
units ................... 1.00 0.0534 0.0007 0.0541 (0.0540) 1.00 5.54
1995-ILA Service units ..... 1.00 0.0500 0.0005 0.0505 (0.0505) 1.00 5.28
1994-ILA units ............. 1.00 0.0397 0.0001 0.0398 (0.0398) 1.00 4.01
1994-ILA Administration
units ................... 1.00 0.0397 0.0001 0.0398 (0.0398) 1.00 3.85
1994-ILA Service units ..... 1.00 0.0371 0.0001 0.0372 (0.0372) 1.00 3.59
1993-ILA units ............. 1.00 0.0288 0.0006 0.0294 (0.0294) 1.00 2.98
1993-ILA Administration
units ................... 1.00 0.0273 0.0006 0.0279 (0.0279) 1.00 2.83
1993-ILA Service units ..... 1.00 0.0248 0.0006 0.0254 (0.0254) 1.00 2.57
1992-ILA units ............. 1.00 0.0338 0.0012 0.0350 (0.0350) 1.00 3.54
1992-ILA Administration
units ................... 1.00 0.0326 0.0012 0.0338 (0.0338) 1.00 3.38
1992-ILA Service units ..... 1.00 0.0275 0.0011 0.0286 (0.0286) 1.00 3.13
For the Period January 30, 1991 (commencement of operations) through December 31,
=================================================================================
1991-ILA units ............. 1.00 0.0486 0.0013 0.0499 (0.0499) 1.00 5.75/(b)/
1991-ILA Administration
units /(c)/.............. 1.00 0.0210 0.0010 0.0220 (0.0220) 1.00 5.21/(b)/
1991-ILA Service units /(c)/ 1.00 0.0473 0.0009 0.0482 (0.0482) 1.00 5.33/(b)/
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
====================================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end expenses to income to
average net average net of period average net average net
assets assets (in 000's) assets assets
=============================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended December 31,
================================
1996-ILA units ............. 0.21% 4.96% $708,999 0.43% 4.74%
1996-ILA Administration
units ................... 0.36 4.82 137,706 0.58 4.60
1996-ILA Service units ..... 0.61 4.56 383,901 0.83 4.34
1995-ILA units ............. 0.21 5.50 586,294 0.44 5.27
1995-ILA Administration
units ................... 0.36 5.34 68,713 0.59 5.11
1995-ILA Service units ..... 0.61 5.00 123,254 0.84 4.77
1994-ILA units ............. 0.20 3.96 547,351 0.43 3.73
1994-ILA Administration
units ................... 0.35 3.97 64,388 0.58 3.74
1994-ILA Service units ..... 0.60 3.72 74,451 0.83 3.49
1993-ILA units ............. 0.20 2.88 456,411 0.44 2.64
1993-ILA Administration
units ................... 0.35 2.73 26,553 0.59 2.49
1993-ILA Service units ..... 0.60 2.48 34,014 0.84 2.24
1992-ILA units ............. 0.18 3.38 422,506 0.45 3.11
1992-ILA Administration
units ................... 0.33 3.26 6,915 0.60 2.99
1992-ILA Service units ..... 0.58 2.75 29,522 0.85 2.48
For the Period January 30, 1991 through December 31,
====================================================
1991-ILA units ............. 0.10/(b)/ 5.28/(b)/ 424,436 0.45/(b)/ 4.93/(b)/
1991-ILA Administration
units /(c)/.............. 0.25/(b)/ 4.77/(b)/ 17,649 0.60/(b)/ 4.42/(b)/
1991-ILA Service units /(c)/ 0.50/(b)/ 5.13/(b)/ 9,430 0.85/(b)/ 4.78/(b)/
</TABLE>
- -------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration and Service unit activity commenced during July and
January of 1991, respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Federal Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
--------------------------------------
Net
asset Net realized Total
value at gain income Net asset
beginning Net on from Distributions value at
of investment investment investment to end Total
period income transactions operations unitholders of period return(a)
======================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended December 31,
- --------------------------------
1996-ILA units ....................... $1.00 $0.0513 -- $0.0513 $(0.0513) $1.00 5.24%
1996-ILA Administration units......... 1.00 0.0498 -- 0.0498 (0.0498) 1.00 5.09
1996-ILA Service units ............... 1.00 0.0473 -- 0.0473 (0.0473) 1.00 4.83
1995-ILA units ....................... 1.00 0.0569 -- 0.0569 (0.0569) 1.00 5.83
1995-ILA Administration units ........ 1.00 0.0550 -- 0.0550 (0.0550) 1.00 5.67
1995-ILA Service units ............... 1.00 0.0522 -- 0.0522 (0.0522) 1.00 5.41
1994-ILA units ....................... 1.00 0.0407 -- 0.0407 (0.0407) 1.00 4.11
1994-ILA Administration units ........ 1.00 0.0388 -- 0.0388 (0.0388) 1.00 3.95
1994-ILA Service units ............... 1.00 0.0392 -- 0.0392 (0.0392) 1.00 3.69
1993-ILA units ....................... 1.00 0.0296 -- 0.0296 (0.0296) 1.00 3.00
1993-ILA Administration units ........ 1.00 0.0281 -- 0.0281 (0.0281) 1.00 2.84
1993-ILA Service units/(c)/........... 1.00 0.0157 -- 0.0157 (0.0157) 1.00 2.56/(b)/
1992-ILA units ....................... 1.00 0.0358 -- 0.0358 (0.0358) 1.00 3.61
1992-ILA Administration units ........ 1.00 0.0340 -- 0.0340 (0.0340) 1.00 3.46
1991-ILA units ....................... 1.00 0.0576 -- 0.0576 (0.0576) 1.00 5.94
1991-ILA Administration units ........ 1.00 0.0542 -- 0.0542 (0.0542) 1.00 5.78
1991-ILA Service units/(c)/........... 1.00 0.0196 -- 0.0196 (0.0196) 1.00 5.55/(b)/
1990-ILA units ....................... 1.00 0.0772 -- 0.0772 (0.0772) 1.00 8.06
1990-ILA Administration units/(d)/.... 1.00 0.0205 -- 0.0205 (0.0205) 1.00 7.39/(b)/
For the Period May 22, 1989 (commencement of operations) through December 31,
- -----------------------------------------------------------------------------
1989-ILA units ....................... 1.00 0.0516 -- 0.0516 (0.0516) 1.00 7.62(b)
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
---------------------------
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end expenses to income to
average net average net of period average net average net
assets assets (in 000's) assets assets
====================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended December 31,
- --------------------------------
1996-ILA units ....................... 0.26% 5.13% $2,303,677 0.43% 4.96%
1996-ILA Administration units......... 0.41 4.98 794,537 0.58 4.81
1996-ILA Service units ............... 0.66 4.73 192,416 0.83 4.56
1995-ILA units ....................... 0.26 5.69 1,731,935 0.42 5.53
1995-ILA Administration units ........ 0.41 5.50 516,917 0.57 5.34
1995-ILA Service units ............... 0.66 5.22 102,576 0.82 5.06
1994-ILA units ....................... 0.25 4.07 1,625,567 0.42 3.90
1994-ILA Administration units ........ 0.40 3.88 329,896 0.57 3.71
1994-ILA Service units ............... 0.65 3.92 15,539 0.82 3.75
1993-ILA units ....................... 0.25 2.96 1,430,292 0.42 2.79
1993-ILA Administration units ........ 0.40 2.81 362,401 0.57 2.64
1993-ILA Service units/(c)/........... 0.65/(b)/ 2.54/(b)/ 1,425 0.82/(b)/ 2.37/(b)/
1992-ILA units ....................... 0.25 3.58 1,600,989 0.42 3.41
1992-ILA Administration units ........ 0.40 3.40 312,792 0.57 3.23
1991-ILA units ....................... 0.25 5.76 1,656,232 0.42 5.59
1991-ILA Administration units ........ 0.40 5.42 291,810 0.57 5.25
1991-ILA Service units/(c)/........... 0.65/(b)/ 5.56/(b)/ -- 0.82/(b)/ 5.39/(b)/
1990-ILA units ....................... 0.25 7.72 1,368,765 0.40 7.57
1990-ILA Administration units/(d)/.... 0.40/(b)/ 7.25/(b)/ 90,748 0.55/(b)/ 7.10/(b)/
For the Period May 22, 1989 (commencement of operations) through December 31,
- -----------------------------------------------------------------------------
1989-ILA units ....................... 0.19/(b)/ 8.41/(b)/ 455,230 0.40/(b)/ 8.20/(b)/
</TABLE>
- ----------------
/(a)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/ Annualized.
/(c)/ ILA Service unit activity commenced during April of 1991; no shares were
outstanding during the period from August 7, 1991 through May 15, 1993.
(d)ILA Administration unit activity commenced during September of 1990.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
Goldman Sachs--Institutional Liquid Assets
- ------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Tax-Exempt Diversified Portfolio
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
======================================
Net
Net asset realized Total Net asset
value at Net gain(loss) income from value at
beginning investment on investment investment Distributions end of Total
of period income transactions operations to unitholders period return/(a)/
===============================================================================================
For the Years Ended December 31,
================================
<S> <C> <C> <C> <C> <C> <C> <C>
1996-ILA units ..................... $1.00 $0.0320 $ $0.0320 $(0.0320) $1.00 3.25%
1996-ILA Administration units....... 1.00 0.0306 -- 0.0306 (0.0306) 1.00 3.09
1996-ILA Service units ............. 1.00 0.0279 -- 0.0279 (0.0279) 1.00 2.84
1995-ILA units ..................... 1.00 0.0365 -- 0.0365 (0.0365) 1.00 3.72
1995-ILA Administration units....... 1.00 0.0351 -- 0.0351 (0.0352) 1.00 3.57
1995-ILA Service units ............. 1.00 0.0324 -- 0.0324 (0.0325) 1.00 3.31
1994-ILA units ..................... 1.00 0.0264 -- 0.0264 (0.0264) 1.00 2.71
1994-ILA Administration units....... 1.00 0.0250 -- 0.0250 (0.0250) 1.00 2.55
1994-ILA Service units ............. 1.00 0.0220 -- 0.0220 (0.0220) 1.00 2.30
1993-ILA units ..................... 1.00 0.0222 -- 0.0222 (0.0222) 1.00 2.25
1993-ILA Administration units....... 1.00 0.0207 -- 0.0207 (0.0207) 1.00 2.09
1993-ILA Service units ............. 1.00 0.0183 -- 0.0183 (0.0183) 1.00 1.84
1992-ILA units ..................... 1.00 0.0277 -- 0.0277 (0.0277) 1.00 2.82
1992-ILA Administration units....... 1.00 0.0266 -- 0.0266 (0.0266) 1.00 2.67
1992-ILA Service units ............. 1.00 0.0243 -- 0.0243 (0.0243) 1.00 2.41
1991-ILA units ..................... 1.00 0.0424 -- 0.0424 (0.0424) 1.00 4.33
1991-ILA Administration units....... 1.00 0.0406 -- 0.0406 (0.0406) 1.00 4.17
1991-ILA Service units ............. 1.00 0.0386 -- 0.0386 (0.0386) 1.00 3.91
1990-ILA units ..................... 1.00 0.0550 (0.0001) 0.0549 (0.0549) 1.00 5.64
1990-ILA Administration units /(c)/. 1.00 0.0301 -- 0.0301 (0.0300) 1.00 5.43/(b)/
1990-ILA Service units /(c)/........ 1.00 0.0259 -- 0.0259 (0.0259) 1.00 5.17/(b)/
1989-ILA units ..................... 1.00 0.0591 (0.0001) 0.0590 (0.0590) 1.00 6.07
1988-ILA units ..................... 1.00 0.0487 0.0003 0.0490 (0.0490) 1.00 5.03
1987-ILA units ..................... 1.00 0.0413 (0.0003) 0.0410 (0.0410) 1.00 4.23
<CAPTION>
Ratio assuming no
waiver of fees and no
expense limitation
==============================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end of expenses to income to
average net average net period average net average net
assets assets (in 000's) assets assets
===================================================================================
For the Years Ended December 31,
================================
<S> <C> <C> <C> <C> <C>
1996-ILA units ..................... 0.31% 3.20% $1,514,443 0.41% 3.10%
1996-ILA Administration units....... 0.46 3.06 59,097 0.56 2.96
1996-ILA Service units ............. 0.71 2.79 28,921 0.81 2.69
1995-ILA units ..................... 0.31 3.65 $1,342,585 0.42 3.54
1995-ILA Administration units....... 0.46 3.51 48,773 0.57 3.40
1995-ILA Service units ............. 0.71 3.24 49,647 0.82 3.13
1994-ILA units ..................... 0.30 2.64 1,434,965 0.41 2.53
1994-ILA Administration units....... 0.45 2.50 97,778 0.56 2.39
1994-ILA Service units ............. 0.70 2.20 36,492 0.81 2.09
1993-ILA units ..................... 0.30 2.22 1,769,477 0.41 2.11
1993-ILA Administration units....... 0.45 2.08 99,896 0.56 1.97
1993-ILA Service units ............. 0.70 1.83 45,172 0.81 1.72
1992-ILA units ..................... 0.30 2.77 1,333,925 0.42 2.65
1992-ILA Administration units....... 0.45 2.66 50,225 0.57 2.54
1992-ILA Service units ............. 0.70 2.43 29,534 0.82 2.31
1991-ILA units ..................... 0.32 4.24 1,044,986 0.42 4.14
1991-ILA Administration units....... 0.47 4.06 37,567 0.57 3.96
1991-ILA Service units ............. 0.72 3.86 52,399 0.82 3.76
1990-ILA units ..................... 0.40 5.50 603,895 0.40 5.50
1990-ILA Administration units /(c)/. 0.55/(b)/ 5.40/(b)/ 42,498 0.55/(b)/ 5.40/(b)/
1990-ILA Service units /(c)/........ 0.80/(b)/ 5.16/(b)/ 56,810 0.80/(b)/ 5.16/(b)/
1989-ILA units ..................... 0.40 5.91 688,556 0.40 5.91
1988-ILA units ..................... 0.40 4.87 907,782 0.40 4.87
1987-ILA units ..................... 0.40 4.13 965,714 0.40 4.13
- -------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration and Service unit activity commenced during June and July
of 1990, respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Tax-Exempt California Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
=====================================
Net Net Total
asset realized income Net asset
value at Net (loss) on from Distributions value at
beginning investment investment investment to end of Total
of period income transactions operations unitholders period return /(a)/
==========================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended
December 31,
==========================
1996-ILA units ............. $1.00 $0.0299 -- $0.0299 $(0.0299) $1.00 3.03%
1996-ILA Administration
units ................... 1.00 0.0284 -- 0.0284 (0.0284) 1.00 2.88
1995-ILA units ............. 1.00 0.0349 -- 0.0349 (0.0350) 1.00 3.55
1995-ILA Administration
units ................... 1.00 0.0332 -- 0.0332 (0.0332) 1.00 3.40
1994-ILA units ............. 1.00 0.0250 -- 0.0250 (0.0250) 1.00 2.53
1994-ILA Administration
units ................... 1.00 0.0233 -- 0.0233 (0.0233) 1.00 2.37
1993-ILA units ............. 1.00 0.0206 -- 0.0206 (0.0206) 1.00 2.09
1993-ILA Administration
units ................... 1.00 0.0191 -- 0.0191 (0.0191) 1.00 1.93
1993-ILA Service units ..... 1.00 0.0166 -- 0.0166 (0.0166) 1.00 1.68
1992-ILA units ............. 1.00 0.0256 (0.0001) 0.0255 (0.0256) 1.00 2.62
1992-ILA Administration
units ................... 1.00 0.0235 (0.0002) 0.0233 (0.0235) 1.00 2.47
1992-ILA Service units (c).. 1.00 0.0081 -- 0.0081 (0.0081) 1.00 1.99/(b)/
1991-ILA units ............. 1.00 0.0388 -- 0.0388 (0.0388) 1.00 3.92
1991-ILA Administration
units ................... 1.00 0.0376 -- 0.0376 (0.0376) 1.00 3.80
1990-ILA units ............. 1.00 0.0511 (0.0001) 0.0510 (0.0511) 1.00 5.24
1990-ILA Administration
units (c)................ 1.00 0.0042 -- 0.0042 (0.0042) 1.00 5.14/(b)/
1989-ILA units ............. 1.00 0.0573 (0.0001) 0.0572 (0.0572) 1.00 5.93
For the Period October 3, 1988 (commencement of operations) through
December 31,
=========================================================
1988-ILA units ............. 1.00 0.0139 -- 0.0139 (0.0139) 1.00 5.81/(b)/
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
============================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end expenses to income to
average net average net period of average net average net
assets assets (in 000's) assets assets
===========================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended
December 31,
==========================
1996-ILA units ............. 0.41% 2.99% $440,476 0.42% 2.98%
1996-ILA Administration
units ................... 0.56 2.84 142 0.57 2.83
1995-ILA units ............. 0.41 3.49 346,728 0.41 3.49
1995-ILA Administration
units ................... 0.56 3.32 61 0.56 3.32
1994-ILA units ............. 0.40 2.50 227,399 0.41 2.49
1994-ILA Administration
units ................... 0.55 2.33 790 0.56 2.32
1993-ILA units ............. 0.40 2.06 229,839 0.44 2.02
1993-ILA Administration
units ................... 0.55 1.91 1,425 0.59 1.87
1993-ILA Service units ..... 0.76 1.66 -- 0.84 1.54
1992-ILA units ............. 0.40 2.56 161,868 0.47 2.49
1992-ILA Administration
units ................... 0.55 2.35 31 0.62 2.28
1992-ILA Service units (c).. 0.80/(b)/ 3 0.87/(b)/ 1.96/(b)/
2.03(b)
1991-ILA units ............. 0.40 3.88 102,494 0.47 3.81
1991-ILA Administration
units ................... 0.55 3.76 13 0.62 3.69
1990-ILA units ............. 0.40 5.11 106,972 0.40 5.11
1990-ILA Administration
units (c)................ 0.55/(b)/ 5.33(b) 68 0.55/(b)/ 5.33/(b)/
1989-ILA units ............. 0.40 5.73 112,463 0.40 5.73
For the Period October 3, 1988 (commencement of
operations) through December 31,
=========================================================
1988-ILA units ............. 0.24/(b)/ 5.74/(b)/ 41,028 0.38/(b)/ 5.60/(b)/
- -------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration and Service unit activity commenced during December of
1990 and August of 1992, respectively. No service shares were outstanding
for the years ended December 31, 1996, 1995, 1994.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
<TABLE>
<CAPTION>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Tax-Exempt New York Portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
----------------------------------------
Net asset Net realized Total Net asset
value at Net loss income from value at
beginning investment on investment investment Distribution end Total
of period income transactions operations to unitholders of period return(a)
=============================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended December 31,
- ---------------------------------
1996-ILA units ..................... $1.00 $0.0301 -- $0.0301 $(0.0301) $1.00 3.05%
1996-ILA Administration units ...... 1.00 0.0288 -- 0.0288 (0.0288) 1.00 2.90
1995-ILA units ..................... 1.00 0.0344 -- 0.0344 (0.0344) 1.00 3.51
1995-ILA Administration units ...... 1.00 0.0328 -- 0.0328 (0.0328) 1.00 3.35
1994-ILA units ..................... 1.00 0.0262 -- 0.0262 (0.0262) 1.00 2.56
1994-ILA Administration units ...... 1.00 0.0247 -- 0.0247 (0.0247) 1.00 2.41
1993-ILA units ..................... 1.00 0.0221 -- 0.0221 (0.0221) 1.00 2.21
1993-ILA Administration units ...... 1.00 0.0205 -- 0.0205 (0.0205) 1.00 2.05
1992-ILA units ..................... 1.00 0.0265 -- 0.0265 (0.0265) 1.00 2.71
1992-ILA Administration units ...... 1.00 0.0253 -- 0.0253 (0.0253) 1.00 2.55
For the Period February 15, 1991 (commencement of operations) through December 31,
- -----------------------------------------------------------------------------------
1991-ILA units ..................... 1.00 0.0347 (0.0002) 0.0345 (0.0347) 1.00 4.02/(b)/
1991-ILA Administration units /(c)/. 1.00 0.0330 -- 0.0330 (0.0330) 1.00 3.87/(b)/
- --------------------
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------------
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end expenses to income to
average net average net of period average net average net
assets assets (in 000's) assets assets
============================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended December 31,
- ---------------------------------
1996-ILA units ..................... 0.32% 3.01% $70,175 0.43% 2.90%
1996-ILA Administration units ...... 0.47 2.88 44,319 0.58 2.77
1995-ILA units ..................... 0.30 3.44 90,537 0.44 3.30
1995-ILA Administration units ...... 0.45 3.28 26,724 0.59 3.14
1994-ILA units ..................... 0.24 2.62 84,517 0.47 2.39
1994-ILA Administration units ...... 0.39 2.47 38,970 0.62 2.24
1993-ILA units ..................... 0.10 2.21 48,367 0.51 1.80
1993-ILA Administration units ...... 0.25 2.05 20,306 0.66 1.64
1992-ILA units ..................... 0.10 2.65 16,844 0.57 2.18
1992-ILA Administration units ...... 0.25 2.53 14,641 0.72 2.06
For the Period February 15, 1991 (commencement of operations) through December 31,
- -----------------------------------------------------------------------------------
1991-ILA units ..................... 0.10/(b)/ 3.96/(b)/ 11,070 0.76/(b)/ 3.30/(b)/
1991-ILA Administration units/(c)/.. 0.25/(b)/ 3.90/(b)/ 19,198 0.91/(b)/ 3.24/(b)/
</TABLE>
- -------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration unit activity commenced during February of 1991.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Unitholders and Board of Trustees of Goldman Sachs Money Market
Trust--Institutional Liquid Assets:
We have audited the accompanying statements of assets and liabilities of
Goldman Sachs Money Market Trust--Institutional Liquid Assets (a Massachusetts
business trust comprising the Prime Obligations, Money Market, Government,
Treasury Obligations, Treasury Instruments, Federal, Tax-Exempt Diversified,
Tax-Exempt California and Tax-Exempt New York Portfolios), including the
statements of investments as of December 31, 1996, and the related statements of
operations for the year then ended, and the statements of changes in net assets
and the financial highlights for the periods presented. These financial
statements and the financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of each of the respective portfolios constituting Goldman Sachs Money
Market Trust--Institutional Liquid Assets as of December 31, 1996, the results
of their operations for the year then ended, the changes in their net assets and
the financial highlights for the periods presented, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 10, 1997
- -------------------------------------- ----------------------------------------
44
<PAGE>
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[This page intentionally left blank]
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45
<PAGE>
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[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 Money Market
Trust--Institutional Liquid Assets Portfolios' Prospectus which contains facts
concerning each Fund's objectives and policies, management, expenses and other
information.
- --------------------------------------------------------------------------------
47
<PAGE>
================================================================================
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser,
Distributor and Transfer Agent
Goldman Sachs
Money Market Trust
Institutional
Liquid Assets
- --------------------------------------------------------------------------------
Annual Report
December 31, 1996
Prime Obligations Portfolio
Money Market Portfolio
Government Portfolio
Treasury Obligations Portfolio
Treasury Instruments Portfolio
Federal Portfolio
Tax-Exempt Diversified Portfolio
Tax-Exempt California Portfolio
Tax-Exempt New York Portfolio
[LOGO OF GOLDMAN SACHS APPEARS HERE]
================================================================================
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS/1/
MOODY'S INVESTORS SERVICE, INC.
Bond Ratings
- ------------
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than with Aaa
securities.
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 some time in the future.
Moody's applies numerical modifiers 1, 2, and 3 in the Aa and A categories.
The modifier 1 indicates that the obligation ranks in the higher end of the
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of the respective category.
Short-Term Ratings
- ------------------
P-1: Issuers have a superior ability for repayment of senior short-term
debt obligations. Prime-1 or P-1 repayment ability will 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 structure with moderate reliance on debt and
ample asset protection.
. Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
A-1
<PAGE>
. Well established access to a range of financial markets and assured
sources of alternate liquidity.
P-2: Issuers have a strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
State and Municipal Obligations
- -------------------------------
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in bond
risk, long-term secular trends for example, may be less important over the short
run. Symbols used will be as follows:
MIG 1/VMIG 1 -- This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
MIG 2/VMIG 2 -- This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
A short-term rating may also be assigned on an issue having a demand
feature-variable rate demand obligation. Such ratings will be designated as
VMIG to reflect such characteristics as payment upon periodic demand rather than
fixed maturity dates and payment relying on external liquidity. Additionally,
investors should be alert to the fact that the source of payment may be limited
to the external liquidity with no or limited legal recourse to the issuer in the
event the demand is not met.
STANDARD & POOR'S RATINGS GROUP
Bond Ratings
- ------------
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the
A-2
<PAGE>
obligor's capacity to meet its financial commitment on the obligation is still
strong.
PLUS (+) OR MINUS (-): The AA and A ratings may be modified by the
addition of a plus or minus sign to show relative standing within the category.
Short-Term Ratings
- ------------------
A-1: A short-term obligation rated A-1 is rated in the highest category by
S&P. The obligor's capacity to meet its financial commitment on the obligation
is strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
A-2: A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.
MUNICIPAL NOTES
An S&P note rating reflects the liquidity factors and market access risks
unique to notes. Notes maturing in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long-term debt
rating. The following criteria will be used in making that assessment.
. Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
. Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 -- Strong capacity to pay principal and interest. Those issues
determined to possess very strong 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.
S&P assigns "dual" ratings to all debt issues that have a put option or
demand feature as part of their structure.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for
A-3
<PAGE>
bonds to denote the long-term maturity and the commercial paper rating symbols
for the put option (for example, "AAA/A-1+"). With short-term demand debt,
S&P's note rating symbols are used with the commercial paper rating symbols (for
example, "SP-1+/A-1+").
DUFF & PHELPS, INC.
Bond Ratings
- ------------
AAA: The highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA: High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A: Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
Duff & Phelps applies modifiers, + and -, in the AA and A categories for
long-term fixed income securities. The modifier + indicates that the security
ranks in the higher end of the category: the modifier AA or A indicates a mid-
range ranking; and the modifier - indicates that the issue ranks in the lower
end of the category.
Short-Term Ratings
- ------------------
D-1: Commercial paper and certificates of deposit rated Duff 1 are
considered to have a very high certainty of timely payment. Liquidity factors
are excellent and are supported by strong fundamental protection factors. Risk
factors are minor.
D-2: Commercial paper and certificates of deposit rated Duff 2 are
considered to have a good certainty of timely payment. Liquidity factors and
company fundamentals are considered sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good and risk
factors are small.
Duff & Phelps applies a plus and minus rating scale, D-1+ , D-1 and D-1- in
the Duff 1 top grade category for short-term debt. The rating D-1+ indicates
that the security has the highest certainty of timely payment, short-term
liquidity is clearly out standing and safety is just below risk-free U.S.
Treasury short-term obligations; the rating D-1 indicates a very high certainty
of timely payment, liquidity factors are excellent and risk factors are minimal;
and the rating D-1- indicates a high certainty of timely payment, liquidity
factors are strong and risk factors are very small.
A-4
<PAGE>
FITCH INVESTORS SERVICE CORP.
AAA: Bonds which are rated AAA are considered to be investment grade and
of the highest credit quality. The obligor has an exceptionally strong ability
to pay its obligations, which is unlikely to be affected by reasonably
foreseeable events.
AA: Bonds which are rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated AAA.
Because bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issuers
is generally rated F-1+.
A: Bonds which are 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.
Fitch applies plus (+) and minus (-) modifiers in the AA and A categories
to indicate the relative position of a credit within the rating category.
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. The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1: Short-term debt obligations rated F-1 are considered to be of very
strong credit quality. Those issues determined to possess exceptionally strong
credit quality and having the strongest degree of assurance for timely payment
will be denoted with a plus ("+") sign designation.
F-2: Short-term debt obligations rated F-2 are considered to be of good
credit quality. Issues assigned this rating have a satisfactory degree of
assurance for timely payment, but the margin of safety is not as great as for
issues assigned F-1+ and F-1 ratings.
IBCA LIMITED AND IBCA INC.
A1: Short-term obligations rated A1 are supported by the highest capacity
for timely repayment. Where issues possess a particularly strong credit feature
a rating of A1+ is assigned.
A2: Short-term obligations rated A2 are supported by a satisfactory
capacity for timely repayment, although such capacity may be susceptible to
adverse changes in business, economic or financial conditions.
A-5
<PAGE>
THOMSON BANKWATCH, INC.
AAA: The highest category; indicates an extremely high ability to repay
principal and interest on a timely basis.
AA: The second highest category; indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental risk,
compared to issues rated in the highest category.
A: The third highest category; indicates the ability to repay principal
and interest is strong. Issues rated A could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
Ratings in the AA and A Long-Term Debt categories may include a plus (+) or
minus (-) designation which indicates where within the respective category the
issue is placed.
The TBW Short-Term Ratings apply only to specific debt instruments that have a
maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an untimely
payment of principal and interest.
TBW-1: The highest category; indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2: The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated TBW-1.
/1/ The ratings indicated herein are believed to be the most recent ratings
available at the date of this Statement of Additional Information for the
securities listed. Ratings are generally given to securities at the time of
issuance. While the rating agencies may from time to time revise such
ratings, they undertake no obligation to do so, and the ratings indicated
do not necessarily represent ratings which will be given to these
securities on the date of the Portfolios' taxable year end.
A-6
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
(a) Financial Statements
Included in the Prospectus:
Financial Highlights for the GS Adjustable Rate Govern ment Fund, GS
Short Duration Government Fund, GS Short Duration Tax-Free Fund, GS
Core Fixed Income Fund and Goldman Sachs Global Income Fund for the
period ended October 31, 1996 (audited);
Financial Highlights for the GS Adjustable Rate Govern ment Fund,
Goldman Sachs Municipal Income Fund, Goldman Sachs Government Income
Fund and Goldman Sachs Global Income Fund for the period ended October
31, 1996 (audited);
Financial Highlights for Goldman Sachs Capital Growth Fund, Goldman
Sachs Select Equity Fund, Goldman Sachs Small Cap Equity Fund, Goldman
Sachs International Equity Fund, Goldman Sachs Growth and Income Fund,
Goldman Sachs Asia Growth Fund, Goldman Sachs Balanced Fund, and
Goldman Sachs Mid-Cap Equity Fund for the period ended January 31,
1997 (audited);
Financial Highlights for the Financial Square Treasury Obligations
Fund, Financial Square Prime Obligations Fund, Financial Square
Government Fund, Financial Square Money Market Fund and Financial
Square Tax-Free Money Market Fund (collectively, the "Financial Square
Funds") for the period ended December 31, 1996 (audit ed); and
Financial Highlights for the Treasury Obligations Portfolio, Treasury
Instruments Portfolio, Prime Obli gations Portfolio, Federal
Portfolio, Government Port folio, Money Market Portfolio, Tax-Exempt
Diversified Portfolio, Tax-Exempt California Portfolio and Tax-Exempt
New York Portfolio for the period ended December 31, 1996
(audited).
Incorporated by Reference into the Additional Statement:
Report of Independent Public Accountants.
Statement of Investments for the GS Adjustable Rate Govern ment Fund, GS
Short Duration Government Fund, GS Short
<PAGE>
Duration Tax-Free Fund, GS Core Fixed Income Fund and Goldman Sachs Global
Income Fund as of October 31, 1996 (audited).
Statement of Investments for the GS Adjustable Rate Govern ment Fund,
Goldman Sachs Municipal Income Fund, Goldman Sachs Government Income Fund
and Goldman Sachs Global Income Fund as of October 31, 1996 (audited).
Statement of Assets and Liabilities for the GS Adjustable Rate Government
Fund, GS Short Duration Government Fund, GS Short Duration Tax-Free Fund,
GS Core Fixed Income Fund and Goldman Sachs Global Income Fund as of
October 31, 1996 (audited).
Statement of Assets and Liabilities for the GS Adjustable Rate Government
Fund, Goldman Sachs Municipal Income Fund, Goldman Sachs Government Income
Fund and Goldman Sachs Global Income Fund as of October 31, 1996 (audited).
Statement of Operations for the GS Adjustable Rate Govern ment Fund, GS
Short Duration Government Fund, GS Short Duration Tax-Free Fund, GS Core
Fixed Income Fund and Goldman Sachs Global Income Fund for the fiscal year
ended October 31, 1996 (audited).
Statement of Operations for the GS Adjustable Rate Govern ment Fund,
Goldman Sachs Municipal Income Fund, Goldman Sachs Government Income Fund
and Goldman Sachs Global Income Fund for the fiscal year ended October 31,
1996 (audited).
Statement of Changes in Net Assets for the GS Adjustable Rate Government
Fund, GS Short Duration Government Fund, GS Short Duration Tax-Free Fund,
GS Core Fixed Income Fund and Goldman Sachs Global Income Fund for the
fiscal year ended October 31, 1996 (audited).
Statement of Changes in Net Assets for the GS Adjustable Rate Government
Fund, Goldman Sachs Municipal Income Fund, Goldman Sachs Government Income
Fund and Goldman Sachs Global Income Fund for the fiscal year ended October
31, 1996 (audited).
Financial Highlights for the GS Adjustable Rate Government Fund, GS Short
Duration Government Fund, GS Short Duration Tax-Free Fund, GS Core Fixed
Income Fund and Goldman Sachs Global Income Fund for the period ended
October 31, 1996 (audited).
Financial Highlights for the GS Adjustable Rate Government Fund, Goldman
Sachs Municipal Income Fund, Goldman Sachs
2
<PAGE>
Government Income Fund and Goldman Sachs Global Income Fund for the period
ended October 31, 1996 (audited).
Statement of Investments as of January 31, 1997 for Goldman Sachs Capital
Growth Fund, Goldman Sachs CORE U.S. Equity Fund (formerly Select Equity
Fund), Goldman Sachs Small Cap Equity Fund, Goldman Sachs International
Equity Fund, Goldman Sachs Growth and Income Fund, Goldman Sachs Asia
Growth Fund, Goldman Sachs Balanced Fund and Goldman Sachs Mid-Cap Equity
Fund.
Statement of Assets and Liabilities as of January 31, 1997 for Goldman
Sachs Capital Growth Fund, Goldman Sachs CORE U.S. Equity Fund (formerly
Select Equity Fund), Goldman Sachs Small Cap Equity Fund, Goldman Sachs
International Equity Fund, Goldman Sachs Growth and Income Fund, Goldman
Sachs Asia Growth Fund, Goldman Sachs Balanced Fund and Goldman Sachs Mid-
Cap Equity Fund.
Statement of Operations for the year ended January 31, 1997 for Goldman
Sachs Capital Growth Fund, Goldman Sachs CORE U.S. Equity Fund (formerly
Select Equity Fund), Goldman Sachs Small Cap Equity Fund, Goldman Sachs
International Equity Fund, Goldman Sachs Growth and Income Fund, Goldman
Sachs Asia Growth Fund, Goldman Sachs Balanced Fund and Goldman Sachs Mid-
Cap Equity Fund.
Statement of Changes in Net Assets for the years ended January 31, 1996 and
January 31, 1997 for Goldman Sachs Balanced Fund, Goldman Sachs Capital
Growth Fund, Goldman Sachs Asia Growth Fund, Goldman Sachs CORE U.S. Equity
Fund (formerly Select Equity Fund), Goldman Sachs Small Cap Equity Fund,
Goldman Sachs International Equity Fund, Goldman Sachs Mid-Cap Equity Fund
and Goldman Sachs Growth and Income Fund.
Financial Highlights for Goldman Sachs Capital Growth Fund, Goldman Sachs
CORE U.S. Equity Fund (formerly Select Equity Fund), Goldman Sachs Small
Cap Equity Fund, Goldman Sachs International Equity Fund, Goldman Sachs
Growth and Income Fund, Goldman Sachs Asia Growth Fund, Goldman Sachs
Balanced Fund and Goldman Sachs Mid-Cap Equity Fund for the period ended
January 31, 1997.
Statements of Investments for the Financial Square Treasury Obligations,
Financial Square Prime Obligations, Financial Square Government, Financial
Square Money Market and Finan cial Square Tax-Free Money Market Funds, as
of December 31, 1996 (audited);
Statements of Investments for the Treasury Obligations Portfolio, Treasury
Instruments Portfolio, Prime Obligations
3
<PAGE>
Portfolio, Federal Portfolio, Government Portfolio, Money Market Portfolio,
Tax-Exempt Diversified Portfolio, Tax-Exempt California Portfolio and Tax-
Exempt New York Portfo lio for the period ended December 31, 1996
(audited);
Statements of Assets and Liabilities for the Financial Square Treasury
Obligations, Financial Square Prime Obliga tions, Financial Square
Government, Financial Square Money Market and Financial Square Tax-Free
Money Market Funds, as of December 31, 1996 (audited);
Statements of Assets and Liabilities for the Treasury Obli gations
Portfolio, Treasury Instruments Portfolio, Prime Obligations Portfolio,
Federal Portfolio, Government Portfo lio, Money Market Portfolio, Tax-
Exempt Diversified Portfo lio, Tax-Exempt California Portfolio and Tax-
Exempt New York Portfolio for the period ended December 31, 1996 (audited);
Statements of Operations for the Financial Square Treasury Obligations,
Financial Square Prime Obligations, Financial Square Government, Financial
Square Money Market and Finan cial Square Tax-Free Money Market Funds, as
of December 31, 1996 (audited);
Statements of Operations for the Treasury Obligations Port folio, Treasury
Instruments Portfolio, Prime Obligations Portfolio, Federal Portfolio,
Government Portfolio, Money Market Portfolio, Tax-Exempt Diversified
Portfolio, Tax-Exempt California Portfolio and Tax-Exempt New York Portfo
lio for the period ended December 31, 1996 (audited);
Statements of Changes in Net Assets for the Financial Square Treasury
Obligations, Financial Square Prime Obligations, Financial Square
Government, Financial Square Money Market and Financial Square Tax-Free
Money Market Funds, as of December 31, 1996 (audited);
Statements of Changes in Net Assets for the Treasury Obliga tions
Portfolio, Treasury Instruments Portfolio, Prime Obligations Portfolio,
Federal Portfolio, Government Portfo lio, Money Market Portfolio, Tax-
Exempt Diversified Portfo lio, Tax-Exempt California Portfolio and Tax-
Exempt New York Portfolio for the period ended December 31, 1996 (audited);
Financial Highlights for the Financial Square Treasury Obli gations,
Financial Square Prime Obligations, Financial Square Government, Financial
Square Money Market and Finan cial Square Tax-Free Money Market Funds, as
of December 31, 1996 (audited);
Financial Highlights for the Treasury Obligations Portfolio, Treasury
Instruments Portfolio, Prime Obligations Portfolio,
4
<PAGE>
Federal Portfolio, Government Portfolio, Money Market Port folio, Tax-
Exempt Diversified Portfolio, Tax-Exempt Califor nia Portfolio and Tax-
Exempt New York Portfolio for the period ended December 31, 1996 (audited);
Notes to Financial Statements.
(b) Exhibits
The following exhibits are incorporated herein by reference to Registrant's
Registration Statement on form N-1A as initially filed (Reference A), to Pre-
Effective Amendment No. 1 to such Registration Statement (Reference B), or to
Post-Effective Amend ment No. 1 to such Registration Statement (Reference C), or
to Post-Effective Amendment No. 2 to such Registration Statement (Reference D),
or to Post-Effective Amendment No. 4 to such Registration Statement (Reference
F), or to Post-Effective Amend ment No. 12 to such Registration Statement
(Reference M), or to Post-Effective Amendment No. 16 to such Registration
Statement (Reference Q) or to Post-Effective Amendment No. 17 to such
Registration Statement (Reference R), or to Post-Effective Amendment No. 19 to
such Registration Statement (Reference T), or to Post-Effective Amendment No. 20
to such Registration Statement (Reference U), or to Post-Effective Amendment No.
21 to such Registration Statement (Reference V), or to Post-Effective Amendment
No. 24 to such Registration Statement (Reference Y), or to Post-Effective
Amendment No. 25 to such Registration Statement (Reference Z), to Post-Effective
Amendment No. 26 to such Regis tration Statement (Accession No. 0000950130-95-
002856), to Post-Effective Amendment No. 27 to such Registration Statement
(Acces sion No. 0000950130-96-004931), to Post-Effective Amendment No. 29 to
such Registration Statement (Accession No.0000950130-97-000573), to Post-
Effective Amendment No. 31 to such Registration Statement (Accession No.
0000950130-97-000805) and to Post-Effective Amendment No. 33 to such
Registration Statement (Ac cession No. 0000950130-97-0001867).
1. Agreement and Declaration of Trust. (Accession No. 0000950130-97-
000573)
2. By-laws of the Delaware business trust (Accession No. 0000950130-
97-000573)
5(a). Advisory Agreement between Registrant on behalf of GS Short-Term
Government Agency Fund and Goldman, Sachs & Co. (Reference P)
5(b). Advisory Agreement between Registrant on behalf of GS Adjustable
Rate Government Agency Fund and Goldman Sachs Asset Management.
(Reference P)
5
<PAGE>
5(c). Advisory Agreement between Registrant on behalf of GS Short
Duration Tax-Free Fund and Goldman, Sachs & Co. (Reference P)
5(d). Advisory Agreement between Registrant on behalf of GS Core Fixed
Income Fund and Goldman Sachs Asset Management. (Reference T)
5(e). Form of Management Agreements on behalf of Dela ware business
trust (Accession No. 0000950130-97-000573)
6(a). Distribution Agreement between Registrant and Goldman, Sachs &
Co. (Reference P)
8(a). Custodian Agreement between Registrant and State Street Bank and
Trust Company. (Reference P)
8(b). Form of Wiring Agreement among State Street Bank and Trust
Company, Goldman, Sachs & Co. and The Northern Trust Company.
(Reference B)
8(c). Fee schedule relating to the Custodian Agreement between
Registrant and State Street Bank and Trust Company. (Reference C)
8(d). Form of Letter Agreement between Registrant and State Street Bank
and Trust pertaining to the latter's designation of Security
Pacific National Bank as its sub-custodian and certain other mat
ters. (Reference C)
8(g). Form of Amendment dated August, 1989 to the Wiring Agreement
among State Street Bank and Trust Compa ny, Goldman, Sachs & Co.
and The Northern Trust Company relating to the indemnification of
The Northern Trust Company. (Reference D)
9(a). Transfer Agency Agreement between Registrant and Goldman, Sachs &
Co. (Reference P)
9(b). Fee schedule relating to the Transfer Agency Agreement between
Registrant and Goldman, Sachs & Co. (Reference B)
10. Opinion of Delaware Counsel (Accession No. 0000950130-97-0001867)
13. Subscription Agreement with Goldman, Sachs & Co. (Reference B)
6
<PAGE>
15(a). Distribution Plan pursuant to Rule 12b-1 for Goldman Sachs
Municipal Income Fund. (Reference P) 15(c). Distribution Plan
pursuant to Rule 12b-1 for Goldman Sachs Government Income Fund
(Reference O)
15(d). Distribution Plan pursuant to Rule 12b-1 for Goldman Sachs Global
Income Fund. (Reference O)
15(f). Distribution Plan Pursuant to Rule 12b-1 for GS Adjustable Rate
Government Agency Fund-Class A Shares. (Reference Y)
15(h). Administration Plan and Service Plan of the Trust. (Reference X)
18. Form of Plan entered into by Registrant pursuant to Rule 18f-3
(Reference Z).
19. Powers of Attorney of Messrs. Bakhru, Ford, Grip, Shuch, Smart,
Springer, Strubel, Mosior, Gilman, Perlowski, Richman, Surloff,
Mmes. MacPherson, Mucker and Taylor (Accession No. 0000950130-97-
000805)
27. Financial Data Schedules (Accession No. 0000950130-97-0001867)
The following exhibits relating to Goldman Sachs Trust are filed herewith
electronically pursuant to EDGAR rules:
11. Consent of Arthur Andersen LLP.
1(h). Amendment to Declaration of Trust.
5(e). Management Agreement on behalf of Delaware busi ness trust.
5(f). Form of Amendment to Schedule A of the Management Agreement to
include Goldman Sachs CORE Small Cap Equity Fund and Goldman
Sachs CORE International Equity Fund.
6(b). Class C Plan of Distribution Pursuant to Rule 12b-1 between
Registrant and Goldman, Sachs & Co.
15(i). Class C Authorized Dealer Service Plan.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
-------------------------------------------------------------
7
<PAGE>
Not Applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
-------------------------------
<TABLE>
<CAPTION>
Number of
Title of Class Record Holders
- -------------- --------------
<S> <C>
Treasury Obligations Portfolio
ILA Units 770
ILA Administration Units 70
ILA Service Units 10
Treasury Instruments Portfolio
ILA Units 396
ILA Administration Units 48
ILA Service Units 20
Federal Portfolio
ILA Units 2,407
ILA Administration Units 665
ILA Service Units 125
Government Portfolio
ILA Units 1,346
ILA Administration Units 66
ILA Service Units 11
Prime Obligations Portfolio
ILA Units 818
ILA Class B Units __
ILA Administration Units 69
ILA Service Units 19
Money Market Portfolio
ILA Units 1,492
ILA Administration Units 942
ILA Service Units 8
Tax-Exempt Diversified Portfolio
ILA Units 2,135
ILA Administration Units 30
ILA Service Units 23
Tax-Exempt California Portfolio
ILA Units 859
ILA Administration Units 4
ILA Service Units 1
Tax-Exempt New York Portfolio
ILA Units 195
ILA Administration Units 69
ILA Service Units 2
Financial Square Treasury Obligations Fund
FST Shares 375
FST Administration Shares 120
FST Service Shares 684
FST Preferred Shares 24
Financial Square Prime Obligations Fund
FST Shares 514
FST Administration Shares 132
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
FST Service Shares 437
FST Preferred Shares 15
Financial Square Government Fund
FST Shares 246
FST Administration Shares 185
FST Service Shares 93
FST Preferred Shares 12
Financial Square Money Market Fund
FST Shares 518
FST Administration Shares 226
FST Service Shares 124
FST Preferred Shares 26
Financial Square Tax-Free Money Market Fund
FST Shares 263
FST Administration Shares 54
FST Service Shares 83
FST Preferred Shares 9
Financial Square Treasury Instruments Fund
FST Shares 103
FST Administration Shares 2
FST Service Shares 4
FST Preferred Shares 0
Financial Square Federal Fund
FST Shares 166
FST Administration Shares 113
FST Service Shares 131
FST Preferred Shares 0
Financial Square Municipal Money Market Fund
FST Shares 0
FST Administration Shares 0
FST Service Shares 0
FST Preferred Shares 0
Financial Square Money Market Plus Fund
FST Shares 0
FST Administration Shares 0
FST Service Shares 0
FST Preferred Shares 0
GS Short Duration Government Fund
Institutional Shares 352
Administration Shares 27
Service Shares 6
Class A 8
Class B 9
GS Adjustable Rate Government Fund
Institutional Shares 459
Administration Shares 18
Service Shares 2
Class A Shares 399
GS Short Duration Tax-Free Fund
Institutional Shares 146
Administration Shares 8
Service Shares 0
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Class A 9
Class B 8
GS Core Fixed Income Fund
Institutional Shares 172
Administration Shares 29
Service Shares 4
Class A 9
Class B 9
Goldman Sachs Global Income Fund
Institutional Shares 34
Service Shares 6
Class A Shares 2,631
Class B Shares 117
Goldman Sachs Government Income Fund
Class A Shares 841
Class B Shares 150
Goldman Sachs Municipal Income Fund
Class A Shares 1,518
Class B Shares 30
Goldman Sachs Capital Growth Fund Shares
Class A 31,430
Class B 706
Class C 0
Goldman Sachs CORE U.S. Equity Fund Shares
Class A 12,343
Class B 1,560
Class C 0
Institutional Class 23
Service Class 8
Goldman Sachs Small Cap Equity Fund Shares
Class A 16,911
Class B 887
Class C 0
Goldman Sachs International Equity Fund Shares
Class A 24,211
Class B 2,967
Class C 0
Institutional Class 41
Service Class 6
Goldman Sachs Growth and Income Fund Shares
Class A 37,701
Class B 5,575
Class C 0
Institutional Class 15
Service Class 9
Goldman Sachs Asia Growth Fund Shares
Class A 10,984
Class B 503
Class C 0
Institutional Class 11
Service Class 4
Goldman Sachs Balanced Fund Shares
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
Class A 4,038
Class B 400
Class C 0
Goldman Sachs Mid-Cap Equity Fund
Institutional Shares 23
Service Shares 4
Goldman Sachs CORE Large Cap Growth Fund
Class A 51
Class B 11
Class C 0
Institutional 7
Service 7
Goldman Sachs Emerging Markets Equity Fund
Class A 0
Class B 0
Class C 0
Institutional 0
Service 0
Goldman Sachs CORE Small Cap Equity Fund
Class A 0
Class B 0
Class C 0
Institutional 0
Service 0
Goldman Sachs CORE International Fund
Class A 0
Class B 0
Class C 0
Institutional 0
Service 0
Goldman Sachs Real Estate Securities Fund
Class A 0
Class B 0
Class C 0
Institutional 0
Service 0
</TABLE>
(Information supplied as of May 16, 1997)
ITEM 27. INDEMNIFICATION
---------------
Article III of the Declaration of Trust of Goldman Sachs Trust, the Delaware
business trust, provides for indemnification of the Trustees, offices and agents
of the Trust, subject to certain limitations. The Declaration of Trust was
filed as Exhibit 1(g).
The Management Agreement with each of the Funds (other than the ILA Portfolios)
provides that the applicable Investment Adviser will not be liable for any error
of judgment or mistake of law or for any loss suffered by a Fund, except a loss
resulting from wilful misfeasance, bad faith or gross negligence on the party of
the Investment Adviser or from reckless disregard by the Invest-
11
<PAGE>
ment Adviser of its obligations or duties under the Management Agreement.
Section 7 of the Advisory Agreement with respect to the ILA Portfolios provides
that the ILA Portfolios will indemni fy the Adviser against certain liabilities;
provided, however, that such indemnification does not apply to any loss by
reason of its wilful misfeasance, bad faith or gross negligence or the Adviser's
reckless disregard of its obligation under the Advisory Agreement. The
Management Agreements were filed as Exhibit 5(o).
Section XI of the Distribution Agreement and Section 7 of the Transfer Agency
Agreement between the Registrant and Goldman, Sachs & Co. dated July 15, 1991
each provides that the Registrant will indemnify Goldman, Sachs & Co. against
certain liabilities. A copy of such Agreements were filed as Exhibits 6(a) and
17(a), respectively, to the Registrant's Registration Statement.
Mutual fund and Trustees and officers liability policies pur chased jointly by
the Registrant, Goldman Sachs Money Market Trust, Goldman Sachs Equity
Portfolios, Inc., Trust for Credit Unions, The Benchmark Funds and The Commerce
Funds and Goldman, Sachs & Co. insure such persons and their respective
trustees, partners, officers and employees, subject to the policies' cover age
limits and exclusions and varying deductibles, against loss resulting from
claims by reason of any act, error, omission, misstatement, misleading
statement, neglect or breach of duty.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
----------------------------------------------------
The business and other connections of the officers and Managing Directors of
Goldman, Sachs & Co., Goldman Sachs Funds Manage ment, L.P., and Goldman Sachs
Asset Management International are listed on their respective Forms ADV as
currently filed with the Commission (File Nos. 801-16048, 801-37591 and 801-
38157, respec tively) the text of which are hereby incorporated by reference.
ITEM 29. PRINCIPAL UNDERWRITERS.
----------------------
(a). Goldman, Sachs & Co. or an affiliate or a division thereof currently
serves as investment adviser and distributor of the units of Trust for Credit
Unions and for shares of Goldman Sachs Trust. Goldman, Sachs & Co., or a
division thereof currently serves as administrator and distributor of the units
or shares of The Benchmark Funds and The Commerce Funds.
(b). Set forth below is certain information pertaining to the Managing
Directors of Goldman, Sachs & Co., the Registrant's principal underwriter, who
are members of Goldman, Sachs & Co.'s Executive Committee. None of the members
of the executive committee holds a position or office with the Registrant.
12
<PAGE>
GOLDMAN SACHS EXECUTIVE COMMITTEE
Name and Principal
Business Address Position
---------------- --------
Jon S. Corzine (1) Chief Executive Officer
Robert J. Hurst (1) Managing Director
Henry M. Paulson, Jr. (1) Chief Operating Officer
John A. Thain (1)(3) Chief Financial Officer
John L. Thornton (3) Managing Director
Roy J. Zuckerberg (2) Managing Director
_______________________
(1) 85 Broad Street, New York, NY 10004
(2) One New York Plaza, New York, NY 10004
(3) Peterborough Court, 133 Fleet Street, London EC4A 2BB, England
(c) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
--------------------------------
The Declaration of Trust, By-laws and minute books of the Regis trant are in the
physical possession of Goldman Sachs Asset Management, One New York Plaza, New
York, New York 10004. All other accounts, books and other documents required
to be main tained under Section 31(a) of the Investment Company Act of 1940 and
the Rule promulgated thereunder are in the physical posses sion of State Street
Bank and Trust Company, P.O. Box 1713, Bos ton, Massachusetts 02105 except for
certain transfer agency records which are maintained by Goldman, Sachs & Co.,
4900 Sears Tower, Chicago, Illinois 60606.
13
<PAGE>
ITEM 31. MANAGEMENT SERVICES
-------------------
The Custodian Agreement between State Street Bank and Trust Company and
Registrant provides for State Street Bank and Trust Company to act as custodian
and to maintain certain accounting records for Registrant. Remuneration is
based on a minimum fixed dollar charge per annum and the Funds' average daily
net assets (such remuneration being subject to adjustment on the basis of the
amount of the Funds' uninvested cash) and on the number of portfolio
transactions. Such Agreement together with the related letter and other
agreements and amendments pertaining thereto, referred to under Item 24(b) are
hereby incorporated by refer ence.
ITEM 32. UNDERTAKINGS
------------
(a) The Funds Annual Reports contain performance information and are available
to any recipient of the Prospectuses upon request and without charge by writing
to Goldman, Sachs & Co., 4900 Sears Tower, Chicago, Illinois 60606.
(b) With respects to Goldman Sachs CORE Small Cap Equity Fund, Goldman Sachs
CORE International Fund and Goldman Sachs Real Estate Securities Fund, the
Registrant undertakes to file a post-effective amendment, using financial
statements which need not be certified, within four to six months from the
effective date of the Post-Effective Amendment to the Registration Statement
relating to shares of such Funds.
14
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, Goldman Sachs Trust, a Delaware business trust (the
"Delaware Trust") has duly caused this Post-Effective Amendment No. 35 to its
Registration State ment to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City and State of New York on the 11th day of June,
1997.
GOLDMAN SACHS TRUST
(A Delaware business trust)
By: /s/Michael J. Richman
--------------------------
Michael J. Richman
Secretary
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 35 to the Registration State ment of the Delaware Trust
has been signed below by the following persons in the capacities and on the date
indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------- -------------------- -------------
<S> <C> <C>
*Douglas C. Grip President June 11, 1997
- ---------------------------
Douglas C. Grip
*Scott M. Gilman Principal Accounting June 11, 1997
- ---------------------------
Scott M. Gilman Officer And Principal
Financial Officer
*David B. Ford Trustee June 11, 1997
- ---------------------------
David B. Ford
*Mary Patterson McPherson Trustee June 11, 1997
- ---------------------------
Mary Patterson McPherson
*Ashok N. Bakhru Trustee June 11, 1997
- ---------------------------
Ashok N. Bakhru
*Alan A. Shuch Trustee June 11, 1997
- ---------------------------
Alan A. Shuch
*Jackson W. Smart Trustee June 11, 1997
- ---------------------------
Jackson W. Smart, Jr.
</TABLE>
15
<PAGE>
<TABLE>
<S> <C> <C>
*John P. McNulty Trustee June 11, 1997
- ----------------------
John P. McNulty
*William H. Springer Trustee June 11, 1997
- ----------------------
William H. Springer
*Richard P. Strubel Trustee June 11, 1997
- ----------------------
Richard P. Strubel
</TABLE>
*By: /s/Michael J. Richman June 11, 1997
----------------------
Michael J. Richman,
Attorney-In-Fact
* Pursuant to a power of attorney previously filed.
16
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibits
- --------
11. Consent of Arthur Andersen LLP.
1(h). Amendment to Declaration of Trust.
5(e). Management Agreement of behalf of Delaware busi ness trust.
5(f). Form of Amendment to Schedule A of the Management Agreement to
include Goldman Sachs CORE Small Cap Equity Fund and Goldman
Sachs CORE International Equity Fund.
6(b). Class C Plan of Distribution Pursuant to Rule 12b-1 between
Registrant and Goldman, Sachs & Co.
15(i). Class C Authorized Dealer Service Plan.
17
<PAGE>
Exhibit 99.11
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
for Goldman Sachs Growth and Income Fund, Goldman Sachs CORE U.S. Equity Fund
(formerly the Goldman Sachs Select Equity Fund), Goldman Sachs Mid Cap Equity
Fund, Goldman Sachs International Equity Fund, Goldman Sachs Asia Growth Fund,
Goldman Sachs Balanced Fund, Goldman Sachs Capital Growth Fund, Goldman Sachs
Small Cap Equity Fund of Goldman Sachs Trust dated March 15, 1997, the use of
our report for Goldman Sachs Adjustable Rate Government Fund, Goldman Sachs
Short Duration Government Fund, Goldman Sachs Short Duration Tax-Free Fund,
Goldman Sachs Government Income Fund, Goldman Sachs Municipal Income Fund,
Goldman Sachs Core Fixed Income Fund and Goldman Sachs Global Income Fund of
Goldman Sachs Trust dated December 12, 1996 and the use of our report for the
Goldman Sachs Institutional Liquid Assets Portfolios, Prime Obligations and Tax-
Exempt Diversified Portfolios, of Goldman Sachs Trust dated February 10, 1997
(and to all references to our firm) included in or made a part of Post-Effective
Amendment No. 35 and Amendment No. 37 to Registration Statement File Nos. 33-
17169 and 811-5349, respectively.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
June 13, 1997
<PAGE>
Exhibit 99.1(h)
AMENDMENT NO. 2
TO THE
DECLARATION OF TRUST
OF
GOLDMAN SACHS TRUST
This AMENDMENT NO. 2 dated the ____ day of ______, 1997 to the AGREEMENT
AND DECLARATION OF TRUST (the "Declaration"), as amended, dated the 28th day of
January, 1997 is made by the Trustees name below;
WHEREAS, the Trustees have established a trust for the investment and
reinvestment of funds contributed thereto;
WHEREAS, the Trustees divided the beneficial interest in the trust assets
into transferable shares of beneficial interest and divided such shares of
beneficial interest into separate Series;
WHEREAS, the Trustees desire to create new Series and designate new Classes
of shares of certain of the existing Series;
NOW, THEREFORE, in consideration of the foregoing premises and the
agreements contained herein, the undersigned, being all of the Trustees of the
Trust and acting in accordance with Article V, Section 1 of the Declaration,
hereby amend the Declaration as follows:
The Trust shall consist of one or more Series. Without limiting the
authority of the Trustees to establish and designate any further Series,
the Trustees hereby establish the following 39 Series: Goldman Sachs
Adjustable Rate Government Fund, Goldman Sachs Short Duration Government
Fund, Goldman Sachs Short Duration Tax-Free Fund, Goldman Sachs Core Fixed
Income Fund, Goldman Sachs Global Income Fund, Goldman Sachs Government
Income Fund, Goldman Sachs Municipal Income Fund, Goldman Sachs High Yield
Fund, Goldman Sachs Balanced Fund, Goldman Sachs CORE Large Cap Growth
Fund, Goldman Sachs CORE U.S. Equity Fund, Goldman Sachs CORE Small Cap
Equity Fund, Goldman Sachs CORE International Equity Fund, Goldman Sachs
Growth and Income Fund, Goldman Sachs Capital Growth Fund, Goldman Sachs
Mid-Cap Equity Fund, Goldman Sachs Small Cap Equity Fund, Goldman Sachs
International Equity Fund, Goldman Sachs Asia Growth Fund, Goldman Sachs
Emerging Markets Equity Fund, Institutional Liquid Assets- - Prime
Obligations Portfolio, Institutional Liquid Assets-Government Portfolio,
Institutional Liquid Assets-Treasury Obligations Portfolio, Institutional
Liquid Assets-Money Market Portfolio, Institutional Liquid Assets-Federal
Portfolio, Institutional Liquid Assets-Treasury Instruments Portfolio,
Institutional Liquid Assets-Tax-Exempt Diversified Portfolio, Goldman Sachs
Real Estate Securities Fund, Institutional Liquid Assets-Tax-Exempt New
York Portfolio, Institutional Liquid Assets-Tax-Exempt California
Portfolio, Financial Square Prime Obligations Fund, Financial Square
Government Fund, Financial Square Treasury Obligations Fund, Financial
Square Money Market Fund, Financial Square Money Market Plus Fund,
Financial Square Municipal Money Market Fund, Financial Square Tax-Free
Fund, Financial Square Federal Fund, and Financial Square Treasury
Instruments Fund (the "Existing Series"). Each additional
<PAGE>
Series shall be established and is effective upon the adoption of a
resolution of a majority of the Trustees or any alternative date specified
in such resolution. The Trustees may designate the relative rights and
preferences of the Shares of each Series. The Trustees may divide the
Shares of any Series into Classes. Without limiting the authority of the
Trustees to establish and designate any further Classes, the Trustees
hereby establish the following classes of shares with respect to the series
set forth below:
Class A Goldman Sachs Adjustable Rate Government Fund, Goldman Sachs
Shares: Global Income Fund, Goldman Sachs Government Income Fund, Goldman
Sachs Municipal Income Fund, Goldman Sachs High Yield Fund,
Goldman Sachs Short Duration Government Fund, Goldman Sachs Short
Duration Tax-Free Fund, Goldman Sachs Core Fixed Income Fund,
Goldman Sachs Balanced Fund, Goldman Sachs CORE U.S. Equity Fund,
Goldman Sachs CORE Small Cap Equity Fund, Goldman Sachs CORE
International Equity Fund, Goldman Sachs CORE Large Cap Growth
Fund, Goldman Sachs Growth and Income Fund, Goldman Sachs Capital
Growth Fund, Goldman Sachs Small Cap Equity Fund, Goldman Sachs
International Equity Fund, Goldman Sachs Emerging Markets Equity
Fund, Goldman Sachs Asia Growth Fund and Goldman Sachs Real
Estate Securities Fund.
Class B Goldman Sachs Global Income Fund, Goldman Sachs Government
Shares Income Fund, Goldman Sachs Municipal Income Fund, Goldman Sachs
High Yield Fund, Goldman Sachs Short Duration Government Fund,
Goldman Sachs Short Duration Tax-Free Fund, Goldman Sachs Core
Fixed Income Fund, Goldman Sachs Balanced Fund, Goldman Sachs
CORE U.S. Equity Fund, Goldman Sachs CORE Small Cap Equity Fund,
Goldman Sachs CORE International Equity Fund, Goldman Sachs CORE
Large Cap Growth Fund, Goldman Sachs Growth and Income Fund,
Goldman Sachs Capital Growth Fund, Goldman Sachs Small Cap Equity
Fund, Goldman Sachs International Equity Fund, Goldman Sachs
Emerging Markets Equity Fund, Goldman Sachs Asia Growth Fund,
Institutional Liquid Assets Prime Obligations Portfolio and
Goldman Sachs Real Estate Securities Fund.
Class C Goldman Sachs Global Income Fund, Goldman Sachs Government
Shares Income Fund, Goldman Sachs Municipal Income Fund, Goldman Sachs
High Yield Fund, Goldman Sachs Short Duration Government Fund,
Goldman Sachs Short Duration Tax-Free Fund, Goldman Sachs Core
Fixed Income Fund, Goldman Sachs Balanced Fund, Goldman Sachs
CORE U.S. Equity Fund, Goldman Sachs CORE Small Cap Equity Fund,
Goldman Sachs CORE International Equity Fund, Goldman Sachs CORE
Large Cap Growth Fund, Goldman Sachs Growth and Income Fund,
Goldman Sachs Capital Growth Fund, Goldman Sachs Small Cap Equity
Fund, Goldman Sachs International Equity Fund, Goldman Sachs
Emerging Markets Equity Fund, Goldman Sachs Asia Growth Fund,
Institutional Liquid Assets Prime Obligations Portfolio and
Goldman Sachs Real Estate Securities Fund.
Institutional Goldman Sachs Adjustable Rate Government Fund, Goldman
Shares: Sachs Short Duration Government Fund, Goldman Sachs Short
Duration Tax-Free Fund, Goldman Sachs Government Income Fund,
Goldman Sachs Municipal Income Fund, Goldman Sachs Core Fixed
Income Fund, Goldman Sachs Global Income Fund, Goldman Sachs High
Yield Fund, Goldman Sachs Balanced Fund, Goldman Sachs Small Cap
Equity Fund, Goldman Sachs Capital Growth Fund, Goldman Sachs
CORE Large Cap Growth Fund, Goldman Sachs CORE U.S. Equity Fund,
Goldman Sachs Growth and Income Fund, Goldman Sachs Mid-Cap
Equity Fund, Goldman Sachs International Equity Fund, Goldman
Sachs Emerging Markets Equity, Goldman Sachs Asia Growth Fund,
Financial Square Prime Obligations Fund, Financial Square
Government Fund, Financial Square Treasury Obligations Fund,
Financial Square Money Market Fund, Financial Square Money Market
Plus Fund, Financial Square Municipal Money Market
<PAGE>
Fund, Financial Square Tax- Free Fund, Financial Square Federal
Fund, Financial Square Treasury Instruments Fund, Institutional
Liquid Assets-Prime Obligations Portfolio, Institutional Liquid
Assets-Government Portfolio, Institutional Liquid Assets-
Treasury Obligations Portfolio, Institutional Liquid Assets-Money
Market Portfolio, Institutional Liquid Assets-Federal Portfolio,
Institutional Liquid Assets-Treasury Instruments Portfolio,
Institutional Liquid Assets-Tax-Exempt Diversified Portfolio,
Institutional Liquid Assets-Tax-Exempt New York Portfolio,
Institutional Liquid Assets-Tax-Exempt California Portfolio and
Goldman Sachs Real Estate Securities Fund.
Service Goldman Sachs Adjustable Rate Government Fund, Goldman Sachs
Shares: Short Duration Government Fund, Goldman Sachs Short Duration Tax-
Free Fund, Goldman Sachs Government Income Fund, Goldman Sachs
Municipal Income Fund, Goldman Sachs Core Fixed Income Fund,
Goldman Sachs Global Income Fund, Goldman Sachs High Yield Fund,
Goldman Sachs Balanced Fund, Goldman Sachs Small Cap Equity Fund,
Goldman Sachs Capital Growth Fund, Goldman Sachs CORE U.S. Equity
Fund, Goldman Sachs CORE Large Cap Growth Fund, Goldman Sachs
Growth and Income Fund, Goldman Sachs Mid-Cap Equity Fund,
Goldman Sachs International Equity Fund, Goldman Sachs Emerging
Markets Equity Fund, Goldman Sachs Asia Growth Fund, Financial
Square Prime Obligations Fund, Financial Square Government Fund,
Financial Square Treasury Obligations Fund, Financial Square
Money Market Fund, Financial Square Money Market Plus Fund,
Financial Square Municipal Money Market Fund, Financial Square
Tax-Free Fund, Financial Square Federal Fund, Financial Square
Treasury Instruments Fund, Institutional Liquid Assets-Prime
Obligations Portfolio, Institutional Liquid Assets-Government
Portfolio, Institutional Liquid Assets- Treasury Obligations
Portfolio, Institutional Liquid Assets-Money Market Portfolio,
Institutional Liquid Assets-Federal Portfolio, Institutional
Liquid Assets-Treasury Instruments Portfolio, Institutional
Liquid Assets-Tax-Exempt Diversified Portfolio, Institutional
Liquid Assets-Tax-Exempt New York Portfolio, Institutional Liquid
Assets-Tax-Exempt California Portfolio and Goldman Sachs Real
Estate Securities Fund.
Administration Goldman Sachs Adjustable Rate Government Fund, Goldman
Shares: Sachs Short Duration Government Fund, Goldman Sachs Short
Duration Tax-Free Fund, Goldman Sachs Core Fixed Income Fund,
Financial Square Prime Obligations Fund, Financial Square
Government Fund, Financial Square Treasury Obligations Fund,
Financial Square Money Market Fund, Financial Square Money Market
Plus Fund, Financial Square Municipal Money Market Fund,
Financial Square Tax-Free Fund, Financial Square Federal Fund,
Financial Square Treasury Instruments Fund, Institutional Liquid
Assets-Prime Obligations Portfolio, Institutional Liquid Assets-
Government Portfolio, Institutional Liquid Assets-Treasury
Obligations Portfolio, Institutional Liquid Assets-Money Market
Portfolio, Institutional Liquid Assets-Federal Portfolio,
Institutional Liquid Assets-Treasury Instruments Portfolio,
Institutional Liquid Assets-Tax-Exempt Diversified Portfolio,
Institutional Liquid Assets-Tax- Exempt New York Portfolio and
Institutional Liquid Assets-Tax-Exempt California Portfolio.
Preferred
Administration Financial Square Prime Obligations Fund, Financial
Shares: Square Government Fund, Financial Square Treasury Obligations
Fund, Financial Square Money Market Fund, Financial Square Money
Market Plus Fund, Financial Square Municipal Money Market Fund,
Financial Square Tax-Free Fund, Financial Square Federal Fund and
Financial Square Treasury Instruments Fund.
<PAGE>
All capitalized terms which are not defined herein shall have the same
meanings as are assigned to those terms in the Declaration.
IN WITNESS WHEREOF, the undersigned have executed this instrument as of the
date first written above.
_________________________________________
Ashok N. Bakhru,
as Trustee and not individually
________________________________________
David B. Ford,
as Trustee and not individually
________________________________________
Douglas Grip,
as Trustee and not individually
________________________________________
John P. McNulty,
as Trustee and not individually,
Mary P. McPherson
as Trustee and not individually,
________________________________________
Alan A. Shuch
as Trustee and not individually,
________________________________________
Jackson W. Smart,
as Trustee and not individually,
________________________________________
William H. Springer
as Trustee and not individually,
________________________________________
Richard P. Strubel
as Trustee and not individually,
<PAGE>
EXHIBIT 99.5(e)
GOLDMAN SACHS TRUST
4900 Sears Tower
Chicago, Illinois 60606
April 30, 1997
Goldman Sachs Asset Management Goldman Sachs Asset Management International
Goldman Sachs Funds Management L.P. 133 Peterborough CT
One New York Plaza, London, England
New York, New York 10004
MANAGEMENT AGREEMENT
--------------------
Dear Sirs:
Goldman Sachs Trust (the "Registrant") is organized as a business trust under
the laws of the State of Delaware to engage in the business of an investment
company. The shares of the Registrant ("Shares") may be divided into multiple
series ("Series"), including the Series listed on Annex A (including any Series
added to Annex A in the future, each a "Fund"). Each Series will represent the
interests in a separate portfolio of securities and other assets. Each Series
may be terminated, and additional Series established, from time to time by
action of the Trustees. The Registrant on behalf of each Fund has selected you
to act as the investment adviser and administrator of the Funds and to provide
certain services, as more fully set forth below, and you are willing to act as
such investment adviser and administrator and to perform such services under the
terms and conditions hereinafter set forth. Accordingly, the Registrant agrees
with you as follows:
1. Name of Registrant. The Registrant may use any name including or
------------------
derived from the name "Goldman Sachs" in connection with a Fund only for so long
as this Agreement or any extension, renewal or amendment hereof remains in
effect, including any similar agreement with any organization which shall have
succeeded to your business as investment adviser or administrator. Upon the
termination of this Agreement, the Registrant (to the extent that it lawfully
can) will cause the Funds to cease to use such a name or any other name
indicating that it is advised by or otherwise connected with you or any
organization which shall have so succeeded to your business.
2. Sub-Advisers. You may engage one or more investment advisers which are
-------------
either registered as such or specifically exempt from registration under the
Investment Advisers Act of 1940, as amended, to act as sub-advisers to provide
with respect to the Fund certain services set forth in Paragraphs 3 and 6
hereof, all as shall be set forth in a written contract to which the Registrant,
on behalf of the Fund, and you shall be parties, which contract shall be subject
to approval by the vote of a majority of the Trustees who are not interested
persons of you, the sub-adviser, or of the Registrant, cast in person at a
meeting called for the purpose of voting on such approval and by the vote of a
majority of the outstanding voting securities of the Fund and otherwise
consistent with the terms of the Investment Company Act of 1940 Act, as amended
(the "1940 Act").
3. Management Services.
-------------------
(a) You will regularly provide each Fund with investment research,
advice and supervision and will furnish continuously an investment program
for each Fund consistent with the investment objectives and policies of the
Fund. You will determine from time to time what securities shall be
purchased for a Fund, what securities shall be held or sold by a Fund, and
what portion of a Fund's assets shall be held uninvested as cash, subject
always to the provisions of the Registrant's Declaration of Trust and By-
Laws and of the 1940 Act, and to the
<PAGE>
investment objectives, policies and restrictions of the Fund, as each of
the same shall be from time to time in effect, and subject, further, to
such policies and instructions as the Trustees of the Registrant may from
time to time establish.
(b) Subject to the general supervision of the Trustees of the
Registrant, you will provide certain administrative services to each Fund.
You will, to the extent such services are not required to be performed by
others pursuant to the custodian agreement (or the transfer agency
agreement to the extent that a person other than you is serving thereunder
as the Registrant's transfer agent), (i) provide supervision of all aspects
of each Fund's operations not referred to in paragraph (a) above; (ii)
provide each Fund with personnel to perform such executive, administrative
and clerical services as are reasonably necessary to provide effective
administration of the Fund; (iii) arrange for, at the Registrant's expense,
(a) the preparation for each Fund of all required tax returns, (b) the
preparation and submission of reports to existing shareholders and (c) the
periodic updating of the Fund's prospectuses and statements of additional
information and the preparation of reports filed with the Securities and
Exchange Commission and other regulatory authorities; (iv) maintain all of
the Funds' records and (v) provide the Funds with adequate office space and
all necessary office equipment and services including telephone service,
heat, utilities, stationery supplies and similar items.
(c) You will also provide to the Registrant's Trustees such periodic
and special reports as the Trustees may reasonably request. You shall for
all purposes herein be deemed to be an independent contractor and shall,
except as otherwise expressly provided or authorized, have no authority to
act for or represent the Registrant or the Funds in any way or otherwise be
deemed an agent of the Registrant or the Funds.
(d) You will maintain all books and records with respect to the Funds'
securities transactions required by sub-paragraphs (b)(5), (6), (9) and
(10) and paragraph (f) of Rule 31a-1 under the 1940 Act (other than those
records being maintained by the Fund's custodian or transfer agent) and
preserve such records for the periods prescribed therefor by Rule 31a-2 of
the 1940 Act. You will also provide to the Registrant's Trustees such
periodic and special reports as the Board may reasonably request.
(e) You will notify the Registrant of any change in your membership
within a reasonable time after such change.
(f) Your services hereunder are not deemed exclusive and you shall be
free to render similar services to others.
4. Allocation of Charges and Expenses. You will pay all costs incurred by you
----------------------------------
in connection with the performance of your duties under paragraph 3. You will
pay the compensation and expenses of all personnel of yours and will make
available, without expense to the Funds, the services of such of your partners,
officers and employees as may duly be elected officers or Trustees of the
Registrant, subject to their individual consent to serve and to any limitations
imposed by law. You will not be required to pay any expenses of any Fund other
than those specifically allocated to you in this paragraph 4. In particular,
but without limiting the generality of the foregoing, you will not be required
to pay: (i) organization expenses of the Funds; (ii) fees and expenses incurred
by the Funds in connection with membership in investment company organizations;
(iii) brokers' commissions; (iv) payment for portfolio pricing services to a
pricing agent, if any; (v) legal, auditing or accounting expenses (including an
allocable portion of the cost of your employees rendering legal and accounting
services to the Fund); (vi) taxes or governmental fees; (vii) the fees and
expenses of the transfer agent of the Registrant; (viii) the cost of preparing
stock certificates or any other expenses, including clerical expenses of issue,
redemption or repurchase of Shares of the Fund; (ix) the expenses of and fees
for registering or qualifying Shares for sale and of maintaining the
registration of the Funds and registering the Registrant as a broker or a
dealer; (x) the fees and expenses of Trustees of the Registrant who are not
affiliated with you; (xi) the cost of preparing and distributing reports and
notices to shareholders, the
2
<PAGE>
Securities and Exchange Commission and other regulatory authorities; (xii) the
fees or disbursements of custodians of each Fund's assets, including expenses
incurred in the performance of any obligations enumerated by the Declaration of
Trust or By-Laws of the Registrant insofar as they govern agreements with any
such custodian; or (xiii) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the Fund's
business. You shall not be required to pay expenses of activities which are
primarily intended to result in sales of Shares of the Funds.
5. Compensation of the Manager.
---------------------------
(a) For all services to be rendered and payments made as provided in
paragraphs 3 and 4 hereof, the Registrant on behalf of each Fund will pay
you each month a fee at an annual rate equal to the percentage of the
average daily net assets of the Fund set forth with respect to such Fund on
Annex A. The "average daily net assets" of a Fund shall be determined on
the basis set forth in the Fund's prospectus(es) or otherwise consistent
with the 1940 Act and the regulations promulgated thereunder.
(b) In addition to the foregoing, you may from time to time agree not
to impose all or a portion of your fee otherwise payable hereunder (in
advance of the time such fee or portion thereof would otherwise accrue)
and/or undertake to pay or reimburse a Fund for all or a portion of its
expenses not otherwise required to be borne or reimbursed by you. Any such
fee reduction or undertaking may be discontinued or modified by you at any
time.
6. Avoidance of Inconsistent Position. In connection with purchases or sales
----------------------------------
of portfolio securities for the account of the Funds, neither you nor any of
your partners, officers or employees will act as a principal, except as
otherwise permitted by the 1940 Act. You or your agent shall arrange for the
placing of all orders for the purchase and sale of portfolio securities for each
Fund's account with brokers or dealers (including Goldman, Sachs & Co.) selected
by you. In the selection of such brokers or dealers (including Goldman, Sachs &
Co.) and the placing of such orders, you are directed at all times to seek for
the Funds the most favorable execution and net price available. It is also
understood that it is desirable for the Funds that you have access to
supplemental investment and market research and security and economic analyses
provided by brokers who may execute brokerage transactions at a higher cost to a
Fund than may result when allocating brokerage to other brokers on the basis of
seeking the most favorable price and efficient execution. Therefore, you are
authorized to place orders for the purchase and sale of securities for the Funds
with such brokers, subject to review by the Registrant's Trustees from time to
time with respect to the extent and continuation of this practice. It is
understood that the services provided by such brokers may be useful to you in
connection with your services to other clients. If any occasion should arise in
which you give any advice to your clients concerning the Shares of the Funds,
you will act solely as investment counsel for such clients and not in any way on
behalf of any Fund. You may, on occasions when you deem the purchase or sale of
a security to be in the best interests of a Fund as well as your other customers
(including any other Series or any other investment company or advisory account
for which you or any of your affiliates acts as an investment adviser),
aggregate, to the extent permitted by applicable laws and regulations, the
securities to be sold or purchased in order to obtain the best net price and the
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 you in the manner you consider to be the most equitable and consistent
with your fiduciary obligations to the Fund and to such other customers. In
addition, you are authorized to take into account the sale of shares of the
Registrant in allocating purchase and sale orders for portfolio securities to
brokers or dealers (including brokers and dealers that are affiliated with you),
provided that you believe that the quality of the transaction and the commission
is comparable to what they would be with other qualified firms.
7. Limitation of Liability of Manager and Fund. You shall not be liable for
-------------------------------------------
any error of judgment or mistake of law or for any loss suffered by a Fund in
connection with the matters to which this Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on
3
<PAGE>
your part in the performance of your duties or from reckless disregard by you of
your obligations and duties under this Agreement. Any person, even though also
employed by you, who may be or become an employee of and paid by the Registrant
or the Funds shall be deemed, when acting within the scope of his employment by
the Funds, to be acting in such employment solely for the Funds and not as your
employee or agent. The Fund shall not be liable for any claims against any
other Series of the Registrant.
8. Duration and Termination of this Agreement. This Agreement shall remain in
------------------------------------------
force as to each Fund until June 30, 1998 and shall continue for periods of one
year thereafter, but only so long as such continuance is specifically approved
at least annually (a) by the vote of a majority of the Trustees who are not
interested persons (as defined in the 1940 Act) of the Registrant and have no
financial interest in this Agreement, cast in person at a meeting called for
the purpose of voting on such approval and (b) by a vote of a majority of the
Trustees of the Registrant or of a majority of the outstanding voting securities
of such Fund. The aforesaid requirement that continuance of this Agreement be
"specifically approved at least annually" shall be construed in a manner
consistent with the 1940 Act and the rules and regulations thereunder. This
Agreement may, on 60 days written notice to the other party, be terminated in
its entirety or as to a particular Fund at any time without the payment of any
penalty, by the Trustees of the Registrant, by vote of a majority of the
outstanding voting securities of a Fund, or by you. This Agreement shall
automatically terminate in the event of its assignment. In interpreting the
provisions of this Agreement, the definitions contained in Section 2(a) of the
1940 Act (particularly the definitions of "interested person," "assignment" and
"majority of the outstanding voting securities"), as from time to time amended,
shall be applied, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission by any rule, regulation or order.
9. Amendment of this Agreement. No provisions of this Agreement may be
---------------------------
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. No amendment of this Agreement shall be
effective as to a Fund until approved by vote of the holders of a majority of
the outstanding voting securities of such Fund and by a majority of the Trustees
of the Registrant, including a majority of the Trustees who are not interested
persons (as defined in the 1940 Act) of the Registrant and have no financial
interest in this Agreement, cast in person at a meeting called for the purpose
of voting on such amendment. Notwithstanding the foregoing, this Agreement may
be amended at any time to add to a new Fund to Annex A provided such amendment
is approved by a majority of the Trustees of the Registrant, including a
majority of the Trustees who are not interested persons (as defined in the 1940
Act) of the Registrant and have no financial interest in this Agreement. This
paragraph does not apply to any agreement described in paragraph 5(b) hereof,
which shall be effective during the period you specify in a prospectus, sticker,
or other document made available to current or prospective shareholders.
10. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
-------------
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
11. Miscellaneous. The captions in this Agreement are included for convenience
-------------
of reference only and in no way define or delimit any of the provisions hereof
or otherwise affect their construction or effect. This Agreement may be
executed simultaneously in two or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
The name Goldman Sachs Trust is the designation of the Trustees for the
time being under a Declaration of Trust dated January 28, 1997 as amended from
time to time, and all persons dealing with the Trust or a Funds must look
solely to the property of the Trust or such Fund for the enforcement of any
claims as none of Trustees, officers, agents or shareholders assume any
personal liability for obligations entered into on behalf of the Trust. No
Fund shall be liable for any claims against any other Series.
If you are in agreement with the foregoing, please sign the form of
acceptance on the
4
<PAGE>
Registrant counterpart of this letter and return such counterpart to the
Registrant, whereupon this letter shall become a binding contract.
Yours very truly,
GOLDMAN SACHS TRUST
Attest: \s\ Michael J. Richman By: \s\ Douglas C. Grip
------------------------ ---------------------
Michael J. Richman Douglas C. Grip
Secretary of the Registrant President of the
Registrant
The foregoing Agreement is hereby accepted as of the date thereof.
GOLDMAN SACHS ASSET MANAGEMENT,
A DIVISION OF GOLDMAN, SACHS & CO.
Attest: \s\ Michael J. Richman By: \s\ David B. Ford
----------------------- -----------------------
Michael J. Richman David B. Ford
Counsel to the Funds Group Managing Director
GOLDMAN SACHS FUNDS MANAGEMENT L.P.,
EACH AN AFFILIATE OF GOLDMAN, SACHS & CO.
Attest: \s\ Michael J. Richman By: \s\ David B. Ford
----------------------- -----------------------
Michael J. Richman David B. Ford
Counsel to the Funds Group Managing Director
GOLDMAN SACHS ASSET MANAGEMENT INTERNATIONAL,
EACH AN AFFILIATE OF GOLDMAN, SACHS & CO.
Attest: \s\ Michael J. Richman By: \s\ David B. Ford
----------------------- -----------------------
Michael J. Richman David B. Ford
Counsel to the Funds Group Managing Director
5
<PAGE>
Annex A
GOLDMAN SACHS ASSET MANAGEMENT
- ------------------------------
Annual Rate
-----------
Goldman Sachs Government Income Fund 0.65%
Goldman Sachs Municipal Income Fund 0.55%
Goldman Sachs High Yield Fund 0.70%
Goldman Sachs Balanced Fund 0.65%
Goldman Sachs Growth and Income Fund 0.70%
Goldman Sachs CORE Large Cap Growth Fund 0.75%
Goldman Sachs Mid Cap Equity Fund 0.75%
Goldman Sachs Small Cap Equity Fund 1.00%
Financial Square Prime Obligations Fund 0.205%
Financial Square Money Market Fund 0.205%
Financial Square Money Market Plus Fund 0.205%
Financial Square Treasury Obligations Fund 0.205%
Financial Square Treasury Instruments Fund 0.205%
Financial Square Government Fund 0.205%
Financial Square Federal Fund 0.205%
Financial Square Tax-Free Money Market Fund 0.205%
Financial Square Municipal Money Market Fund 0.205%
GOLDMAN SACHS FUNDS MANAGEMENT L.P.
- -----------------------------------
Goldman Sachs CORE U.S. Equity Fund 0.75%
Goldman Sachs Capital Growth Fund 1.00%
GOLDMAN SACHS ASSET MANAGEMENT INTERNATIONAL
- --------------------------------------------
Goldman Sachs Global Income Fund 0.90%
Goldman Sachs International Equity Fund 1.00%
Goldman Sachs Emerging Markets Equity Fund 1.20%
Goldman Sachs Asia Growth Fund 1.00%
6
<PAGE>
EXHIBIT 99.5(f)
ANNEX A
GOLDMAN SACHS ASSET MANAGEMENT
Annual Rate
------------
Goldman Sachs Government Income Fund 0.65%
Goldman Sachs Municipal Income Fund 0.55%
Goldman Sachs High Yield Fund 0.70%
Goldman Sachs Balanced Fund 0.65%
Goldman Sachs Growth and Income Fund 0.70%
Goldman Sachs CORE Large Cap Growth Fund 0.75%
Goldman Sachs CORE Small Cap Equity Fund 1.00%
Goldman Sachs CORE International Equity Fund 1.00%
Goldman Sachs Mid Cap Equity Fund 0.75%
Goldman Sachs Small Cap Equity Fund 1.00%
Financial Square Prime Obligations Fund 0.205%
Financial Square Money Market Fund 0.205%
Financial Square Money Market Plus Fund 0.205%
Financial Square Treasury Obligations Fund
0.205%
Financial Square Treasury Instruments Fund
0.205%
Financial Square Government Fund 0.205%
Financial Square Federal Fund 0.205%
Financial Square Tax-Free Money Market Fund 0.205%
Financial Square Municipal Money Market Fund
0.205%
GOLDMAN SACHS FUNDS MANAGEMENT L.P.
Goldman Sachs CORE U.S. Equity Fund
0.75%
Goldman Sachs Capital Growth Fund 1.00%
GOLDMAN SACHS ASSET MANAGEMENT INTERNATIONAL
Goldman Sachs Global Income Fund 0.90%
Goldman Sachs International Equity Fund 1.00%
Goldman Sachs Emerging Markets Equity Fund 1.20%
Goldman Sachs Asia Growth Fund 1.00%
<PAGE>
EXHIBIT 99.6(b)
GOLDMAN SACHS TRUST
On behalf of each of its series that has designated
a class of its shares as the "Class C Shares" thereof
CLASS C PLAN OF DISTRIBUTION
PURSUANT TO RULE 12B-1
August 15, 1997
WHEREAS, Goldman Sachs Trust (the "Trust") engages in business as an
open-end management investment company and is registered as such under the
Investment Company Act of 1940, as amended (the "Act");
WHEREAS, the Trust's Board of Trustees has divided the Trust's shares
into series and classes and may create additional series and classes from time
to time;
WHEREAS, the Trust has established a class of shares of beneficial
interest designated as Class C Shares (the "Class C Shares") with respect to
certain series of the Trust;
WHEREAS, the Trust, on behalf of each series that offers Class C
Shares (a "Fund"), desires to adopt a Plan of Distribution pursuant to Rule 12b-
1 under the Act, and the Board of Trustees of the Trust has determined that
there is a reasonable likelihood that adoption of this Plan of Distribution will
benefit each Fund and its shareholders; and
WHEREAS, the Trust, on behalf of each Fund, employs Goldman, Sachs &
Co. (the "Distributor") as distributor of its Class C Shares pursuant to a
Distribution Agreement dated April 30, 1997, as amended August 15, 1997.
NOW, THEREFORE, the Trust, on behalf of the Funds, hereby adopts, and
the Distributor hereby agrees to the terms of, this Plan of Distribution (the
"Plan") in accordance with Rule 12b-1 under the Act on the following terms and
conditions:
1. (a) The Trust, on behalf of each Fund, is authorized to
compensate the Distributor for distribution services performed
and expenses incurred by the Distributor in connection with each
Fund's Class C Shares. The amount of such compensation paid
during any one year shall not exceed .75% of the average daily
net assets of a Fund attributable to such Class C Shares. Such
compensation shall be calculated and accrued daily and paid
quarterly or at such other intervals as the Board of Trustees may
determine.
(b) Distribution services and expenses for which the Distributor may
be compensated pursuant to this Plan include, without limitation:
compensation to (including sales commissions) and expenses of
brokers and dealers who are members of the National Association
of Securities Dealers, Inc. ("NASD"), other financial services
firms that have entered into an agreement with the Distributor or
their respective officers, sales representatives and employees;
compensation to (including sales commissions) and expenses of the
Distributor and any of its officers, sales representatives and
employees, including allocable overhead, travel and telephone
expenses, who engage in or support distribution of a Fund's Class
C Shares; printing of reports and prospectuses for other than
existing shareholders;
<PAGE>
and preparation, printing and distribution of sales literature
and advertising materials.
(c) Appropriate adjustments to payments made pursuant to clause (a)
of this paragraph 1 shall be made whenever necessary to ensure
that no payment is made by the Trust on behalf of a Fund in
excess of the applicable maximum cap imposed on asset based,
front-end and deferred sales charges by subsection (d) of Section
2830 of the Conduct Rules of the NASD.
2. This Plan shall not take effect with respect to the Class C Shares of
a Fund until it has been approved by a vote of at least a majority (as
defined in the Act) of the outstanding Class C Shares of such Fund.
3. This Plan shall not take effect until the Plan, together with any
related agreement, has been approved by votes of a majority of both
(a) the Board of Trustees of the Trust and (b) those Trustees of the
Trust who are not "interested persons" of the Trust (as defined by the
Act) and who have no direct or indirect financial interest in the
operation of the Plan or any agreements related to it (the "Rule 12b-1
Trustees") cast in person at a meeting (or meetings) called for the
purpose of voting on the Plan and such related agreement.
4. This Plan shall remain in effect until August 15, 1998 and shall
continue in effect thereafter so long as such continuance is
specifically approved at least annually in the manner provided for
approval of this Plan in paragraph 3.
5. The Distributor shall provide to the Board of Trustees of the Trust
and the Board shall review, at least quarterly, a written report of
distribution services and expenses and the purposes for which such
services were performed and expenses were incurred.
6. This Plan may be terminated with respect to a Fund at any time by a
vote of a majority of the Rule 12b-1 Trustees or by vote of a majority
of the outstanding Class C Shares of such Fund. The Trust authorizes
the Distributor, if the distributor so elects, to assign to a third
party any payments that the Distributor is entitled to receive for the
Distributor's services hereunder free and clear of any offset, defense
or counterclaim the Trust may have against the Distributor (it being
understood that the foregoing does not constitute a waiver of any
claim the Trust or the Fund may have against the Distributor) and
except to the extent that any change or modification after the date
hereof of (x) the provisions of the Act, the rules and regulations
thereunder or other applicable law or (y) any interpretation of the
Act, the rules and regulations thereunder or other applicable law
shall restrict your right to make such transfer free and clear of any
offset, defense or counterclaim.
7. This Plan may not be amended with respect to any Fund to increase
materially the amount of compensation payable pursuant to paragraph 1
hereof unless such amendment is approved by a vote of at least a
majority (as defined in the Act) of the outstanding Class C Shares of
such Fund, except to the extent that the approval of another class of
such Fund is required in accordance with Rule 18f-3 under the Act, in
which case the approval of a majority (as defined in the Act) of the
outstanding voting securities of such class shall also be required.
No material amendment to the Plan shall be made unless approved in the
manner provided in paragraph 3 hereof.
-2-
<PAGE>
8. While this Plan is in effect, the selection and nomination of the
Trustees who are not interested persons (as defined in the Act) of the
Trust shall be committed to the discretion of the Trustees who are not
such interested persons.
9. The Trust shall preserve copies of this Plan and any related
agreements and all reports made pursuant to paragraph 5 hereof, for a
period of not less than six years from the date of the Plan, any such
agreement or any such report, as the case may be, the first two years
in an easily accessible place.
10. In the case of a Fund that offers more than one class of Shares, this
Plan only relates to the Class C Shares of such Fund and the fee
determined in accordance with paragraph 1 shall be based upon the
average daily net assets of the Fund attributable to Class C Shares.
The obligations of the Trust and the Funds hereunder are not
personally binding upon, nor shall resort be had to the private
property of any of the Trustees, shareholders, officers, employees or
agents of the Trust, but only the Trust's property allocable to Class
C Shares shall be bound. No series of the Trust shall be responsible
for the obligations of any other series of the Trust.
IN WITNESS WHEREOF, the Trust (on behalf of each Fund that has designated a
class of its shares as the "Class C Shares" thereof) and the Distributor have
executed this Plan of Distribution as of the day and year first above written.
GOLDMAN SACHS TRUST
By:
------------------------------------------
Douglas C. Grip
President of the Trust
GOLDMAN, SACHS & CO.
By:
------------------------------------------
General Partner
-3-
<PAGE>
EXHIBIT 99.15(i)
GOLDMAN SACHS TRUST
On behalf of each of its series that has designated
a class of its shares as the "Class C Shares" thereof.
CLASS C AUTHORIZED DEALER SERVICE PLAN
August 15, 1997
WHEREAS, Goldman Sachs Trust (the "Trust") engages in business as an
open-end management company and is registered as such under the Investment
Company Act of 1940, as amended (the "Act");
WHEREAS, the Trust's Board of Trustees has divided the Trust's shares
into series and classes and may create additional series and classes from time
to time;
WHEREAS, the Trust has established a class of shares of beneficial
interest designated as Class C Shares (the "Class C Shares") with respect to
certain series of the Trust;
WHEREAS, the Trust, on behalf of each series that is authorized to
issue Class C Shares (a "Fund"), desires to adopt an Authorized Dealer Service
Plan (the "Plan"), and the Board of Trustees of the Trust has determined that
there is a reasonable likelihood that adoption of this Plan will benefit each
Fund and its shareholders; and
WHEREAS, the Trust, on behalf of each Fund, employs Goldman, Sachs &
Co. (the "Distributor") as distributor of the Class C Shares pursuant to a
Distribution Agreement dated April 30, 1997, as amended August 15, 1997.
NOW, THEREFORE, the Trust, on behalf of each Fund, hereby adopts, and
the Distributor hereby agrees to the terms of, this Plan on the following terms
and conditions:
1. (a) The Trust, on behalf of each Fund, is authorized to
compensate the Distributor for personal and account maintenance
services performed and expenses incurred by the Distributor in
connection with each Fund's Class C Shares. The amount of such
compensation paid during any one year shall not exceed .25% of
the average daily net assets of a Fund attributable to such Class
C Shares. Such compensation shall be calculated and accrued
daily and paid quarterly or at such other intervals as the Board
of Trustees may determine.
(b) Personal and account maintenance services include, but are not
limited to, payments made to or on account of the Distributor,
other brokers, dealers and financial service firms that have
entered into agreements with the Distributor or their respective
officers, sales representatives and employees who respond to
inquiries of, and furnish assistance to, shareholders regarding
their ownership of Shares or their accounts or who provide
similar services not otherwise provided by or on behalf of a
Fund.
2. This Plan shall not take effect until the Plan, together with any
related agreement, has been approved by votes of a majority of both
(a) the Board of Trustees of the Trust and (b) those Trustees of the
Trust who are not "interested persons" of the Trust (as defined by the
Act) and who have no direct or indirect financial interest in the
operation of the Plan or any agreements related to it (the
"Independent Trustees") cast in person at a meeting (or meetings)
called for the purpose of voting on the Plan and such related
Agreement.
<PAGE>
3. This Plan shall remain in effect until August 16, 1998 and shall
continue in effect thereafter so long as such continuance is
specifically approved at least annually in the manner provided for
approval of this Plan in paragraph 2.
4. The Distributor shall provide to the Board of Trustees of the Trust
and the Board shall review, at least quarterly, a written report of
personal and account maintenance services and expenses.
5. This Plan may be terminated with respect to a Fund at any time by a
vote of a majority of the Independent Trustees or by vote of a
majority of the outstanding Class C Shares of such Fund.
6. The Trust shall preserve copies of this Plan and any related
agreements and all reports made pursuant to paragraph 4 hereof, for a
period of not less than six years from the date of the Plan, any such
agreement or any such report, as the case may be, the first two years
in an easily accessible place.
7. In the case of a Fund that offers more than one class of Shares, this
Plan only relates to the Class C Shares of such Fund and the fee
determined in accordance with paragraph 1 shall be based upon the
average daily net assets of the Fund attributable to Class C Shares.
The obligations of the Trust and the Funds hereunder are not
personally binding upon, nor shall resort be had to the private
property of any of the Trustees, shareholders, officers, employees or
agents of the Trust, but only the Trust's property allocable to Class
C Shares shall be bound. No series of the Trust shall be responsible
for the obligations of any other series of the Trust.
IN WITNESS WHEREOF, the Trust (on behalf of each Fund that has designated a
class of its shares as the "Class C Shares" thereof) and the Distributor have
executed this Authorized Dealer Service Plan as of the day and year first above
written.
GOLDMAN SACHS TRUST
By:
--------------------------------
Douglas C. Grip
President of the Trust
GOLDMAN, SACHS & CO.
By:
--------------------------------
General Partner
-2-
